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Sri Lanka Accountants' Service Exam study materials
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Sri Lanka Accountants' Service Exam practice questions

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Question 1Financial Accounting and Reporting

Under Sri Lanka's accounting framework for public sector reporting, which basis of accounting recognises transactions when they occur rather than when cash is received or paid?

  1. Cash basis
  2. Commitment basis
  3. Accrual basis Correct answer.
  4. Modified cash basis

Explanation

The accrual basis records revenue and expenses in the period they are earned or incurred, regardless of the timing of cash flows. The cash and modified cash bases instead key recognition to cash movement, and commitment accounting records obligations before they become liabilities.

Question 2Financial Accounting and Reporting

A company issues goods with a list price of LKR 500,000 subject to a trade discount of 10% and a cash settlement discount of 5% if paid within 15 days. The customer pays within the discount period. Under the gross method, at what amount is revenue initially recognised?

  1. LKR 450,000 Correct answer.
  2. LKR 475,000
  3. LKR 500,000
  4. LKR 427,500

Explanation

Trade discounts are deducted before revenue is recognised, while cash settlement discounts are only accounted for when the customer actually takes them. The initial revenue is therefore 500,000 less the 10% trade discount, giving 450,000.

Question 3Financial Accounting and Reporting

Which statement best describes the objective of general purpose financial statements under the conceptual framework adopted in Sri Lanka?

  1. To prove that an entity has complied with every statutory requirement
  2. To record every transaction in double entry
  3. To determine the taxable income of an entity for a period
  4. To provide financial information useful to existing and potential investors, lenders and other creditors in making decisions Correct answer.

Explanation

General purpose financial statements aim to supply decision-useful information about an entity's financial position and performance to capital providers. Tax computation and compliance certification are separate objectives served by different reports.

Question 4Financial Accounting and Reporting

An entity purchases machinery for LKR 2,000,000. It incurs import duty of LKR 200,000, non-refundable taxes of LKR 100,000, freight of LKR 50,000 and staff training costs of LKR 80,000 on operating the machine. What is the initial cost of the machinery?

  1. LKR 2,350,000 Correct answer.
  2. LKR 2,430,000
  3. LKR 2,280,000
  4. LKR 2,000,000

Explanation

The cost of property, plant and equipment includes the purchase price, import duties, non-refundable taxes and directly attributable costs such as freight. Training costs are expensed because they are not necessary to bring the asset to its working condition.

Question 5Financial Accounting and Reporting

Which of the following is a fundamental qualitative characteristic of useful financial information?

  1. Timeliness
  2. Comparability
  3. Faithful representation Correct answer.
  4. Verifiability

Explanation

The two fundamental qualitative characteristics are relevance and faithful representation. Timeliness, comparability, verifiability and understandability are enhancing characteristics that increase usefulness but are not fundamental.

Question 6Financial Accounting and Reporting

An entity has a defined benefit obligation with a present value of LKR 5,000,000 and plan assets with a fair value of LKR 4,200,000. What amount is recognised in the statement of financial position?

  1. A liability of LKR 5,000,000
  2. No amount, as the plan is unfunded
  3. A liability of LKR 800,000 Correct answer.
  4. An asset of LKR 4,200,000

Explanation

A defined benefit plan is presented as the net of the present value of the obligation and the fair value of plan assets. Where the obligation exceeds the assets, the net amount is recognised as a liability. Here 5,000,000 less 4,200,000 gives a liability of 800,000.

Question 7Financial Accounting and Reporting

Which of the following best describes the treatment of a change in accounting estimate?

  1. It is applied prospectively and affects current and future periods Correct answer.
  2. It is applied retrospectively and prior periods are restated
  3. It is corrected through opening retained earnings
  4. It is disclosed only and never recorded

Explanation

Changes in accounting estimates arise from new information and are applied prospectively, affecting the current period and future periods. Retrospective restatement applies to changes in accounting policy and corrections of prior period errors.

Question 8Financial Accounting and Reporting

A company's trial balance shows sales of LKR 1,000,000, opening inventory of LKR 150,000, purchases of LKR 700,000 and closing inventory of LKR 200,000. What is the gross profit?

  1. LKR 450,000
  2. LKR 350,000 Correct answer.
  3. LKR 300,000
  4. LKR 250,000

Explanation

Cost of sales equals opening inventory plus purchases less closing inventory, giving 150,000 + 700,000 - 200,000 = 650,000. Gross profit is sales of 1,000,000 less cost of sales of 650,000, which is 350,000.

Question 9Financial Accounting and Reporting

An entity sells goods on credit for LKR 400,000. It estimates that 2% of credit sales will be uncollectible and uses the allowance method. Which entry records the estimated irrecoverable amount?

  1. Dr Trade receivables, Cr Allowance for doubtful debts
  2. Dr Irrecoverable debts expense, Cr Allowance for doubtful debts Correct answer.
  3. Dr Cash, Cr Irrecoverable debts expense
  4. Dr Allowance for doubtful debts, Cr Trade receivables

Explanation

Under the allowance method, the estimated irrecoverable amount is charged to expense and credited to the allowance account, reducing receivables to their expected recoverable amount. Trade receivables are only written off when a specific debt is confirmed bad.

Question 10Financial Accounting and Reporting

Which of the following is a non-current liability?

  1. Bank overdraft repayable on demand
  2. Accrued electricity payable
  3. Trade payables due in 30 days
  4. Ten-year debenture repayable in 2032 Correct answer.

Explanation

Non-current liabilities are obligations not expected to be settled within twelve months after the reporting period. A debenture maturing in 2032 falls due beyond that window, whereas trade payables, overdrafts and accruals are typically current.

Question 11Financial Accounting and Reporting

An entity leases equipment for five years with annual payments of LKR 100,000 made in arrears. The interest rate implicit in the lease is 10%. The present value of an annuity of LKR 1 for five years at 10% is 3.7908. What is the initial lease liability?

  1. LKR 500,000
  2. LKR 379,080 Correct answer.
  3. LKR 400,000
  4. LKR 610,510

Explanation

The lease liability is measured at the present value of the lease payments, discounted at the interest rate implicit in the lease. Multiplying the annual payment by the annuity factor gives 100,000 × 3.7908 = 379,080.

Question 12Financial Accounting and Reporting

Which of the following items is recognised as an intangible asset rather than expensed?

  1. Advertising costs to launch a new product
  2. Internally generated goodwill
  3. Research expenditure for a new process
  4. Development expenditure meeting all capitalisation criteria Correct answer.

Explanation

Development costs are capitalised only when the entity can demonstrate technical feasibility, intention and ability to complete, probable future benefits, and reliable measurement of cost. Internally generated goodwill, research costs and advertising must be expensed.

Question 13Financial Accounting and Reporting

A company has profit before tax of LKR 2,000,000. Taxable temporary differences total LKR 500,000 and deductible temporary differences total LKR 200,000. The tax rate is 30%. What is the deferred tax liability?

  1. LKR 90,000 Correct answer.
  2. LKR 210,000
  3. LKR 150,000
  4. LKR 60,000

Explanation

Deferred tax is measured on temporary differences at the expected tax rate. The taxable temporary difference of 500,000 creates a deferred tax liability of 150,000, while the deductible difference of 200,000 creates a deferred tax asset of 60,000. The net liability is therefore 90,000.

Question 14Financial Accounting and Reporting

Which of the following is presented within other comprehensive income rather than profit or loss?

  1. Sales revenue
  2. Interest expense on borrowings
  3. Revaluation surplus on property, plant and equipment Correct answer.
  4. Depreciation of plant

Explanation

A revaluation surplus recognised under the revaluation model is credited to other comprehensive income and accumulated in equity. Depreciation, revenue and interest expense are all recognised in profit or loss.

Question 15Financial Accounting and Reporting

An entity reports profit for the year of LKR 800,000. During the year it issued shares for cash of LKR 300,000 and paid dividends of LKR 200,000. Depreciation was LKR 120,000 and there were no other non-cash items. What is the net cash flow from operating activities using the indirect method, assuming no working capital changes?

  1. LKR 680,000
  2. LKR 920,000 Correct answer.
  3. LKR 800,000
  4. LKR 1,120,000

Explanation

Under the indirect method, operating cash flow starts with profit and adds back non-cash charges such as depreciation. Share issues are financing inflows and dividends are financing outflows, so they are excluded from operating activities, giving 800,000 + 120,000 = 920,000.

Question 16Financial Accounting and Reporting

Which event occurring after the reporting period is a non-adjusting event?

  1. A fire destroying the entity's main factory after the year end Correct answer.
  2. Bankruptcy of a customer whose debt was already doubtful at year end
  3. Discovery of fraud showing financial statements were misstated
  4. A court judgment confirming a liability that existed at the reporting date

Explanation

Non-adjusting events provide evidence of conditions that arose after the reporting period and do not change amounts recognised. A fire after the year end is such an event, requiring disclosure if material, whereas the other items confirm conditions existing at the reporting date and require adjustment.

Question 17Financial Accounting and Reporting

Which of the following is the correct treatment of a contingent liability that is possible but not probable?

  1. Recognise it as an expense and a liability
  2. Recognise it as a liability in the statement of financial position
  3. Disclose it in the notes unless the possibility of outflow is remote Correct answer.
  4. Ignore it entirely in all circumstances

Explanation

A contingent liability is not recognised because the outflow is not probable and measurable with sufficient reliability. It is disclosed unless the possibility of an outflow is remote. Recognition applies only to present obligations that are probable and measurable.

Question 18Financial Accounting and Reporting

Which of the following is a related party of a company for disclosure purposes?

  1. A government department that collects taxes
  2. A bank that provides a loan at market rates
  3. A customer that buys goods on normal credit terms
  4. A key management personnel member of the company Correct answer.

Explanation

Key management personnel and their close family members are related parties because they have authority over planning and control of the entity's activities. Ordinary customers, lenders and tax authorities dealing on normal terms are not related parties.

Question 19Financial Accounting and Reporting

An entity has current assets of LKR 900,000, inventory of LKR 300,000 and current liabilities of LKR 600,000. What is the quick ratio?

  1. 1.50
  2. 1.00 Correct answer.
  3. 2.00
  4. 0.50

Explanation

The quick ratio excludes inventory from current assets and divides by current liabilities. Current assets less inventory give 600,000, which divided by 600,000 equals 1.00.

Question 20Financial Accounting and Reporting

Which of the following best describes the role of the going concern assumption in preparing financial statements?

  1. It eliminates the need for accruals
  2. It assumes the entity will continue in operation for the foreseeable future Correct answer.
  3. It requires all liabilities to be settled within one year
  4. It requires assets to be measured at liquidation value

Explanation

The going concern assumption presumes the entity will continue operating for the foreseeable future without intention or necessity to liquidate. This supports measuring assets and liabilities on a basis other than break-up value.

Question 21Financial Accounting and Reporting

An entity issues 100,000 ordinary shares with a nominal value of LKR 10 each at an issue price of LKR 15. What amount is credited to share premium?

  1. LKR 1,000,000
  2. LKR 250,000
  3. LKR 1,500,000
  4. LKR 500,000 Correct answer.

Explanation

Share capital is credited with the nominal value of the shares issued, and any excess over nominal value is credited to share premium. The excess per share is 15 - 10 = 5, so the premium is 100,000 × 5 = 500,000.

Question 22Financial Accounting and Reporting

Under the revaluation model, an asset with a carrying amount of LKR 1,000,000 is revalued to LKR 1,200,000. There was no previous revaluation. How is the increase treated?

  1. Recognised as a liability
  2. Recognised in profit or loss as income
  3. Recognised in other comprehensive income and accumulated in a revaluation reserve Correct answer.
  4. Ignored until disposal

Explanation

An upward revaluation with no prior deficit is recognised in other comprehensive income and accumulated in equity as a revaluation surplus. It is not taken to profit or loss, and it is not deferred until disposal.

Question 23Financial Accounting and Reporting

A company reports profit after tax of LKR 600,000. It has 200,000 ordinary shares outstanding throughout the year and 50,000 potential ordinary shares from convertible bonds that are dilutive. What is the diluted earnings per share?

  1. LKR 2.40 Correct answer.
  2. LKR 4.00
  3. LKR 2.00
  4. LKR 3.00

Explanation

Diluted EPS divides profit by the weighted average number of ordinary shares plus dilutive potential ordinary shares. The denominator becomes 250,000, giving 600,000 ÷ 250,000 = 2.40.

Question 24Financial Accounting and Reporting

Which of the following is a purpose of the statement of changes in equity?

  1. To disclose the market value of every asset
  2. To show cash receipts and payments during the period
  3. To reconcile the opening and closing balances of each component of equity Correct answer.
  4. To list all individual sales transactions

Explanation

The statement of changes in equity reconciles opening and closing equity by showing movements such as profit, dividends, share issues and other comprehensive income. It does not report cash flows, individual transactions or asset market values.

Question 25Financial Accounting and Reporting

An entity has an item of plant costing LKR 1,000,000 with accumulated depreciation of LKR 400,000. It is sold for LKR 550,000. What is the gain or loss on disposal?

  1. A loss of LKR 50,000
  2. A gain of LKR 150,000
  3. A gain of LKR 50,000 Correct answer.
  4. A loss of LKR 450,000

Explanation

The carrying amount is cost less accumulated depreciation, which is 1,000,000 - 400,000 = 600,000. Proceeds of 550,000 are below the carrying amount by 50,000, so a loss of 50,000 arises.

Question 26Financial Accounting and Reporting

Under Sri Lanka's financial reporting framework, which body is responsible for issuing Sri Lanka Accounting Standards (SLFRS/LKAS)?

  1. The Central Bank of Sri Lanka
  2. The Institute of Chartered Accountants of Sri Lanka Correct answer.
  3. The Colombo Stock Exchange
  4. The Department of Inland Revenue

Explanation

The Institute of Chartered Accountants of Sri Lanka (CA Sri Lanka) is the standard-setting authority that adopts and issues SLFRS and LKAS, which mirror IFRS and IAS respectively. The other bodies regulate listing, taxation and banking supervision rather than financial reporting standards.

Question 27Financial Accounting and Reporting

An entity purchases machinery for LKR 2,000,000. Freight and installation costs of LKR 150,000 are incurred, and a government grant of LKR 200,000 is received towards the machine. Under the cost model, what is the initial carrying amount of the machinery?

  1. LKR 1,950,000
  2. LKR 2,150,000 Correct answer.
  3. LKR 1,800,000
  4. LKR 2,000,000

Explanation

LKAS 16 requires all directly attributable costs of bringing an asset to working condition, including freight and installation, to be capitalised. A government grant is recognised separately (as deferred income or against the asset under the net presentation option) and does not reduce cost under the gross cost model. Thus cost is LKR 2,000,000 + LKR 150,000 = LKR 2,150,000.

Question 28Financial Accounting and Reporting

Which of the following costs incurred on a research and development project may be capitalised as an intangible asset under LKAS 38?

  1. Advertising costs to launch the resulting product
  2. Development costs meeting all capitalisation criteria Correct answer.
  3. Costs incurred before technical feasibility is established
  4. Costs of training staff to operate the new process

Explanation

LKAS 38 requires research costs to be expensed, while development costs are capitalised only once all six criteria (technical feasibility, intention, ability, probable benefits, resource availability and reliable measurement) are met. Training and advertising are explicitly expensed, and pre-feasibility costs are research.

Question 29Financial Accounting and Reporting

An entity has taxable profit of LKR 1,500,000. Accounting depreciation exceeded tax depreciation by LKR 300,000, and a non-deductible fine of LKR 100,000 was included in profit. The tax rate is 24%. What is the current tax expense?

  1. LKR 408,000
  2. LKR 360,000
  3. LKR 384,000
  4. LKR 336,000 Correct answer.

Explanation

Current tax is based on taxable profit. Accounting depreciation exceeding tax depreciation means the tax deduction is lower, so add back LKR 300,000; the non-deductible fine of LKR 100,000 is also added back. Taxable profit is LKR 1,500,000 + LKR 300,000 + LKR 100,000 = LKR 1,900,000, and tax at 24% is LKR 456,000...

Question 30Financial Accounting and Reporting

An entity receives a government grant of LKR 500,000 to subsidise the purchase of equipment costing LKR 2,000,000. Under the deferred income approach in LKAS 20, how is the grant presented?

  1. As deferred income recognised in profit or loss over the asset's useful life Correct answer.
  2. As a direct credit to retained earnings in the year of receipt
  3. As a deduction from the carrying amount of the equipment
  4. As other income recognised in full in the year of receipt

Explanation

LKAS 20 permits either the capital approach (deduct from the asset) or the income approach; under the income approach the grant is recognised as deferred income and amortised to profit or loss over the periods in which the related costs are recognised. Recognising it fully on receipt or directly in equity does not match the grant to the related expense.

Question 31Financial Accounting and Reporting

Which of the following best describes the treatment of borrowing costs on a qualifying asset under LKAS 23?

  1. Borrowing costs are always capitalised regardless of the asset type
  2. Borrowing costs are recognised in other comprehensive income
  3. Borrowing costs directly attributable to acquisition or construction are capitalised Correct answer.
  4. All borrowing costs are expensed as incurred

Explanation

LKAS 23 requires borrowing costs directly attributable to the acquisition, construction or production of a qualifying asset to be capitalised as part of the asset's cost. Other borrowing costs are expensed. Capitalisation ceases when the asset is substantially ready for its intended use.

Question 32Financial Accounting and Reporting

A company pays a dividend of LKR 250,000 during the year. How is this presented in the statement of cash flows under LKAS 7?

  1. As a non-cash transaction excluded from the statement
  2. As an investing cash outflow
  3. As an operating cash outflow only
  4. As a financing cash outflow, or as an operating outflow if consistently classified as such Correct answer.

Explanation

LKAS 7 permits dividends paid to be classified as financing activities (the common approach) or as operating activities, provided the classification is applied consistently. Dividends paid are cash flows and must be presented, not excluded.

Question 33Financial Accounting and Reporting

Under LKAS 2, how should inventory be measured in the financial statements?

  1. At cost only, with no write-down permitted
  2. At fair value less costs to sell
  3. At the lower of cost and net realisable value Correct answer.
  4. At the higher of cost and net realisable value

Explanation

LKAS 2 requires inventory to be measured at the lower of cost and net realisable value. Net realisable value is estimated selling price less costs of completion and selling costs. Write-downs are recognised as an expense in the period they arise.

Question 34Financial Accounting and Reporting

An entity has a machine with a carrying amount of LKR 800,000 and a recoverable amount of LKR 650,000. Under LKAS 36, what is the impairment loss and how is it recognised?

  1. LKR 150,000 recognised in profit or loss Correct answer.
  2. LKR 150,000 recognised in other comprehensive income
  3. No loss is recognised because the asset is still in use
  4. LKR 150,000 recognised directly against retained earnings

Explanation

LKAS 36 requires an impairment loss when carrying amount exceeds recoverable amount. The loss of LKR 800,000 − LKR 650,000 = LKR 150,000 is recognised immediately in profit or loss unless the asset is carried under the revaluation model.

Question 35Financial Accounting and Reporting

Which of the following is a feature that distinguishes a provision from a contingent liability under LKAS 37?

  1. A provision always arises from a future event
  2. A provision is recognised only when a lawsuit has been filed
  3. A provision is a present obligation that can be measured reliably and is recognised Correct answer.
  4. A provision is disclosed only, while a contingent liability is recognised

Explanation

LKAS 37 recognises a provision when there is a present obligation from a past event, an outflow is probable, and the amount can be reliably estimated. A contingent liability fails one of these criteria and is only disclosed. The distinction is recognition versus disclosure.

Question 36Financial Accounting and Reporting

An entity issues 50,000 ordinary shares of LKR 10 nominal value at LKR 18 each. What amount is credited to share premium?

  1. LKR 500,000
  2. LKR 400,000 Correct answer.
  3. LKR 900,000
  4. LKR 180,000

Explanation

The nominal value of LKR 10 per share (LKR 500,000) is credited to share capital, and the excess of LKR 8 per share (LKR 400,000) is credited to share premium. Share premium is a component of equity and is not a liability.

Question 37Financial Accounting and Reporting

An entity has a defined benefit obligation with present value of LKR 6,000,000 and plan assets of LKR 6,500,000. What is the net defined benefit asset or liability?

  1. LKR 500,000 net liability
  2. LKR 6,500,000 asset
  3. LKR 500,000 net asset Correct answer.
  4. LKR 6,000,000 liability

Explanation

The net defined benefit position is plan assets less the present value of the obligation: LKR 6,500,000 − LKR 6,000,000 = LKR 500,000 net asset. Under LKAS 19 the surplus is recognised subject to the asset ceiling.

Question 38Financial Accounting and Reporting

Under LKAS 21, an entity's functional currency is the currency of the primary economic environment in which it operates. Which factor is most relevant in determining functional currency?

  1. The currency in which the entity's sales prices are denominated and settled Correct answer.
  2. The currency in which the entity's share capital was originally issued
  3. The currency of the country where the entity is legally incorporated
  4. The currency used by the entity's external auditors

Explanation

LKAS 21 identifies the currency that mainly influences sales prices and the currency of the country whose competitive forces determine prices as primary factors. The currency of incorporation and share capital are secondary indicators or irrelevant.

Question 39Financial Accounting and Reporting

Which of the following best describes the purpose of the statement of financial position?

  1. To show the entity's revenues and expenses over a period
  2. To explain changes in retained earnings only
  3. To show the cash inflows and outflows of the entity
  4. To present the entity's assets, liabilities and equity at a point in time Correct answer.

Explanation

The statement of financial position reports assets, liabilities and equity as at a specific date, reflecting the accounting equation. Cash flows and profit or loss belong to other primary statements, and changes in equity are shown in the statement of changes in equity.

Question 40Financial Accounting and Reporting

An entity has profit after tax of LKR 900,000. It has 300,000 ordinary shares outstanding throughout the year and 60,000 potentially dilutive shares. What is the diluted earnings per share?

  1. LKR 2.75
  2. LKR 3.50
  3. LKR 2.50 Correct answer.
  4. LKR 3.00

Explanation

Diluted EPS adds the potentially dilutive shares to the weighted average: LKR 900,000 ÷ (300,000 + 60,000) = LKR 2.50. Diluted EPS is always lower than basic EPS when the potential shares are dilutive.

Question 41Management Accounting and Cost Accounting

In process costing, when opening work in progress is valued using the FIFO method rather than the weighted average method, which statement describes the treatment of opening WIP units?

  1. Opening WIP units are ignored entirely and their costs are written off to the profit and loss account.
  2. Opening WIP units are excluded from equivalent units because their prior-period work was already accounted for in the previous period. Correct answer.
  3. Opening WIP units are merged with units started and completed and treated as a single homogeneous group.
  4. Opening WIP units are valued at current-period cost per equivalent unit for all work done to date.

Explanation

Under FIFO, equivalent units are computed only for work performed in the current period, so opening WIP is counted only to the extent of work still required to complete it. Its earlier costs remain attached to those units and are carried forward separately. The weighted average method instead blends opening WIP costs and units with current activity.

Question 42Management Accounting and Cost Accounting

A company uses the high-low method. At 8,000 machine hours total cost was Rs. 124,000; at 12,000 machine hours total cost was Rs. 156,000. What is the estimated variable cost per machine hour?

  1. Rs. 15.50
  2. Rs. 13.00
  3. Rs. 8.00 Correct answer.
  4. Rs. 10.33

Explanation

The high-low method divides the change in total cost by the change in activity: (156,000 − 124,000) ÷ (12,000 − 8,000) = 32,000 ÷ 4,000 = Rs. 8.00 per machine hour. This isolates the variable element before the fixed element is derived by substitution.

Question 43Management Accounting and Cost Accounting

Which cost is classified as a product cost for external financial reporting under absorption costing but is excluded from inventory valuation under variable costing?

  1. Direct materials consumed in production
  2. Fixed administrative salaries
  3. Fixed manufacturing overhead Correct answer.
  4. Variable selling and distribution expenses

Explanation

Absorption costing assigns fixed manufacturing overhead to units produced, so it sits in inventory until the units are sold. Variable costing treats fixed manufacturing overhead as a period cost charged in full to the current period. Selling and administrative costs are period costs under both methods.

Question 44Management Accounting and Cost Accounting

A company's break-even point is 5,000 units. Its margin of safety in units is 2,000. What is the actual or budgeted sales volume in units?

  1. 7,000 units Correct answer.
  2. 3,000 units
  3. 10,000 units
  4. 2,500 units

Explanation

Margin of safety in units equals actual (or budgeted) sales minus break-even sales. Rearranging gives 5,000 + 2,000 = 7,000 units. The margin of safety measures how far sales can fall before a loss arises.

Question 45Management Accounting and Cost Accounting

A company sells a single product at Rs. 50 per unit with variable cost of Rs. 30 per unit and fixed costs of Rs. 200,000. What sales revenue is required to earn a target profit of Rs. 100,000?

  1. Rs. 750,000 Correct answer.
  2. Rs. 500,000
  3. Rs. 300,000
  4. Rs. 600,000

Explanation

Contribution per unit is Rs. 20, so the contribution margin ratio is 20 ÷ 50 = 40%. Required revenue equals (fixed costs + target profit) ÷ CM ratio = 300,000 ÷ 0.40 = Rs. 750,000. This is equivalent to 15,000 units at Rs. 50.

Question 46Management Accounting and Cost Accounting

In a standard costing system, a favourable material price variance combined with an unfavourable material usage variance most likely indicates which situation?

  1. Materials were purchased at above-standard prices and used with unusual efficiency.
  2. Materials were purchased at a discount but were of lower quality, causing excessive wastage. Correct answer.
  3. The standard price and standard quantity were both set too low.
  4. Both the purchase price and the quantity used exceeded standard.

Explanation

A favourable price variance means material was bought below standard price, while an unfavourable usage variance means more was consumed than allowed. Buying cheaper, lower-grade material commonly produces both signals together, because inferior inputs raise waste. The two variances must be interpreted jointly rather than in isolation.

Question 47Management Accounting and Cost Accounting

A company produces three joint products from a single process costing Rs. 900,000. Which method apportions joint costs using the relative sales value of each product at the split-off point?

  1. Weighted average method
  2. Net realisable value method Correct answer.
  3. Physical units method
  4. First-in-first-out method

Explanation

The net realisable value method allocates joint costs in proportion to each product's sales value at split-off, adjusted for any further processing costs. It reflects the economic worth of each product rather than its physical volume. This is preferred where products have very different unit values.

Question 48Management Accounting and Cost Accounting

A company uses activity-based costing. Which cost driver is most appropriate for a batch-level activity such as machine set-ups?

  1. Number of units produced
  2. Direct labour hours worked
  3. Value of raw materials purchased
  4. Number of set-ups performed Correct answer.

Explanation

Batch-level costs are incurred each time a batch is processed regardless of the number of units in it, so set-up costs are best driven by the number of set-ups. Unit-level drivers such as units produced would distort the assignment. Activity-based costing seeks drivers that reflect the actual cause of the cost.

Question 49Management Accounting and Cost Accounting

A company has a degree of operating leverage of 4 and sales increase by 10%. Assuming fixed costs and the contribution margin ratio remain unchanged, by what percentage does operating profit increase?

  1. 10%
  2. 14%
  3. 4%
  4. 40% Correct answer.

Explanation

Degree of operating leverage measures the sensitivity of operating profit to changes in sales. Multiplying the sales change by the leverage factor gives 10% × 4 = 40%. Higher leverage means profit is more volatile for a given change in sales.

Question 50Management Accounting and Cost Accounting

In a job costing system, which document is used to record the direct materials issued to a specific job?

  1. Purchase order
  2. Stores ledger card
  3. Materials requisition note Correct answer.
  4. Goods received note

Explanation

A materials requisition note authorises and records the issue of materials from stores to a particular job, providing the basis for charging direct material cost to that job. It links the stores records to the job cost sheet. Purchase orders and goods received notes relate to acquiring materials, not issuing them.