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Posted Date: 02 Apr 2009 Posted By: vibhor Member Level: Gold

2008 Symbiosis International Education Centre M.B.A Business Administration Management accounting University Question paper

Course: M.B.A Business Administration

University: Symbiosis International Education Centre

Question Paper
Management Accounting – II (MB162): April 2008
• Answer all 70 questions.
• Marks are indicated against each question.
Total Marks : 100
1. Which of the following is true in respect of full cost pricing method?
(a) It is used to recover market price plus mark-up
(b) It is used to recover standard cost plus mark-up
(c) It is used to recover fixed costs only
(d) It is used to recover variable costs only
(e) It is used if a company does not have the basic idea of demand for the product. (1 mark)

2. If a company has unfavorable material price variance, which of the following departments is primarily
held responsible?
(a) Stores department
(b) Production department
(c) Inspection department
(d) Purchase department
(e) Receiving department. (1 mark)

3. Swathi Ltd., has provided the following data for the month of March 2008:
The material price variance for the month was
Particulars Actual Standard
Material cost per unit Rs.81 Rs.75
Materials used in production 2,480 units 2,350 units
(a) Rs.14,880 (Adverse)
(b) Rs.14,880 (Favorable)
(c) Rs.14,100 (Adverse)
(d) Rs.14,100 (Favorable)
(e) Rs. 9,750 (Adverse). (1 mark)

4. The method of pricing in which the transfer price is usually based on either listed price of an identical
or similar product or service, or the price of a competitor is known as
(a) Full cost transfer pricing
(b) Market based transfer pricing
(c) Negotiated transfer pricing
(d) Marginal cost transfer pricing
(e) Cost plus mark-up transfer pricing. (1 mark)

5. Which of the following is not a characteristic or assumption of Product Life Cycle Costing?
(a) Product cost, revenue and profit patterns tend to follow predictable courses through the product
life cycle
(b) Each phase of the product life cycle poses different threats and opportunities
(c) The products have infinite life period
(d) Profit per unit varies as products move through their life cycles
(e) Products require different functional emphasis in each phase. (1 mark)

6. If the selling subunit is operating at full capacity and can sell everything produced, either internally or
externally, the transfer price of the product will be fixed up on the basis of
(a) Negotiation between the divisions
(b) Market price
(c) Variable cost
(d) Cost plus a mark-up
(e) Full cost. (1 mark)
(e) Full cost. (1 mark)

7. Sravan Ltd., currently operates at 70% capacity level. The normal capacity is 2,00,000 units. The
variable cost per unit is Rs.28 and the total fixed costs are Rs.16,00,000. If the company aims to earn a
profit of Rs.2,48,000, the selling price of the product per unit would be
(a) Rs.29.76
(b) Rs.33.75
(c) Rs.41.20
(d) Rs.45.93
(e) Rs.48.54. (2marks)

8. If the efficiency ratio of a company is 112% and the activity ratio is 98%, then the capacity ratio of the
company would be
(a) 114.29%
(b) 109.76%
(c) 97.43%
(d) 92.16%
(e) 87.50%. (1 mark)

9. If a company uses a predetermined rate for absorbing factory overhead costs, the volume variance is the
(a) Under or over applied variable cost element of factory overheads
(b) Under or over applied fixed cost element of factory overheads
(c) Difference in budgeted cost and actual cost of fixed factory overhead items
(d) Difference in budgeted cost and actual cost of variable factory overhead items
(e) Difference in standard cost and actual cost of variable factory overhead items. (1 mark)

10.The costs associated with materials and products that fail to meet quality standards and result in
manufacturing losses are known as
(a) External failure costs
(b) Quality costs
(c) Internal failure costs
(d) Appraisal costs
(e) Prevention costs. (1 mark)

11.Return on Investment is used to measure the financial performance of a company. This can be improved
by
(a) Decreasing sales
(b) Increasing assets
(c) Decreasing expenses
(d) Decreasing profit margin
(e) Decreasing assets utilization ratio. (1 mark)

12.Consider the following particulars of a company for the month of March 2008:
The fixed overhead costs were neither under absorbed nor over absorbed and the fixed production
overhead expenditure variance was Rs.2,400 (Favorable). The number of units produced by the
company during the month was
Budgeted production 5,250 units
Budgeted fixed production overhead costs Rs.1,26,000
(a) 4,833
(b) 5,150
(c) 5,200
(d) 5,350
(e) 5,617. (2marks)
(e) 5,617. (2marks)

13.Neelam is a divisional manager for Champ Ltd. He has been assigned the task of creating a production
budget for his division, which produces the company’s most popular stuffed toy. Budgeted sales for this
toy for the next year have been set at 6,25,000 units and the following are the estimated data of the
finished goods and work-in-process for the year:
How many equivalent units should Neelam plan for his division to produce during the year?
Particulars
Finished goods units Work-in-process
equivalent units
Opening inventory 85,000 56,000
Closing inventory 1,80,000 64,000
(a) 4,80,000
(b) 5,22,000
(c) 6,25,000
(d) 7,28,000
(e) 7,70,000. (2marks)

14.Which of the following pricing techniques does not consider fixed cost?
(a) Return on investment based pricing
(b) Contribution margin approach pricing
(c) Standard cost based pricing
(d) Cost plus profit pricing
(e) Full cost pricing. (1 mark)

15.Sona Ltd., has furnished the following information pertaining to one of its products – ‘Integrated
Circuits’ for a period:
If variable cost is increased by 20% and the company wants to maintain the same amount of profit, the
mark-up percentage on variable cost will be
Variable cost (Rs.) Rs.6,88,800
Fixed cost (Rs.) Rs.1,35,000
Sales value Rs.9,17,000
(a) 34.40%
(b) 32.50%
(c) 27.61%
(d) 29.28%
(e) 72.39%. (2marks)

16.Which of the following variances is most controllable by the production control supervisor?
(a) Material price variance
(b) Material usage variance
(c) Variable overhead spending variance
(d) Fixed overhead budget variance
(e) Fixed overhead volume variance. (1 mark)

17.Rahul Ltd., has been approached by a foreign customer who wants to place an order for 2,800 units of
Product C at Rs.33.50 per unit, although the company currently sells this item for Rs.49 per unit, and
the item has a cost of Rs.41 per unit. Further analysis reveals that the company need not pay sales
commission of Rs.3.65 per unit for the new order. The fixed costs amounting to Rs.6,48,000 for the
production of existing 48,000 units of such products by the company will not change. Accepting this
job by the company will
(a) Increase profit by Rs.27,020
(b) Increase profit by Rs.23,000
(c) Increase profit by Rs.70,420
(d) Decrease profit by Rs.70,420
(e) Decrease profit by Rs.23,000. (2marks)
(e) Decrease profit by Rs.23,000. (2marks)

18.A standard which can be attained under the most favorable conditions is called
(a) Basic standard
(b) Expected standard
(c) High standard
(d) Current standard
(e) Ideal standard. (1 mark)

19.Which of the following statements is false in respect of activity based costing?
(a) It does not segregate variable and fixed costs
(b) It tends to be more costly than traditional methods of costing
(c) It is based on historical costs
(d) It highlights the causes of costs
(e) It deals with the direct costs only. (1 mark)

20.Jain Ltd., has furnished the following information pertaining to product M for the month of March
2008:
The sales price variance for the month was
Particulars Actual Budget
Sales (Units) 18,500 17,250
Sales revenue (Rs.) 2,37,540 2,27,700
(a) Rs.6,210 (Adverse)
(b) Rs.6,210 (Favorable)
(c) Rs.6,660 (Favorable)
(d) Rs.6,660 (Adverse)
(e) Rs.9,840 (Favorable). (1 mark)

21.Which of the following statements is false?
(a) The use of budget by management to monitor and control a company’s operations is called
budgetary control
(b) The first financial budget prepared is the cash budget
(c) In a fixed budgetary control system, the master budget is based on a single prediction for sales
or production volume
(d) Successful budget should have adequate flexibility to meet changing business conditions
(e) Indirect materials are generally included in factory overhead budget. (1 mark)

22.Shweta Ltd., produces and sells 750 units of product-H each month, with total variable costs of
Rs.12,375 and total fixed costs of Rs.9,000. Idle capacity would permit the acceptance of a special
sales order for 500 units each month. Which of the following minimum selling prices is acceptable for
the product?
(a) Rs.28.50
(b) Rs.24.00
(c) Rs.17.00
(d) Rs.13.50
(e) Rs.11.00. (2marks)

23.‘The average human being has an inherent dislike of work and will avoid it if he can’- this job attitude
is specifically dealt with in
(a) Herzberg’s Two Factor Theory
(b) Douglas McGregor’s Theory Y
(c) The principles of human motivation as revealed by Abraham Maslow
(d) Douglas McGregor’s Theory X
(e) McDonald’s Theory Z. (1 mark)
(e) McDonald’s Theory Z. (1 mark)

24.Mohit Ltd., has furnished the following costs for 3,250 units of its product ‘Z’:
Product ‘Z’ is available in the market. If the company buys it from the market, fixed selling costs would
be the same but the variable selling costs would be reduced by 30%. The maximum amount per unit of
the product that the company can pay to the supplier without reducing the operating income, is
Direct material Rs.26,650
Direct wages Rs.17,550
Manufacturing overheads:
Variable Rs.16,575
Fixed Rs.18,000
Selling overheads:
Variable Rs.19,500
Fixed Rs.20,000
(a) Rs.22.93
(b) Rs.20.50
(c) Rs.22.90
(d) Rs.24.70
(e) Rs.30.24. (2marks)

25.Sudha Exports Ltd., has estimated the following data pertaining to its Product ‘A’ for the quarter
ending June 30, 2008:
The total of selling and distribution expenses of the company for the quarter ending June 30, 2008 will
be
Sales Rs.6,00,000
Selling costs:
Salaries 7% of sales
Traveling expenses 3% of sales
Sales office 2% of sales
General expenses 1% of sales
Distribution costs:
Wages Rs.21,000
Rent 2% of sales
Other expenses 3% of sales
(a) Rs.1,08,000
(b) Rs. 78,000
(c) Rs. 51,000
(d) Rs. 42,000
(e) Rs.1,29,000. (2marks)

26.Madhuban Ltd., has furnished the following data relating to a product for the last quarter ending March
31, 2008:
If the company manufactures 3,600 units in the next quarter, the cost per unit will be
Units produced 3,200
Direct materials (Rs.) 3,80,000
Direct labor (Rs.) 3,10,000
Manufacturing overheads (Rs.) 1,86,950 (60% fixed)
Selling and administrative overheads (Rs.) 85,625 (20% fixed)
(a) Rs.300.23
(b) Rs.328.13
(c) Rs.296.32
(d) Rs.330.10
(e) Rs.295.83. (2marks)
(e) Rs.295.83. (2marks)

27.Consider the following data of Combi Ltd., for a period:
The total quantity of materials to be purchased during the period is
Projected production 37,500 units
Raw materials per unit of finished goods 3 kg
Opening stock of raw materials 24,200 kg
Closing stock of raw materials 28,000 kg
(a) 1,16,300 kg
(b) 1,23,900 kg
(c) 1,08,700 kg
(d) 1,04,800 kg
(e) 1,01,100 kg. (2marks)

28.The following information is extracted from the books of Parmeshwari Ltd., for product ‘HIK’ for the
month of March 2008:
If there is no labor rate variance, the labor efficiency variance would be
Standard labor hours per unit 5 hours
Actual hours 350 hours
Actual labor rate Rs.22.40
Units produced 78 units
(a) Rs.581 (Favorable)
(b) Rs.581 (Adverse)
(c) Rs.896 (Adverse)
(d) Rs.896 (Favorable)
(e) Rs.729 (Adverse). (2marks)

29.Which of the following statements is false?
(a) Under full cost pricing, the normal mark-up is based on sales value
(b) Full cost pricing is designed to recover both fixed costs and variable costs
(c) Contribution margin pricing and full cost pricing are complementary to each other but not
competing
(d) Pricing decisions may be influenced by internal factors such as cost and profit objectives
(e) Contribution margin approach to pricing is concerned with cost, volume and profit. (1 mark)

30.Audi Ltd., has furnished the following information relating to its product for the month of March 2008:
The accountant of the company has determined the following variances for the period:
The standard material cost per unit for the period was
Output
Material 5,100 kg
7,600 units
Rs. 60,750
Material price variance
Material usage variance
Rs.2,850 (F)
Rs. 900 (A)
(a) Rs.6.45
(b) Rs.7.74
(c) Rs.8.25
(d) Rs.8.00
(e) Rs.8.52. (2marks)

31.A budget manual, which enhances the operation of a budgeting system, is most likely to include
(a) Employee training policies
(b) Distribution instructions for budget schedules
(c) Employee hiring policies
(d) Documentation of the accounting system
(e) Company policies regarding the authorization of transactions. (1mark)
(e) Company policies regarding the authorization of transactions. (1mark)

32.Which of the following statements is false with respect to target costing?
(a) Target costing is a customer oriented technique
(b) Target costing requires market research to determine the customer’s perceived value of
the product based on its functions and attributes
(c) The maximum advantage of adopting target costing is when it is deployed at the product’s
selling stage
(d) A major feature of target costing is that a team approach is adopted to achieve the target cost
(e) Target costs are conceptually different from standard costs. (1 mark)

33.Sumit Ltd., has furnished the following information relating to various costs at a capacity level of 6,300
units:
The budgeted production cost per unit, at the level of 7,500 units, is
Particulars Rs.
Prime cost 79,380 (100% variable)
Power 20,685 (85% variable)
Administration overheads 16,800 (25% variable)
Depreciation 21,000 (100% fixed)
(a) Rs.18.55
(b) Rs.19.07
(c) Rs.20.95
(d) Rs.21.40
(e) Rs.22.85. (2marks)

34.Which of the following is not the cause of Material Price Variance?
(a) Failure to take advantage of cash discount
(b) Buying substitute materials at different prices
(c) Excessive shrinkage or loss in transit
(d) Purchasing non-standard lots and the consequent reduction in quantity discount
(e) Rigid inspection resulting in more rejections requiring additional materials for rectification. (1 mark)

35.Rohit Ltd., has furnished the following information relating to its production department for a period:
The overhead cost variance is
Actual overhead costs Rs.37,400
Standard hours for actual work 13,200 hours
Actual hours during the period 13,500 hours
Standard overhead rate Rs.2.75 per hour
(a) Rs.1,100 (Adverse)
(b) Rs.1,100 (Favorable)
(c) Rs. 825 (Adverse)
(d) Rs. 275 (Adverse)
(e) Rs. 275 (Favorable). (2marks)

36.Which of the following information is required by the Corporate Management?
(a) Capacity utilization
(b) Rejections and complaints
(c) Sales volume and price realization
(d) Supply position of inputs
(e) Critical operational and marketing variables. (1 mark)

37.If the transferor division has an idle capacity for a product then the transfer price can be based on
(a) Standard costs
(b) Total costs
(c) Full costs plus profit
(d) Marginal cost
(e) Opportunity cost. (1 mark)
(e) Opportunity cost. (1 mark)

38.The smallest segment of activity or area of responsibility for which costs are accumulated is called
(a) Revenue center
(b) Profit center
(c) Cost center
(d) Investment center
(e) Contribution center. (1 mark)

39.The basic difference between a fixed budget and a flexible budget is that a
(a) Flexible budget considers only variable costs but a fixed budget considers all costs
(b) Flexible budget allows management latitude in meeting goals whereas a fixed budget is based
on a fixed standard
(c) Fixed budget is for an entire production facility but a flexible budget is applicable to single
department only
(d) Fixed budget is based on one specific level of production and a flexible budget can be prepared
for any production level within a relevant range
(e) Fixed budget considers only variable costs, whereas flexible budget considers only fixed costs. (1 mark)

40.Which of the following is false in respect of zero-based budgeting?
(a) It starts from scratch
(b) It represents a move towards allocation of resources by need
(c) It identifies and eliminates wastage and obsolete operations
(d) It does not create a questioning attitude of the current practice of the organization
(e) It increases communication and coordination within the organization. (1 mark)

41.Consider the following data of Soft Plastics Ltd., for production and sales of 64,000 units of a product:
The capital employed is Rs.76,500. If the company desires to earn a profit of 40% (ignore taxation) on
capital employed, the selling price per unit of the product would be
Particulars Rs.
Material 2,86,800
Labor 1,89,000
Overheads 3,80,000
(a) Rs.14.57
(b) Rs.20.39
(c) Rs.13.85
(d) Rs.18.72
(e) Rs.13.37. (2marks)

42.Which of the following statements is false with respect to transfer pricing?
(a) It motivates divisional managers to make good economic decisions
(b) It is useful for evaluating performance of the divisional managers
(c) It is a selling price established for goods or services sold by one division to another under the
same organization
(d) It does not help in measuring divisional performances
(e) Cost based transfer pricing can be used when market price does not exist. (1 mark)

43.The data, equipment and computer programs that are used to develop information for managerial use is
known as
(a) Management by exception
(b) Management by objective
(c) Management control
(d) Management information system
(e) Value chain analysis. (1 mark)
(e) Value chain analysis. (1 mark)

44.Do-Little Ltd., produces oak desks. The company uses the standard direct material of 28 square feet of
oak lumber at a rate of Rs.5.35 per square foot for one oak desk. The company produced 2,300 desks at
a total material price of Rs.3,23,232 for 62,400 square feet of oak lumber. The material price variance
was
(a) Rs. 9,500 (Adverse)
(b) Rs.10,948 (Favorable)
(c) Rs.10,948 (Adverse)
(d) Rs.10,608 (Favorable)
(e) Rs.10,608 (Adverse). (2marks)

45.Fardeen Ltd., has furnished the following information pertaining to product X for a period:
If the company produces 9,870 units, the fixed manufacturing overhead volume variance would be
Budgeted fixed overhead costs Rs.32,400
Budgeted production 10,800 units
Actual fixed overhead costs Rs.33,000
(a) Rs. 600 (Adverse)
(b) Rs.1,100 (Adverse)
(c) Rs.1,100 (Favorable)
(d) Rs.2,790 (Favorable)
(e) Rs.2,790 (Adverse). (2marks)

46.Which of the following best identifies the decision-making relationship between cost drivers, cost
objects and accumulated cost?
(a) Cost objects are used to allocate estimated accumulated cost to cost drivers
(b) Cost objects are used to allocate actual accumulated cost to cost drivers
(c) Cost drivers are used to allocate estimated accumulated cost to cost objects
(d) Cost drivers are used to allocate actual accumulated cost to cost objects
(e) Cost objects are used to apportion actual accumulated cost to cost drivers. (1 mark)

47.Sankara Ltd., has provided the following actual data for the last two quarters:
The company has estimated the budgeted profit for quarter III as Rs.78,050. The capacity utilization at
budgeted production for quarter III will be
Particulars Quarter I Quarter II
Capacity usage 42% 60%
Net profit (Rs.) 17,300 57,800
(a) 63%
(b) 72%
(c) 79%
(d) 69%
(e) 61%. (2marks)

48.Which of the following activities is not a primary activity of value chain analysis?
(a) Procurement
(b) Inbound logistics
(c) Outbound logistics
(d) Service
(e) Marketing and sales. (1 mark)
(e) Marketing and sales. (1 mark)

49.The sales volume variance is
(a) (Actual quantity × Actual selling price) ~ (Standard quantity × Standard selling price)
(b) Actual quantity × (Actual selling price ~ Standard selling price)
(c) Standard selling price × (Actual quantity of sales ~ Standard quantity of sales)
(d) Actual selling price × (Actual quantity of sales ~ Standard quantity of sales)
(e) Standard quantity × (Actual selling price ~ Standard selling price). (1 mark)

50.Kundan Ltd., manufactures and sells a special model of calculator – N9. The company has estimated
the following for the month of April 2008:
The net cash surplus or deficit for the month will be
Credit sales Rs.7,85,000
Gross profit on sales 25%
Decrease in sundry debtors Rs. 37,900
Total selling and administrative expenses Rs. 16,845
(a) Rs.1,79,405 (Deficit)
(b) Rs.2,17,305 (Surplus)
(c) Rs.1,47,125 (Deficit)
(d) Rs.2,08,905 (Surplus)
(e) Rs.1,96,250 (Surplus). (2marks)

51.The cost of manufacturing a sub-assembly of Motul Ltd., is given below:
Annual fixed overhead costs which can be avoided by purchasing the sub-assembly are Rs.2,94,000.
The sub-assembly can be purchased from outside for Rs.45.05 per unit. If the annual requirement of the
sub-assembly is 52,500 units, then buying it from outside will
Particulars Rs. per unit
Material costs 20.50
Direct labour costs 8.40
Variable overhead costs 12.50
(a) Save Rs.1,02,375
(b) Save Rs.1,81,125
(c) Cost Rs.1,02,375 more
(d) Cost Rs.1,81,125 more
(e) Save Rs.80,000. (2marks)

52.The variance created to segregate the difference due to a new factor like a steep rise in price of
material, is known as
(a) Revision variance
(b) Uncontrollable variance
(c) Price variance
(d) Favorable variance
(e) Efficiency variance. (1 mark)

53.Consider the following data pertaining to a company for the month of March 2008:
The capacity ratio of the company for the month was
Budgeted hours 318
Actual hours 297
Maximum possible hours in the budget period 345
Standard hours for actual production 325
(a) 108.5%
(b) 102.5%
(c) 93.4%
(d) 91.4%
(e) 86.1%. (2marks)
(e) 86.1%. (2marks)

54.Yadav Ltd., manufactures product-N which requires two raw materials – A and B. It had produced 325
units in the month of March, 2008. The company has furnished the following standard data per unit and
actual cost and consumption in the month of March, 2008:
The total material usage variance was
Material
Standard per unit Actual
Qty (kg) Rate (Rs.) Qty (kg) Rate (Rs.)
A 4 16.00 1,245 15.58
B 3 30.00 1,020 29.65
(a) Rs.400 (Adverse)
(b) Rs.400 (Favorable)
(c) Rs.470 (Adverse)
(d) Rs.470 (Favorable)
(e) Rs.650 (Adverse). (2marks)

55.Which of the following statements is false in relation to a budget?
(a) Direct labor budget represents direct labor requirements necessary to produce the types and
quantities of output planned in the production budget
(b) An inventory budget can be prepared to find out the values of direct materials and
finished inventory
(c) A fixed budget is a budget that is prepared for a range, i.e. for more than one level of
activity
(d) A direct materials budget indicates the expected amount of direct materials required to
produce the budgeted units of finished goods
(e) Direct budgeted labor costs consist of wages of employees who are engaged directly in
specific production output. (1 mark)

56.Consider the following details pertaining to Govind Ltd., for the month of March 2008:
The return on investment for the month of March 2008 was 16%. In the month of April 2008, it is
expected that the selling price will increase by 3% and all costs will be reduced by 5%. The return on
investment for the month of April 2008 will be
Particulars Rs.
Sales 1,05,600
Variable costs 67,000
Fixed overhead costs 25,000
Capital employed 85,000
(a) 23.80%
(b) 25.14%
(c) 22.85%
(d) 27.25%
(e) 12.36%. (2marks)

57.Jaideep Ltd., has furnished the following information pertaining to its product manufacturing at 75%
capacity level:
An export order has been received that would utilize the remaining capacity of the factory. The order
has to be taken in full and executed at 10% below the normal domestic prices. By accepting the offer,
the profit/loss pertaining to the export order would be
Sales Rs.16,20,000
Costs:
Direct material Rs.4,80,000
Direct labour Rs.2,75,000
Variable overheads Rs.1,60,000
Fixed overheads Rs.4,25,000 Rs.13,40,000
Profit Rs. 2,80,000
(a) Rs.2,44,000 (loss)
(b) Rs.1,95,000 (loss)
(c) Rs.1,65,000 (profit)
(d) Rs.1,81,000 (profit)
(e) Rs.4,61,000 (profit). (2marks)

58.If the overhead spending variance is favorable and if more units are produced than the normal level,
then it can be said that
(a) Actual overhead costs exceed budgeted overhead costs
(b) An adverse overhead volume variance will result
(c) Labor efficiency variance is favorable
(d) Manufacturing overhead is under-applied
(e) Manufacturing overhead is over-applied. (1 mark)

59.Somna Ltd., has estimated its direct material costs of Rs.3,45,000 and direct labor costs of Rs.2,10,000
for the month of May 2008. The company absorbs the overhead costs as follows:
The company is expected to earn a profit of 20% on sales. The budgeted sales for the month of May
2008 will be
Factory overhead costs 70% of direct labor
Administrative overhead costs 20% of works cost
Selling and distribution overhead costs 15% of works cost
(a) Rs. 9,30,600
(b) Rs.10,75,500
(c) Rs.11,37,240
(d) Rs.11,84,625
(e) Rs.12,10,313. (2marks)

60.Kshitiz Ltd., has furnished the following information pertaining to its business:
The residual income of the company is
Sales Rs.8,25,000
Variable costs Rs.4,78,000
Traceable fixed costs Rs.1,24,000
Average invested capital Rs.4,65,000
Imputed interest rate 19%
(a) Rs.1,16,700
(b) Rs.1,34,650
(c) Rs.2,08,450
(d) Rs.2,23,000
(e) Rs.2,35,090. (2marks)

61.A segment of an organization is referred to as an investment center, if it has
(a) Responsibility for developing markets and selling the output of the organization
(b) Authority to make decisions affecting the major determinants of profit, including the power to
choose its markets and sources of supply
(c) Responsibility for combining materials, labor and other factors of production into a final output
(d) Authority to provide specialized support to other units within the organization
(e) Authority to make decisions affecting the major determinants of profit, including the power to
choose its markets and sources of supply and significant control over the amount of invested
capital. (1 mark)
capital. (1 mark)

62.Vandana Ltd., has furnished the following data relating to its product for a period :
If the company desires to earn a profit of 13% on sale price, the sale price per unit would be
Sales (Units) 24,000
Material cost (Rs.) 2,76,000
Other variable costs (Rs.) 2,31,500
Fixed cost (Rs.) 1,45,000
Apportioned investment (Rs.) 4,90,000
(a) Rs.26.82
(b) Rs.27.18
(c) Rs.29.84
(d) Rs.30.72
(e) Rs.31.25. (2marks)

63.Center 1 of Mauli Manufacturing Ltd., transfers parts to Center 2 of the same organization. The cost to
Center 1 for providing the parts to Center 2 is Rs.46.75 per unit. With an additional cost of Rs.22.70
per unit, Center 2 sells the units to an outside party for Rs.145 per unit. What transfer price will provide
a profit of Rs.32.60 per unit to Center 2?
(a) Rs.42.95
(b) Rs.55.30
(c) Rs.65.65
(d) Rs.75.55
(e) Rs.89.70. (2marks)

64.Rahul Ltd., has furnished the following data relating to its product for the year 2007-08:
The fixed overhead efficiency variance for the year 2007-08 was
Particulars Budget Actual
Production units 1,80,000 1,86,000
Machine hours 60,000 61,000
Fixed overhead (Rs.) 6,00,000 6,40,000
(a) Rs. 3,333 (A)
(b) Rs.10,000 (F)
(c) Rs.10,000 (A)
(d) Rs.40,000 (A)
(e) Rs. 3,333 (F). (2marks)

65.An organized creative approach, which emphasizes efficient identification of unnecessary cost is known
as
(a) Management by objective
(b) Value analysis
(c) Zero-based budgeting
(d) Activity based costing
(e) Quality costing. (1 mark)

66.The most fundamental responsibility center affected by the use of market-based transfer prices is
(a) Revenue center
(b) Expense center
(c) Profit center
(d) Investment center
(e) Production center. (1 mark)
END OF QUESTION PAPER
Suggested Answers
Management Accounting – II (MB162): April 2008
(e) Production center. (1 mark)

67.Which of the following should be considered as a cause of material cost variance resulting from
favorable materials price variance coupled with an unfavorable materials usage variance?
(a) Labor efficiency problems
(b) Machine efficiency problems
(c) The purchase of lower than standard quality materials
(d) The purchase and use of higher than standard quality materials
(e) Change of product mix. (1 mark)

68.Nitya Ltd., with a capacity of 1,25,000 units per annum manufactures a single product. The company
has furnished the following income statement for the previous year:
The company desires to increase the present level of sales from 85,000 units to 95,000 units at a price
of Rs.22 per unit. If an expenditure of Rs.1,75,000 is made on advertising, the profit of the company
will be
Particulars Rs. Rs.
Sales (85,000 units @ Rs.20 per unit) 17,00,000
Cost of sales: Direct materials 3,06,000
Direct labor 2,46,500
Variable overheads 1,44,500
Fixed overheads 7,40,000
Total costs 14,37,000
Profit 2,63,000
(a) Rs.3,96,000
(b) Rs.4,80,000
(c) Rs.6,50,000
(d) Rs.7,84,000
(e) Rs.8,90,000. (2marks)

69.Assuming that the mark-up-percentage and the quantity of production/sales remain constant, which of
the following pricing methods will give more profit as the fixed cost of production increases?
(a) Return on investment pricing
(b) Full cost pricing
(c) Contribution margin approach to pricing
(d) Differential cost pricing
(e) Economic theory of pricing. (1 mark)

70.The contribution or income that is forgone by not using a limited resource for its next best alternative
use is called
(a) Discretionary cost
(b) Potential cost
(c) Opportunity cost
(d) Marginal cost
(e) Out-of-pocket cost. (1 mark)

Answers with REASONS:-

1. E Full cost pricing method is used if a company does not have the basic idea of demand for
the product. It is not used to recover the only fixed costs or only variable cost. It is not used
to recover market price plus mark-up or standard cost plus mark-up.
2. D Purchase department is responsible for an unfavorable materials price variance. Other
departments like stores, production, inspection and receiving are not responsible for
unfavorable materials price variance.
3. A Material price variance = Actual quantity (Standard price ~ Actual price)
= 2,480 units (Rs.75 ~ Rs.81) = Rs.14,880 (A)
4. B If the transfer price is based on the listed price of an identical or similar product or service,
or price of a competitor, it is known as market based transfer pricing. It is not full cost
transfer pricing, negotiated transfer pricing, marginal cost transfer pricing or cost plus
markup transfer pricing.
5. C Options (a), (b), (d) and (e) are the characteristics of the Product Life Cycle Costing i.e.,
they are not right options. One of the major characteristics of the Product Life Cycle
Costing is that products have finite lives and hence pass through the cycle of development,
introduction growth, maturity, decline and deletion. Hence correct answer is (c).
6. B Since the division can sell the full capacity production to the outside market, it has no
incentive to take a lower price i.e. it will not opt for negotiation or variable costing or cost
plus a mark-up and full cost pricing methods i.e. it will be willing to use a transfer price set
by the market.
7. C Total fixed cost = Rs. 16,00,000
Expected profit = Rs. 2,48,000
Variable cost at 70% level
(70% × 2,00,000 units × Rs.28) = Rs.39,20,000
Total cost =Rs.16,00,000 + Rs.2,48,000 + Rs.39,20,000 = Rs.57,68,000
Per unit price at 70% level = Rs.57,68,000/(2,00,000 × 70%) =Rs.41.20.
8. E Activity ratio = Capacity ratio × Efficiency ratio
Capacity ratio = 98.00% ÷ 112.00%× 100 = 87.50%
9. B The volume variance is the under applied or over applied of fixed factory overhead. It is the
difference between the budgeted fixed factory overhead and applied (standard) fixed factory
overhead. The volume variance is not applicable in case of variable factory overhead. Other
options (a), (c), (d) and (e) are not correct.
10. C The costs associated with materials and products that fail to meet quality standards and
result in manufacturing losses are known as internal failure costs. These defects are
identified before they are shipped to customers. Scrap and the costs of spoiled units that can
not be salvaged are internal failure costs. Defects create additional costs because they lead
to down time in the production process.
11. C Return on Investment is used to measure the financial performance of a company. This can
be improved by decreasing expenses. Hence, the answer is (c).
12. B
Fixed overhead recovery rate =
As there is no under or over absorption of overheads, Absorbed overhead = Actual fixed
overhead = Rs.1,23,600
fixed overhead cost Rs.1,26,000
= =Rs.24 per unit
Production (Units) 5,250 units
Particulars Rs.
Budgeted fixed overhead 1,26,000
Less: Favorable fixed overhead expenditure variance 2,400
Actual fixed overhead 1,23,600
Actual production = = 5,150 units
Overhead absorbed Rs.1,23,600
=
Fixed overhead rate Rs.24
13. D Using production related budgets, units to produce = Budgeted sales + desired ending
finished goods inventory + desired equivalent units in ending work-in-process inventory –
beginning finished goods inventory – equivalent units in beginning work-in-process
inventory.
Therefore, units to produce = 6,25,000 + 1,80,000 + 64,000 – 85,000 – 56,000 = 7,28,000.
14. B Contribution margin approach for pricing ignores fixed cost. In contribution approach
pricing models, only variable costs are used as the basis of pricing. The pricing model is
concerned only with the costs that vary with the product or service being priced. Therefore,
fixed cost has no relevancy with these differential cost techniques. Other techniques
mentioned in (a), (c), (d) and (e) consider the fixed cost in pricing the goods.
15. C Profit = Rs.9,17,000 – Rs.6,88,800 – Rs.1,35,000 = Rs.93,200
Revised variable cost = Rs.6,88,800 × 1.20 = Rs.8,26,560
Markup % on variable cost = [(Rs.1,35,000 + Rs.93,200) ÷ Rs.8,26,560] × 100 = 27.61%.
16. B The production control supervisor has the most control over the materials usage variance.
The materials usage variance measures the amount of material used over the amount
specified in the standard. Production control supervisor is not responsible for material price
variance, variable overhead spending variance, fixed overhead budget variance, fixed
overhead volume variance. Therefore, (b) is correct.
17. A Total cost per unit = Rs.41
Fixed cost per unit at 48,000 units = Rs.6,48,000 ÷ 48,000 = Rs.13.50.
Variable cost per unit = Rs.41.00 – Rs.13.50 = Rs.27.50
Cost savings = Commission = Rs.3.65.
Therefore, net cost = Rs.27.50 – Rs.3.65 = Rs.23.85
Net profit per unit = Rs.33.50 – Rs.23.85 = Rs.9.65
Total profit will increase by = 2,800 × Rs.9.65 = Rs.27,020.
18. E A standard which can be attained under the most favorable conditions is called Ideal
standard. Ideal standards are not widely used in practice because they may influence
employee’s motivation adversely. All the options defined here are incorrect. (a) Basic
standard is the standard established for use over a long period from which a current standard
can be developed. (b) Expected standard is standard based on conditions which may be
realized in actual practice. (c) High standards represent the best possible performance. (d)
The standards which are set for use over a limited period to reflect current conditions is
called current standard.
19. E Activity based costing deals with the overhead costs. Overhead cost is the cost other than
direct cost. It does not segregate variable and fixed costs. It is based on historical costs. It
highlights the causes of costs. It is very costly. Therefore (e) is false.
20. D The correct answer is (d). The sales price variance is determined by multiplying the
difference between actual price and budgeted price by actual units.
Actual price = Rs. 2,37,540 ÷ 18,500 units = Rs.12.84
Budgeted = Rs. 2,27,700 ÷ 17,250 units = Rs.13.20
\ Sales price variance is 18,500 units (Rs.12.84 – Rs.13.20) = Rs.6,660 (adverse).
21. B The use of budgets by the management to monitor and control a company’s operations is
called budgetary control. Budget reports contain relevant information that compares actual
results to planned activities (budgets). The first financial budget prepared is the budgeted
income statement but not the cash budget. The amounts detailed in a budgeted income
statement are used in the determination of projected cash flows. A fixed budget, also called
a static budget, is based on a single predicted amount of sales or production volume.
Successful budget should have adequate flexibility to meet changing business conditions.
Indirect materials are generally included in factory overhead budget. Statements (a), (c), (d)
and (e) are true, while (b) is false, hence the correct answer is (b).
22. C The variable cost per unit = Rs.12,375 ÷ 750 units = Rs.16.50.
The lowest price, (e) Rs.11 and (d) Rs.13.50 are below variable cost (Rs.16.50), so it is not
acceptable. The other costs exceed variable cost per unit, but Rs.17 per unit is the lowest
acceptable price in the given options, it is acceptable. Therefore, the answer is (c).
23. D McGregor’s Theory X is based on the conception that ‘The average human being has an
inherent dislike of work and will avoid it if he can’. Because of this human characteristic of
dislike for work most people must be coerced, controlled and directed towards the
achievement of goal. Option (b) is incorrect as this theory is based on the principles that the
average human being does not inherently dislike work. Option (c) is incorrect as it is set
forth hierarchy of human needs. Option (a) and (e) are not related to the question asked.
Therefore, (d) is correct.
24. B If the company purchases from the market, the avoidable unit cost = (Direct material +
Direct wages + Variable manufacturing overheads + Variable selling overheads to the extent
reduced) ÷ 3,250 = (Rs.26,650 + Rs.17,550 + Rs.16,575 + 30% of Rs.19,500) ÷ 3,250
= Rs.60,775 + Rs.5,850 = Rs.66,625 ÷ 3,250 =Rs.20.50.
25. E
Particulars Amount in Rs. Or
% on Sales
(Rs.)
Sales 6,00,000
Selling Costs :
Salaries 7 % of sales 42,000
Traveling expenses 3 % of sales 18,000
Sales Office 2 % of sales 12,000
General expenses 1 % of sales 6,000
Distribution costs :
Wages 21,000 21,000
Rent 2 % of sales 12,000
Other expenses 3 % of sales 18,000
Total of Selling and distribution expenses 1,29,000
26. C
Total cost of 3,600 units = Rs.260.40 × 3,600 units + Rs.1,12,170 + Rs.17,125
= Rs.9,37,440 + Rs.1,29,295 = Rs.10,66,735
Cost per unit = Rs.296.32
Particulars Rs.
Direct materials 3,80,000
Direct labor 3,10,000
Manufacturing overheads 74,780
Selling and administrative overheads 68,500
Total variable cost 8,33,280
Per unit variable cost 260.40
27. A
Required production of finished
goods
37,500 units
Raw material per unit × 3 kg
Material usage 1,12,500 kg
Add: Closing raw material 28,000 kg
1,40,500 kg
Less: Opening raw material 24,200 kg
Required purchases 1,16,300 kg
28. D If there is no labor rate variance the actual labor rate is equal to Standard labor rate =
Rs.22.40
Labor efficiency variance = Standard rate × (Standard hours ~ Actual hours)
= Rs.22.40 × (5 hours × 78 units ~350 hours)
= Rs.22.40 × (390 hours ~ 350 hours) = Rs. 22.40 × 40 hours = Rs. 896 (F).
29. A Under full cost pricing, the normal mark-up is not based on sales value. It is generally based
on total cost or variable cost to recover profit and/or fixed cost. Full cost pricing is designed
to recover both fixed costs and variable costs. Contribution margin pricing and full cost
pricing are complementary to each other but not competing. Pricing decision may be
influenced by internal factors and contribution margin approach to pricing is concerned with
the cost, volume and profit. Therefore (a) is false.
30. C Standard material cost
= Actual material cost + Favorable material price variance – adverse material usage
variance
Standard material cost = Rs.60,750 + Rs.2,850 – Rs.900 = Rs.62,700
Standard material cost per unit = Rs.62,700 ÷ 7,600 = Rs.8.25.
31. B A budget manual describes how a budget is to be prepared. Items usually included in a
budget manual are a planning calendar and distribution instructions for all budget
schedules. Distribution instructions are important because, once a schedule is prepared,
other departments within the organization will use the schedule to prepare their own
budgets. Without distribution instructions, someone who needs a particular schedule may be
overlooked.
Answer (a) is incorrect because employees training policies are not required in the budget
manual. Answer (c) is incorrect because employee hiring policies are not needed for budget
preparation. They are already available in the personnel manual. Answer (d) is incorrect
because software documentation is not needed in the budget preparation process. Answer
(e) is incorrect because the authorization of transactions is not necessary for budget
preparation purposes.
32. C The major advantage of adopting target costing is that it is deployed during a products
design and planning stage so that it can have a maximum impact in determining the level of
the locked in costs. Target costing is not deployed at the product selling stage. Therefore (c)
is false.
33. C The production cost budget
Particulars Rs.
Prime cost (variable) 94,500
Power (semi-variable) 24,034
Administration overheads (semivariable)
17,600
Depreciation (fixed) 21,000
Total 1,57,134
Cost per unit (Rs.1,57,034 ÷ 7,500) 20.95
34. E The causes for material price variance are all the other options except rigid inspection
resulting in more rejections requiring additional materials for rectification. Hence, the
answer is (e).
35. A
Other options (b), (c), (d) and (e) are not correct.
Actual overhead costs Rs.37,400
Less: Applied overhead cost = (Standard
hours for actual work × standard overhead
rate) = 13,200 hours × Rs.2.75
Rs.36,300
Overhead cost variance Rs.1,100 (Adverse)
36. D Information on supply position of inputs is required by the Corporate Management.
Capacity utilization and sales volume and price realization are required by operational
manager whereas rejections and complaints and critical operational and marketing variables
are required by executive manager. Therefore, the answer is (d).
37. D If the transferor division has idle capacity, the transfer price can be based on marginal cost
only because fixed cost is already recovered by existing production. If there is no idle
capacity, the transfer price will be based on marginal cost plus opportunity cost. The
transferor division cannot fix up the transfer price at standard costs, total costs, full costs
plus profit and opportunity cost under the situation of unutilized capacity.
38. C A cost center is the most basic level of financial responsibility, but this does not mean that
all cost centers are small or their operations simple. The Department of National Defence is
essentially a cost center, and it certainly is neither small nor simple.
39. D A flexible budget is a series of budgets prepared for different levels of activity. It allows
adjustments of the budget to the actual level of activity before comparing the budgeted
activity with actual result. Fixed budget is a budget prepared for one level of activity. So
option (d) is correct.
40. D Zero-based budgeting starts from scratch, moves towards allocation of resources by needs,
identifies and eliminates wastage and obsolete operation, increases communication and
coordination within the firm. It also helps to create a questioning attitude of the current
practice of the organization. Therefore, (d) is false.
41. C The sale price per unit = (Rs.2,86,800 + Rs.1,89,000 + Rs.3,80,000 + 40% of Rs.76,500) ÷
64,000
= (Rs.8,55,800 + Rs.30,600 ) ÷ 64,000 = Rs.8,86,400 ÷ 64,000 = Rs.13.85.
42. D Transfer pricing motivates divisional managers to perform well. It is useful for evaluating
performance of the divisional managers. It also helps in measuring divisional performance.
It is the selling price established for goods or services sold by one division to other under
the same organization. Therefore, (d) is the answer.
43. D The data, equipment and computer programs that are used to develop information for
managerial use is called Management Information System (MIS). Other options (a), (b), (c)
and (e) are not correct.
44. D Materials price variance: Actual quantity used × (Standard price - Actual price). The actual
price is Rs.3,23,232/62,400 = Rs.5.18. The materials price variance is 62,400 × (Rs.5.35 ~
Rs.5.18)
= Rs.10,608 (F).
45. E Fixed volume variance = Budgeted FOH ~ standard FOH cost of actual output.
Step 1: 10,800 budgeted units of production ~ 9,870 actual units produced = 930 units.
Step 2: Standard fixed overhead rate = Rs.32,400 ÷ 10,800 units = Rs.3.00 per unit.
Volume variance = 930 units variance × Rs.3.00 fixed overhead rate = Rs.2,790 (Adverse).
46. C A cost driver has a cause and effect relationship with a cost object. For decision-making
estimated costs are important because actual costs are not known until the decision is made.
Therefore, cost drivers are used to allocate estimated accumulated cost to cost objects. So,
(c) is correct.
47. D At 60% capacity, profit = Rs.57,800, at 42% capacity, profit = Rs.17,300. Then the
difference is Rs.40,500 (Rs.57,800 – Rs.17,300) for the two levels.
Difference in capacity levels = 60% – 42% = 18%
So every 1% increase in capacity utilization increases profit by (Rs. 40,500 ÷ 18%)
Rs.2,250.
To get a profit of Rs.78,050 the extra profit required above 60% = Rs.78,050 – Rs.57,800 =
Rs.20,250
The extra capacity required for an extra profit of Rs.20,250 = Rs.20,250 ÷ Rs.2,250 = 9%
So, the capacity utilization for a profit of Rs.78,050 = 60% + 9% = 69%.
48. A The primary activities of Value chain analysis are (b) Inbound logistics, (c) Outbound
logistics, (d) Service and (e) Marketing and sales. Procurement is the support activity of
Value chain analysis. Hence, the answer is (a).
49. C The sales volume variance is equal to Standard selling price × (Actual quantity of sales –
Standard quantity of sales). Therefore, the answer is (c).
50. B Cash receipts = Sales + Decrease in sundry debtors = Rs.7,85,000 + Rs.37,900 =
Rs.8,22,900
Cash payment = Cost of goods sold (75% of sales) + Total selling & administrative
expenses
= Rs.5,88,750 + Rs.16,845 = Rs.6,05,595.
Surplus in cash = Rs.8,22,900 – Rs.6,05,595 = Rs.2,17,305.
51. A Cost of manufacturing is:
Particulars Rs. per unit
Variable cost (Rs.20.50 + Rs.8.40 + Rs.12.50) 41.40
Fixed cost Rs.2,94,000 ÷ 52,500 units 5.60
Total cost 47.00
Cost of purchasing is Rs.45.05
Hence purchasing the subassembly will save Rs.(45.05 – 47) ×
52,500
1,02,375
52. A Due to some unforeseen circumstances, it may be necessary to alter a standard during an
accounting period. Once a standard has been set, it is undesirable that it should be changed,
because this affects budgets, standard costs, etc. Therefore, it is often preferable to create a
revision variance, which segregates the difference due to this factor.
53. C Capacity ratio = Actual hours ÷ Budgeted hours
= 297 hours ÷ 318 hours × 100 = 93.4%.
54. C Material usage variance = Standard rate (Actual quantity ~ Standard quantity)
Material A = Rs.16 (1,245 kg ~ 325 units × 4 kg)
= Rs.16 × 55 kg =
Rs.880 (Favorable)
Material B = Rs.30 (1,020 kg ~ 325 units × 3 kg)
= Rs.30 × 45 kg =
Rs.1,350 (Adverse)
Material usage variance Rs.470 (Adverse)
55. C A fixed budget is not prepared for a range, rather it is used unaltered during the budget
period. It is prepared for a particular activity level and it does not change with actual
activity level being higher or lower than the budgeted activity level.
56. B The budgeted increase
*Return on investment in March 2008 was 16%. Hence profit was Rs.85,000 × 16% =
Rs.13,600.
Particulars
March 2008
(Rs.)
April 2008 (Rs.)
Sales 1,05,600 1,05,600 × 103%
=
1,08,768.00
Total variable cost 67,000 67,000 × 95% = 63,650.00
Fixed overheads 25,000 25,000 × 95% = 23,750.00
Profit* 13,600 21,368.00
Capital employed 85,000 85,000.00
Return on
investment
16% 25.14%
57. D
Rs.
Export sales 25% – [(16,20,000 ÷ 0.75) × 0.25] × 0.90 4,86,000
Variable cost (9,15,000 ÷ 0.75) × 0.25 3,05,000
Contribution or profit (fixed cost is already absorbed by
the domestic sales)
1,81,000
58. E If the overhead spending variance is favorable and if more units are produced than the
normal level, then it can be said that manufacturing overhead is over-applied. So, the correct
answer is (e).
59. D
Particulars Rs.
Direct material costs 3,45,000
Direct labor costs 2,10,000
Factory overhead costs (70% of direct labor) 1,47,000
Works costs 7,02,000
Administrative overhead costs (20% of works cost) 1,40,400
Selling and distribution expenses (15% of works
cost)
1,05,300
Total costs 9,47,700
Profit 20% on sales (i.e. 25% on cost) 2,36,925
Sales 11,84,625
60. B
Sales Rs.8,25,000
Less: variable costs Rs.4,78,000
Rs.3,47,000
Less: fixed costs (traced) Rs.1,24,000
Rs.2,23,000
Less: imputed interest (19% of Rs.4,65,000) Rs. 88,350
Residual income Rs.1,34,650
61. E An investment center is a segment of a company responsible for revenues, expenses and the
amount of invested capital. Option (a) is not correct because a revenue center is responsible
for developing markets and selling the firm’s products. Option (b) is incorrect because a
profit center is responsible for revenues and expenses. Option (c) is not correct because a
cost center combines labor, materials, and other factors of production into a final output.
Option (d) is not correct because a service center provides specialized support to other units
of the organization.
62. E Sale price per unit = Total cost + Profit
Total cost = Rs.2,76,000 + Rs.2,31,500 + Rs.1,45,000 = Rs.6,52,500
If Profit = 13% of sale price, then cost 87% (100% - 13%) of sale price
x = Rs.6,52,500 ÷ 0.87 = Rs.7,50,000
Sale value ÷ unit = Rs.7,50,000 ÷ 24,000 = Rs.31.25.
63. E Profit = Revenue – (Transfer price + Division cost).
Let the required transfer price be X
Rs.145 – (X + Rs.22.70) = Rs.32.60
X = Rs.89.70.
64. B Fixed overhead efficiency variance = Standard rate (Standard hours for actual output –
actual hours)
Standard rate = Budgeted fixed overhead ÷ Budgeted machine hours = Rs.6,00,000 ÷
60,000 = Rs.10
Standard hours for actual output = × 1,86,000 = 62,000 hours
Fixed overhead efficiency variance = Rs.10 × (62,000hours ~ 61,000 hours)
= Rs.10 × 1,000 hours = Rs.10,000 (F).
60,000
1,80,000
65. B An organized creative approach, which emphasizes efficient identification of unnecessary
cost i.e. cost that, provides neither quality, nor use, nor life, nor appearance, nor customer’s
satisfaction is known as value-analysis.
66. C Transfer prices are often used by profit centers and investment centers. Profit centers are the
most fundamental of these two centers because the investment centers are responsible not
only for the revenues and costs but also for invested capital. Answer (a) is incorrect because
a revenue center is responsible only for revenue generation, not cost control or profitability.
Answer (b) is incorrect because transfer prices are not used in a cost center. Answer (d) is
not correct because an investment center is not as fundamental as a profit center. Answer (e)
is not correct because a production center may be a cost center, a profit center or even an
investment center. Transfer prices are not used in a cost center. Transfer prices are used to
compute profitability but a cost center is responsible only for cost control.
67. C A favorable materials price variance is the result of paying less than the standard price for
materials. An unfavorable materials usage variance is the result of using an excessive
quantity of materials. If purchase manager purchases substandard materials to achieve a
favorable price variance, an unfavorable quality variance could result from using an
excessive amount of poor quality materials.
68. A Revised fixed cost = Rs.7,40,000 + Rs.1,75,000 = Rs.9,15,000
Selling price per unit = Rs.22
Variable cost per unit = Rs.3.60 + Rs.2.90 + Rs.1.70 = Rs.8.20;
Total contribution = 95,000 × (Rs.22 - Rs.8.20) = Rs.13,11,000;
Profit = Rs.13,11,000 – Rs.9,15,000 = Rs.3,96,000.
69. B Under ROI pricing method, mark up percentage is related to investment. The profit will
change in direct proportion to investment. The profit figure computed as a percentage of
investment is added to the total cost to determine the selling price. As a result, when
variable or fixed cost of production changes the profit per unit or total profit remains the
same. Hence (a) is not correct. Under full cost pricing method, mark-up is added as a
percentage of total cost of production to arrive at the price. Hence, a change in variable or
fixed cost of production will lead to a change in profit if the markup percentage remains the
same. Hence (b) is correct. Contribution margin approach to pricing computes the profit
using the mark up percentage on the variable cost. Therefore, if fixed cost increases the
profit is not affected. Hence (c) is not correct. Differential cost pricing does not consider the
fixed cost. It considers only variable cost and new fixed costs. Hence, (d) is not correct.
Economic theory of pricing depends on supply and demand of the product and not its cost.
Hence, (e) is not correct. Therefore (b) is the answer.
70. C An opportunity cost is the maximum benefit sacrificed by employing a scarce productive
resource in a specified manner. It is the value of resource in the next best alternative.
Therefore (c) is correct. Discretionary cost is not relevant in decision making. Marginal cost
is an incremental or differential cost. Incremental cost is the difference in total cost between
two decision choices. Out-of-pocket costs is that portion of cost which involves payment,
i.e. gives rise to costs and is relevant for price fixation during recession or when make or
buy decision is to be made.

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