0901 Adm-Ii (MB2D2)
0901 Adm-Ii (MB2D2)
0901 Adm-Ii (MB2D2)
is a loss making product. The company is paying a rent of Rs.60,000 per annum for its factory. For the
decision of whether to continue or discontinue product C, the rent of factory is considered as
(a) Marginal cost
(b) Unavoidable cost
(c) Avoidable cost
(d) Opportunity cost
(e) Imputed cost. (1 mark)
4. The margin of safety can be decreased by <Answer>
Particulars Rs.
Sales 5,00,000
Fixed expenses 1,50,000
Direct materials 2,00,000
Direct labour 50,000
Direct expenses 50,000
The margin of safety of the company is
(a) Rs.3,75,000
(b) Rs. 50,000
(c) Rs.1,25,000
(d) Rs.2,00,000
(e) Rs. 75,000. (2marks)
Page 1 of 25
7. Sameera Ltd. manufactures product H and has furnished the following data: <Answer>
Particulars Rs.
Purchase of Raw materials 1,80,000
Opening stock:
Raw materials 36,000
Finished goods 45,000
Closing stock:
Raw materials 45,000
Finished goods 67,500
Carriage inwards 30,000
Carriage outwards 35,000
The cost of raw material consumed is
(a) Rs.2,46,000
(b) Rs.2,91,000
(c) Rs.1,71,000
(d) Rs.2,01,000
(e) Rs.2,68,500. (1 mark)
9. Pallavi Ltd. has furnished the following data pertaining its product ‘PH’: <Answer>
Particulars
Direct material cost per unit Rs. 24
Direct labour cost per unit Rs. 15
Fixed overheads per annum Rs.72,000
Variable overheads (60% on direct labour)
Selling price per unit Rs. 72
If the sales are 15% above the break even point, the net profit of the company is
(a) Rs.25,600
(b) Rs.18,800
(c) Rs.12,720
(d) Rs. 9,408
(e) Rs.10,800. (2marks)
10.Welcome Ltd. produces and sells a product ‘Ferrum’. The company has a P/V ratio of 20%. The <Answer>
company incurs Rs.1,20,000 as fixed cost per annum and its present sales are Rs.90,000 per month. The
fixed cost is likely to increase to Rs.1,35,000 and the variable cost is expected to increase by 5% for the
next period. The percentage increase in selling price required to maintain the existing level of profit is
(a) 4.00%
(b) 5.00%
(c) 5.39%
(d) 5.50%
(e) 6.00%. (2marks)
Page 2 of 25
11.For the purpose of planning and control, costs are classified as <Answer>
Particulars Rs.
Material cost 1,60,500
Labor cost 99,000
Overheads cost 1,74,120
The fixed portion of capital employed is Rs.1,35,000 and the varying portion is 40% of sales turnover.
If the company desires to earn a profit of 12% on capital employed, the selling price of the product is
(a) Rs.10.25
(b) Rs.11.55
(c) Rs.10.50
(d) Rs. 9.55
(e) Rs.12.20. (2marks)
13.The full cost pricing method is used to recover <Answer>
Page 3 of 25
16.The costs incurred for the product of a company are as follows: <Answer>
Particulars Rs.
Direct materials 2,28,000
Direct wages 1,86,550
Direct expenses 1,97,750
Variable manufacturing overheads 1,30,200
Fixed administrative overheads 96,600
Fixed selling & distribution overheads 65,450
The prime cost of the product is
(a) Rs.4,14,550
(b) Rs.5,44,750
(c) Rs.6,12,300
(d) Rs.7,42,500
(e) Rs.9,04,550. (1 mark)
17.The operating results of Osman Ltd. for the year 2007-08 were as follows: <Answer>
Page 4 of 25
19.The cost data pertaining to a product of Plain Ltd. are as follows: <Answer>
period:
Variable cost per unit (Rs.) Rs. 36
Fixed cost (Rs.) Rs.2,00,000
Production units 50,000
Market price per unit of similar product is Rs.50 per unit, which the company finds suitable to achieve
its required mark up percentage. If variable cost is increased by 20%, the mark-up percentage on
variable cost is
(a) 32.40%
(b) 42.50%
(c) 46.67%
(d) 56.67%
(e) 75.24%. (2marks)
21.The profit-volume ratio will be reduced by <Answer>
capacity of 28,500 units per annum. The selling price is Rs.315 per unit. The fixed costs are
Rs.17,95,500 per annum at normal capacity and the variable cost per unit is as follows:
Particulars Rs.
Cloth 123
Labor 54
177
An exporter has offered to buy 7,500 units at a price of Rs.225 per unit. If the export order is accepted
by the company, the total profit or loss would be
(a) Rs. 3,60,000 loss
(b) Rs. 3,60,000 profit
(c) Rs. 9,57,600 loss
(d) Rs. 9,57,600 profit
(e) Rs.13,17,600 profit. (2marks)
Page 5 of 25
23.Which of the following is a cost-behavior oriented approach to product costing? <Answer>
Rs.19,500 and total fixed costs of Rs.19,500. Idle capacity would permit the acceptance of a special
order for 1,000 units each month. The lowest acceptable selling price per unit of the product is
(a) Rs.26.00
(b) Rs.19.50
(c) Rs.15.00
(d) Rs.11.00
(e) Rs. 9.00. (1 mark)
25.In a decision analysis situation, which of the following costs is generally not relevant? <Answer>
Snip. The sales mix in value comprises 35%, 35% & 30% of all three products respectively. The total
budgeted sales at full capacity are Rs.2,05,000 per month. The operating costs are as follows:
i. Variable costs: Product - Flip 60% of selling price
Product - Flop 40% of selling price
Product - Snip 55% of selling price
ii. Break-even sales 80% of full capacity
The fixed cost per month is
(a) Rs.1,64,000
(b) Rs. 99,425
(c) Rs. 74,950
(d) Rs. 79,540
(e) Rs.2,05,000. (2marks)
Page 6 of 25
29.The profits and sales of Kaparthi Ltd. for two consecutive years were as follows: <Answer>
Page 7 of 25
33.Vitae Ltd. has furnished the following information pertaining to its product Z: <Answer>
Particulars Rs.
Raw materials purchased 2,90,000
Direct labor 1,95,000
Factory overheads 43,000
Administrative overheads 36,000
Opening stock:
Raw materials 10,000
Finished goods 25,500
Closing stock:
Raw materials 12,500
Finished goods 24,000
The cost of production of product Z is
(a) Rs.5,87,000
(b) Rs.5,63,000
(c) Rs.5,85,500
(d) Rs.5,61,500
(e) Rs.5,60,000. (2marks)
34.Classifying a cost as either direct or indirect depends upon <Answer>
Particulars Rs.
Direct material 8,10,000
Direct wages 4,87,500
Profit 5,44,950
Selling & distribution overheads 3,89,250
Administrative overheads 3,89,250
Factory overheads 6,48,750
The works cost for Job No.5C is
(a) Rs.12,97,500
(b) Rs.19,46,250
(c) Rs.23,35,500
(d) Rs.27,24,750
(e) Rs.32,69,700. (2marks)
36.Kiran Ltd. has furnished the following information pertaining to its product C: <Answer>
Particulars Rs.
Fixed expenses 1,50,000
Variable Cost per unit 10
Selling Price per unit 15
If the break even point is brought down to 25,000 units, the revised selling price per unit will be
(a) Rs.10
(b) Rs.16
(c) Rs. 6
(d) Rs. 5
(e) Rs.15. (2marks)
Page 8 of 25
37.Madhavi Ltd. has furnished the following information pertaining to its product MX for two periods: <Answer>
Particulars 2007-08
Total sales Rs.30,63,750
Total cost Rs.26,79,000
P/V ratio (%) 30%
The fixed cost as a percentage of sales would be
(a) 27.56%
(b) 33.23%
(c) 42.27%
(d) 17.44%
(e) 11.30%. (2marks)
41.During the year 2007-08, Mandip Ltd. has increased its production from 15,000 units to 16,500 units. <Answer>
The total cost of production has been increased by Rs.21,000 compared with previous cost of
Rs.2,69,000. The fixed cost of the company during the year 2007-08 was
(a) Rs.62,450
(b) Rs.54,000
(c) Rs.50,000
(d) Rs.59,000
(e) Rs.40,000. (2marks)
Page 9 of 25
42.In computation of gross value added, which of the following is not included? <Answer>
(a) Depreciation
(b) Income from royalties
(c) Cost of all materials and services
(d) Sales revenue
(e) Income from investments. (1 mark)
43.Which of the following statements is true with respect to marginal costing? <Answer>
Particulars Rs.
Net operating profit after tax 14,52,000
Average capital employed 40,00,000
Weighted average cost of capital (%) 13.5%
The economic value added is
(a) Rs.10,30,000
(b) Rs. 9,12,000
(c) Rs. 5,20,000
(d) Rs. 4,02,000
(e) Rs.14,76,050. (1 mark)
46.Ahalya Ltd. is manufacturing a product which has a sale price of Rs.130 per unit and variable cost of <Answer>
Rs.80 per unit. Variable costs are expected to increase from Rs.80 to Rs.90 per unit and fixed costs of
Rs.6,00,000 will not change. The additional sales units required in order to maintain the current
operating income of Rs.3,00,000 would be
(a) 18,000 units
(b) 22,500 units
(c) 1,500 units
(d) 4,500 units
(e) 3,000 units. (2marks)
Page 10 of 25
47.Sanglina Ltd. a manufacturer of product S, has furnished the following information pertaining to its <Answer>
product:
Particulars Rs.
Material cost per unit 300
Labor cost per unit 240
Variable overhead cost per unit 160
Selling price per unit 1,000
For the coming year, if the material cost, labor cost and variable overhead cost are expected to increase
by 10%, 8% and 5% respectively, the contribution to sales ratio would be
(a) 20.00%
(b) 25.00%
(c) 24.28%
(d) 25.63%
(e) 20.50%. (2marks)
48.For a given period, profit under absorption costing is less than the profit under marginal costing, if <Answer>
fixed costs of Rs.8,40,000. If the company sells 2,760 additional units above the break-even point, the
profit will be increased by
(a) Rs. 30,760
(b) Rs. 52,040
(c) Rs. 88,200
(d) Rs. 82,800
(e) Rs.1,13,560. (2marks)
50.AZ Ltd. has the following estimated information at 75% operating capacity for the coming year: <Answer>
Page 11 of 25
51.Pechii Ltd. has provided the following information for a period: <Answer>
Particulars Rs.
Sales 6,00,000
Direct materials used 2,50,000
Direct labour 70,000
Fixed manufacturing overhead 1,20,000
Variable selling and distribution overhead 40,000
Gross profit 50,000
Net loss 20,000
The total contribution in rupees is
(a) Rs.1,10,000
(b) Rs. 70,000
(c) Rs.1,40,000
(d) Rs.1,30,000
(e) Rs.2,40,000. (2marks)
52.On setting the price at which the customers will buy and accordingly bringing down the costs so as to <Answer>
can be used for 92,000 hours during its life to produce 25,000 units of a product. The current annual
demand for the product is 5,000 units. The cost data per unit of the product is as follows:
Particulars Rs.
Direct Material 20
Direct Labour at the rate of Rs.10 per hour 40
Power at the rate of Rs.6 per hour 24
Overheads (excluding depreciation and power):
Variable cost 20
Fixed cost per annum 80,000
The selling price per unit is Rs.150. The organization has received an export order of 600 units. The
minimum selling price per unit to be quoted for export order is
(a) Rs.104
(b) Rs. 62
(c) Rs. 90
(d) Rs.110
(e) Rs. 86. (2marks)
55.An assessment of brand strength requires all of the following except <Answer>
Page 12 of 25
56.Brand valuation is a tool that quantifies the economic value of a brand. One of the methods of brand <Answer>
valuation is Cost method. Which of the following statements is false with respect to Cost method?
(a) This method involves stating the brand at its cost to the company
(b) This is relatively easy when the brands are acquired
(c) Normally under this method the cost is arrived based on the historical earnings profile of the
brand
(d) This method is more difficult to value the brand that has been developed in-house by the
company
(e) This methodology involves determining the costs incurred in developing the brands. (1 mark)
57.A company is said to have created economic value only if the <Answer>
(a) Return on its capital employed is greater than the opportunity cost
(b) Return on its capital employed is lesser than the opportunity cost
(c) Return on its capital employed is greater than the sunk cost
(d) Return on its capital employed is lesser than the sunk cost
(e) Return on its capital employed is equal to opportunity cost. (1 mark)
<Answer>
Fixed cost per unit increases when
58.
(a) Production volume decreases
(b) Production volume increase
(c) Production volume remains constant
(d) Variable cost per unit decreases
(e) Variable cost per unit increases. (1 mark)
59.Vanaja Electronics Ltd. a calculator manufacturer, is planning to produce a new model of calculator. <Answer>
The potential demand for the next year is estimated to be 90,000 units. The company has the capacity to
produce 3,50,000 units and could sell 90,000 units at a price of Rs.1,000 per calculator. The demand
would double for every decrease of Rs.100 in the selling price. The company expects a minimum
margin of 20% on sales. At full capacity level, the target cost per unit will be
(a) Rs. 640
(b) Rs. 975
(c) Rs. 960
(d) Rs. 800
(e) Rs.1,080. (2marks)
60.Which of the following statements is false? <Answer>
(a) This method helps in determining what rate of return a given price for the product will give to
the company
(b) This method does not recognize capital investment in determining the proposed selling price
(c) This method guides management in determining what selling price will provide a given rate of
return
(d) This method furnishes an analytical tool for appraisal of alternative selling prices
(e) Under this method, the required rate of return is applied on capital investment to reach the
normal mark-up on price. (1 mark)
62.A company’s approach to the decision of make or buy a product <Answer>
Page 13 of 25
63.The term ‘cost’ refers to <Answer>
Particulars Rs.
Direct material 2,00,000
Direct wages 1,20,000
Factory overheads 1,30,000
Administrative overheads 69,600
The company produces 10,000 units of the product. If the profit realized is 25% on sales then the selling
price per unit of the product is
(a) Rs.69.28
(b) Rs.64.95
(c) Rs.69.82
(d) Rs.64.59
(e) Rs.62.35. (2marks)
65.While computing the profits of a business, which of the following measures considers the cost of debt <Answer>
(a) When unit variable costs increase and sales price remains unchanged
(b) When unit variable costs decrease and sales price remains unchanged
(c) When unit variable costs remain unchanged and sales price increases
(d) When unit variable costs decrease and sales price increases
(e) When unit variable costs and unit sales price increase by the same amount in rupees. (1 mark)
67.Which of the following statements is true regarding management accounting? <Answer>
Page 14 of 25
70.Revanth Ltd. has furnished the following information pertaining to its 2 products – A and B: Product A <Answer>
has a contribution to sales ratio of 0.60 and Product B has a contribution to sales ratio of 0.50. At
present 300 units of each product are sold. If the total sales units remain at the present level but 50 units
of B are substituted for 50 units of A, which of the following is true of the overall position?
(a) Contribution to sales ratio remains unchanged
(b) Contribution to sales ratio rises from 0.55 to 0.56
(c) Contribution to sales ratio rises from 0.55 to 0.65
(d) Contribution to sales ratio falls from 0.55 to 0.54
(e) Contribution to sales ratio rises from 0.55 to 0.60. (2marks)
Page 15 of 25
Suggested Answers
Accounting For Decision Making - II (MB2D2): January 2009
Answer Reason
1. D Marginal cost is the total of variable costs, i.e., prime cost plus variable overheads. < TOP
2. B A sunk cost is the cost of resources already acquired where the total is unaffected < TOP
by the choice between alternatives. They are created by a decision made in the past
and hence not relevant for decision making.
3. B Unavoidable costs are those costs which will not be eliminated with < TOP
discontinuation of a product or department; hence the rent is an unavoidable cost.
4. B The margin of safety decreases with increase in the variable cost. All the other < TOP
options (a) Reduction in fixed cost, (c) Increase in the level of production or selling
price or both, (d) Change in the sales mix in order to increase the contribution and
(e) Substitute the existing unprofitable product with the profitable ones increase the
margin of safety. Hence, the answer is (b).
5. C Property tax on Factory Building is included in cost while preparing a cost sheet. < TOP
All the following items: (a) Goodwill written off, (b) Provision for taxation, (d)
Transfer to reserves and (e) Interest paid are excluded from cost while preparing a
cost sheet.
6. C Contribution = Sales – (Direct Materials + Direct Labour + Direct Expenses) < TOP
Particulars Rs. Rs.
Sales 5,00,000
Less:
Direct materials 2,00,000
Direct labour 50,000
Direct expenses 50,000 3,00,000
Contribution 2,00,000
Contribution Rs.2,00,000
× 100
P/V Ratio = Sales 100 = Rs.5,00,000 = 40%
Fixed cost Rs.1,50,000
Break even point = P/VRatio = 40% = Rs.3,75,000.
Margin of safety = Rs.5,00,000 – Rs.3,75,000 = Rs.1,25,000.
7. E Cost statement of product H: < TOP
Particulars Per unit Total
Rs. Rs.
Raw materials consumed 3.00 75,000
Direct wages 1.50 37.500
Prime cost 4.50 1,12,500
Add: Factory overheads 0.40 10,000
(2,000 hours Rs.5)
Works cost 4.90 1,22,500
Add: Office overheads 0.98 24,500
(20% on works cost)
Cost of production 5.88 1,47,000
Add: Selling overheads 0.35 8,750
(35 paise 25,000 units)
Cost of sales 6.23 1,55,750
Page 16 of 25
Answer Reason
8. D Computation of raw material consumed < TOP
Particulars Rs.
Opening stock of raw materials 36,000
Add: Purchases of raw materials 1,80,000
Carriage inwards 30,000
2,46,000
Less: Closing stock of raw materials 45,000
Cost of raw material consumed 2,01,000
Page 17 of 25
Answer Reason
13. E Full cost pricing method is used to recover all costs plus normal profit margin in < TOP
the long run. It is not used to recover the fixed costs plus mark-up, variable costs
plus fixed costs, market price plus mark-up or standard cost plus mark-up.
14. D Contribution to sales ratio < TOP
16. C Prime Cost = Direct materials + Direct wages + Direct expenses < TOP
Therefore prime cost = Rs.2,28,000 + Rs.1,86,550 + Rs.1,97,750 = Rs.6,12,300.
Page 18 of 25
Answer Reason
21. B By increasing the sales price and variable cost with equal amount, the P/V Ratio < TOP
will be reduced. In all the other cases (a) By increasing the selling price per unit,
(c) By reducing the variable costs and ensuring the efficient utilization of men,
material and machines, (d) By increasing the sales price and variable cost with
equal percentage and (e) By reducing the sales mix of low profit-volume products
the P/V Ratio improves. Hence, the answer is (b).
22. E (in < TOP
Rs.)
Particulars *19,950 7,500 units 27,450 units
Units (a) (b) (a) + (b)
Selling price per unit 315 225 -
Less: Variable cost per unit 177 177 -
Contribution per unit 138 48 -
Total contribution 27,53,100 3,60,000 31,13,100
Less: Fixed cost 17,95,500 - 17,95,500
Profit 9,57,600 3,60,000 13,17,600
*Normal capacity = 28,500 units
Therefore at 70% capacity = 28,500 units × 70% = 19,950 units.
23. B Marginal costing is a cost behavior oriented approach to product costing. In this < TOP
method costs are separated into fixed and variable cost. If volume of production
increases, the total contribution increases and profit is also increased after covering
fixed costs. Hence option (b) is correct answer.
24. C The lowest price, Rs.9 and Rs.11 are below variable cost (Rs.13), so it is not < TOP
acceptable. The other costs exceed variable cost, but the Rs.15 price is the lowest
acceptable price in the given options.
25. E Management decision analysis is based on the concept of relevant costs. Relevant < TOP
costs differ among decision choices. Thus, incremental (differential or avoidable)
costs are always relevant. Replacement cost is also relevant. Historical costs
occurred in the past, are sunk costs and not relevant to most management decision
analysis.
26. E 24% return on investment = 24% of Rs.7,00,000 = Rs.1,68,000 < TOP
Selling price per unit = Variable cost per unit + fixed costs per unit + profit per
unit
Rs.3,15,000 Rs.1,68,000
+
= Rs.82.50 + 26,250 units 26,250 units = Rs.82.50 + Rs.12 + Rs.6.40 =
Rs.100.90.
27. D Cost-volume-profit analysis is important for the determination of relationship < TOP
between revenues and costs at various level of operation. Other options (a), (b), (c)
and (e) are not correct in respect of cost-volume-profit analysis. Therefore, (d) is
correct.
28. D < TOP
Particulars Flip Flop Snip Total
Sales (Rs.) 71,750 71,750 61,500 2,05,000
Variable costs (Rs.) 43,050 28,700 33,825 1,05,575
Contribution (Rs.) 28,700 43,050 27,675 99,425
Profit-volume ratio = Rs.99,425 Rs.2,05,000 = .485 or 48.5%
Fixed cost = Break-even sales × Profit-volume ratio
= 80% of Rs.2,05,000 × 0.485
= Rs.1,64,000 × 0.485 = Rs.79,540.
Page 19 of 25
Answer Reason
29. D < TOP
Year Profit (Rs.) Sales (Rs.) Costs (Rs.)
1 30,000 2,40,000 2,10,000
2 45,000 3,15,000 2,70,000
Change of Profit
Contribution to sales ratio = Change of Sales
Page 20 of 25
Answer Reason
35. B < TOP
Particulars Rs.
Direct material 8,10,000
Direct wages 4,87,500
Prime cost 12,97,500
Factory overheads cost (50% on Prime cost) 6,48,750
Works cost 19,46,250
36. B New Selling Price if BEP is brought down to 25,000 units: < TOP
Fixed Cost
BEP (units) = Contribution per unit
Fixed Cost Rs.1,50,000
Contribution per unit = BEP in units = 25,000 units = Rs.6
The new Selling price per unit should be
= Variable cost per unit + Contribution per unit = Rs.10 + Rs.6 = Rs.16.
37. C Profit Volume Ratio < TOP
Change in Profit Rs.13,000 - Rs.9,000
100 100
= Change in Sales = Rs.1,40,000 - Rs.1,20,000 =
Rs.4,000
100
Rs.20,000 = 20%
Variable Cost for Period II = (1 – P/V Ratio) × Sales = (1 – 0.20) × Rs.1,40,000 =
Rs.1,12,000.
38. C The statement, absorption costing discloses the efficient or inefficient utilization of < TOP
production resources by indicating under or over absorption of factory overheads is
an advantage of absorption costing and not a limitation. Hence, option (c) is correct
answer.
39. B Since there is no change in direct labor and supervisor’s salary so direct material < TOP
and variable overheads would be relevant, because there is a change of costs.
Hence, option (b) is correct answer.
40. D < TOP
Particulars Rs.
Total cost 26,79,000
Less: Variable cost 21,44,625
(Rs.30,63,750 × 70%)
Fixed cost 5,34,375
Fixed cost Rs.5,34,375
× 100 ×100
Fixed cost as a percentage to sales = TotalSales = Rs.30,63,750 =
17.44%.
41. D Variable cost per unit < TOP
Change of costs Rs.21,000 Rs.21,000
= Change of units = 16,500 units - 15,000 units = 1,500 units = Rs.14
Fixed cost
= Total cost – Variable cost = Rs.2,69,000 – (15,000 units Rs.14) =
Rs.59,000.
42. A Gross value added does not consider depreciation. Hence option (a) is correct < TOP
answer.
Page 21 of 25
Answer Reason
43. C Under marginal costing technique, products are valued at variable cost. Fixed costs < TOP
are not considered for valuation of product. Therefore, this statement is correct.
Other statements given in (a), (b), (d) and (e) are not correct.
44. E Contribution per unit = Rs.180 – Rs.130 = Rs.50 < TOP
Present contribution = 4,500 Rs.50 = Rs.2,25,000
Increase in labor cost = Rs.50 20% = Rs.10.
New contribution per unit = Rs.180 – Rs.130 – Rs.10 = Rs.40
Number of units to be sold = Rs. 2,25,000 ÷ Rs.40 = 5,625 units
Extra units to be sold = 5,625 – 4,500 = 1,125 units.
45. B < TOP
Particulars Rs.
Net operating profit after tax 14,52,000
*Less: cost of capital @ 13.5% 5,40,000
Economic value added 9,12,000
*Cost of capital = Average capital employed × 13.5% = Rs.40,00,000 × 13.5% =
Rs.5,40,000.
46. D Projected unit sales = (Fixed costs + Target operating income) ÷ Unit contribution < TOP
margin.
Projected unit sales = (Rs.6,00,000 + Rs.3,00,000) ÷ Rs.40 = 22,500 units.
Current sales units = (Rs. 6,00,000 + Rs.3,00,000) ÷ Rs.50 = 18,000 units.
Increase in units: 22,500 units – 18,000 units = 4,500 units.
47. C Variable cost = Direct material + Direct labor + Overheads < TOP
= Rs.300 + Rs.240 + Rs.160 =Rs.700;
Selling price = Rs.1,000;
Contribution per unit = Rs.1,000 – Rs.700 = Rs.300;
P/V ratio = Contribution per unit ÷ Selling price per unit
= Rs.300 ÷ Rs.1,000 = 30%.
Material - Rs.300 × 1.1 = Rs.330.00
Labor - Rs.240 × 1.08 = Rs.259.20
Overheads - Rs.160 × 1.05 = Rs.168.00
Variable cost per unit = Rs.757.20
Contribution = Rs.1,000 – Rs.757.20 = Rs.242.80
Contribution to sales ratio = Rs.242.80 ÷ Rs.1,000 = 24.28%.
48. C If the opening stock is more than closing stock or sales are more than production, < TOP
the profit under absorption costing is less than the profit under marginal costing.
On the reverse situation, profit under absorption costing is more than profit under
marginal costing. Therefore, (c) is correct.
49. D Unit contribution margin is Rs.120 – Rs.90 = Rs.30. Additional profit will be < TOP
Rs.82,800 (2,760 × Rs.30). After break even, profit is equal to the unit contribution
margin multiplied by the number of units sold beyond break-even.
Page 22 of 25
Answer Reason
50. A It is seen from the given below table that contribution per unit has reduced and as a < TOP
result the profit volume ratio would also be reduced and the profit reported is far
less than the budgeted values. Therefore, it is not advisable for the management to
go for the alternative.
75% 90%
Production 9,000 units 10,800 units
(Rs.) (Rs.)
Selling price 32.00 28.00
Less: Variable costs 19.00 19.00
Contribution 13.00 9.00
Total contribution 1,17,000 97,200
Less: Fixed costs 78,000 78,000
Profit 39,000 19,200
Therefore the decrease in the profit = Rs.39,000 – Rs.19,200 = Rs.19,800.
51. D Sales = Direct materials used + Direct labour + Fixed manufacturing overhead + < TOP
Variable manufacturing overhead + Gross profit
Rs.6,00,000 = Rs.2,50,000 + Rs.70,000 + Rs.1,20,000 + Variable manufacturing
overhead + Rs.50,000
Variable manufacturing overhead:
= Rs.6,00,000 – Rs.2,50,000 – Rs.70,000 – Rs.1,20,000 – 50,000 = Rs.1,10,000
Total contribution = Sales – (Direct materials used + Direct labor + Variable
manufacturing overhead + Variable selling and distribution
expenses.)
= Rs.6,00,000 – (Rs.2,50,000 + Rs.70,000 + Rs.1,10,000 + 40,000) = Rs.1,30,000.
52. A Target costing is the technique by which first, the price at which the customers are < TOP
willing to buy that particular product is determined and then the cost is adjusted
accordingly to earn the desired profits.
53. D The opportunity cost is the maximum benefit foregone by using a scarce resource < TOP
for a given purpose. It is the benefit provided by the next best use of that resource.
Thus, in a factory operating at full capacity, the opportunity cost of making a
component is the benefit given up by not selecting an alternative use of the plant
capacity. The other options are not correct.
54. D The minimum selling price to be quoted is the incremental cost per unit. Here all < TOP
the costs including depreciation, except Rs.80,000 fixed costs, are incremental and
variable. So, the incremental cost per unit = cost of {Direct Material = Rs.20 per
unit + Direct Labour at the rate of Rs.10 per hour = Rs.40 per unit + Power at the
rate of Rs.6 per hour = Rs.24 + Variable Overheads = Rs.20 per unit +
Depreciation of [(Rs.1,70,000 – Rs.20,000) ÷ 25,000 units] = Rs.6 per unit}
= Rs.110.
[Cost is different from cash flow and here depreciation is not a period cost and it
increases with increase in number of units produced.]
55. C When assessing the brand strength, a company should consider brand positioning, < TOP
customer loyalty, statutory protection, brand management by the company and the
long-term trends along with a detailed review of the brand. Hence the short-term
trends are not considered.
56. C Statement (c) is true with respect to the other method which is more widely < TOP
accepted in valuing a brand known as Earnings Valuation Method. Hence option
(c) is correct answer.
57. A A company is said to have created economic value added, if the Return on its < TOP
capital employed is greater than the opportunity cost.
Page 23 of 25
Answer Reason
58. A The fixed overhead per unit increases with a decrease in production volume either < TOP
due to capacity remaining unused or due to inefficiency in production, hence
option (a) is correct.
59. A Target cost = Selling price at capacity – 20% profit margin < TOP
Price (Rs.) Demand (Units)
1,000 90,000
900 1,80,000
800 3,60,000
Target cost = Rs.800 – 20% Rs.800
= Rs.800 – Rs.160 = Rs.640.
60. C Out of pocket costs are those costs which give rise to cash expenditure as opposed < TOP
to such costs as depreciation, which do not involve any cash expenditure. Costs
which are ascertained after being incurred are called historical costs and not out of
pocket costs.
61. B Return on Investment pricing recognizes capital investment in determining the < TOP
proposed selling price. Whereas, under full-cost pricing, the normal mark-up is
based on the total cost as such it does not recognize capital investment in
determining proposed selling price and hence option (b) is false. Hence option (b)
is correct answer.
62. C The principle underlying a make or buy decision is to use available resources as < TOP
efficiently as possible before buying from an outside supplier. The manager
considers only the costs relevant to the investment decision. If the total relevant
costs of production are less than the cost to buy the item, it should be produced in-
house. The key variable is relevant costs. Thus the costs that can be avoided under
either decision choice must be determined.
Option (a) is incorrect because the breakeven point is not relevant, but the extent of
the use of operating capacity may be a consideration.
Option (b) is incorrect because whether operations are at normal volume is less
important than the amount of idle capacity. The company is less likely to buy if it
has sufficient unused capacity.
Option (d) is incorrect because total costs (absorption costing) are not as important
as relevant costs.
Option (e) is incorrect because activity based costing is used to allocate fixed
overhead. Fixed overhead would not be a relevant cost in a make or buy decision
unless it is avoidable by not making the item.
63. E The cost means the value of the sacrifice made to acquire goods or services. < TOP
Therefore, (e) is correct.
Page 24 of 25
Answer Reason
64. A Computation of Selling price per unit < TOP
Particulars Rs. Rs.
(for 10,000 units) (per unit)
Direct material 2,00,000 20.00
Direct wages 1,20,000 12.00
Prime cost 3,20,000 32.00
Add: Factory overheads 1,30,000 13.00
Factory cost 4,50,000 45.00
Add: Administrative overheads 69,600 6.96
Total cost of production 5,19,600 51.96
Profit* 1,73,200 17.32
Sales** 6,92,800 69.28
Rs.5,19,600 × 25
*Profit = 75 = Rs.1,73,200.
**Total sales = Total cost of production + Profit = Rs.5,19,600 + Rs.1,73,200 =
Rs.6,92,800.
Hence selling price per unit is Rs.6,92,800 ÷ 10,000 units = Rs.69.28 per unit.
65. C Economic value added considers the cost of debt as well as cost of equity while < TOP
computing profit of a business. Hence, option (c) is the correct answer.
66. A The break-even point in units is calculated by dividing the fixed costs by < TOP
contribution per unit. If selling price is constant and variable costs increase, the
unit contribution margin will decline. It results in an increase in the break-even
point. Other options given in (b), (c), (d) and (e) are not true.
67. E Management accounting is not mandatory. Management accounting is not based on < TOP
any set of accepted principles. It focuses more on the parts or segments of a
company and less on a company as a whole. It does not provide an alternative to
administration. It refers to reports prepared to fulfill the needs of management.
Hence, option (e) is correct answer.
68. D Relevant costs are the costs which are relevant or pertinent to the decision. In < TOP
decision making, the relevancy of cost data takes on a special meaning. It exhibits
two fundamental characteristics – it must be future and it must differ between
alternatives. Hence (d) is the answer.
69. D The price of the other different products in the same company is not a < TOP
consideration while setting the price of a product. The other options are not the
answer because they are all the major considerations while setting the price of a
product. Hence, option (d) is correct answer.
70. B Let the sale price of each of both the products be Re.1. < TOP
Total contribution of both the products
= 300 units 0.60 Re.1 + 300 units 0.50 Re.1 = Rs.330.
Contribution to sales ratio = Rs.330 ÷ (Rs.300 + Rs.300) = 0.55
If 50 units of B are substituted for 50 units of A, total contribution
= 350 units 0.60 Re.1 + 250 units 0.50 Re.1 = Rs.335.
Contribution to sales ratio = Rs.335 ÷ Rs.600 = 0.558 or 0.56.
Contribution to sales ratio rises from 0.55 to 0.56.
Page 25 of 25