PRACTICE & REVISION KIT

CA SRI LANKA CURRICULUM 2020

Business Level II
BL6 – Management
Accounting
 Second edition 2020

ISBN 9781 5097 3134 3

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©
BPP Learning Media Ltd
2020

ii
Contents

Page
Question index iv
Introduction v
How to use this Practice & Revision Kit vi
Format of the exam viii
Exam techniques ix
Action verbs x
Questions 3
Answers 119
Mock exam questions 203
Mock exam answers 221

Contents iii
 Question index

Page
Title
Question Answer
Part A: Cost Accounting
1. Introduction to Management Accounting 3 119
2. Cost Classification 5 120
3. Accounting for Labour Costs 16 126
4. Accounting for Overhead Costs 20 131
5. Pricing 26 135
6. Integrated Accounting 27 136
7. Job, Batch, Contract & Service Costing 31 138
8. Process Costing 37 143
9. Marginal & Absorption Costing 44 148
Part B: Planning & Controlling
10. Standard Costing & Variance Analysis 51 155
11. Budgeting, Preparation & Control 65 166
Part C: Decision Making
12. Short-term Decision Making 78 174
13. Long-term Decision Making 89 181
Part D: Risk & Uncertainty
14. Risk & Uncertainty 98 187
Part E: Working Capital Management
15. Inventory Control 108 195
Mock Exam 203 221

iv BL6 – Management Accounting

Introduction

Welcome to this Practice & Revision Kit for the Institute of Chartered Accountants of
Sri Lanka professional examinations for curriculum 2020.
One of the key criteria for achieving exam success is question practice. There is
generally a direct correlation between candidates who revise all topics and practise
exam questions and those who are successful in their real exams. This Practice &
Revision Kit gives you ample opportunity for such practice in the run up to your
exams.
The Practice & Revision Kit is structured to follow the modules of the Study Text and
comprises banks of objective test questions. Suggested solutions to all questions are
supplied.
We welcome your feedback. If you have any comments about this Practice &
Revision Kit, or would like to suggest areas for improvement, please e-mail
[email protected].
Good luck in your exams!

BPP LEARNING MEDIA

Introduction v
 How to use this Practice & Revision Kit

This Practice & Revision Kit comprises banks of practice questions of the style that
you will encounter in your exam. It is the ideal tool to use during the revision phase of
your studies.
Questions in your exam may test any part of the syllabus so you must revise the
whole syllabus. Selective revision will limit the number of questions you can answer
and hence reduce your chances of passing. It is better to go into the exam knowing a
reasonable amount about most of the syllabus rather than concentrating on a few
topics to the exclusion of the rest. You should at all costs avoid falling into the trap of
question spotting, that is trying to predict what are likely to be popular areas for
questions, and restricting your revision and question practice to those.
Practising as many exam-style questions as possible will be the key to passing this
exam. You must do questions under timed conditions and ensure you write full
answers to the discussion parts as well as doing the calculations.
Planning your revision
When you begin your course, you should make a plan of how you will manage your
studies, taking into account the volume of work that you need to do and your other
commitments, both work and domestic.
In this time, you should go through your notes to ensure that you are happy with all
areas of the syllabus and practise as many questions as you can. You can do this in
different ways, for example:
· Revise the subject matter a module at a time and then attempt the questions
relating to that module; or
· Revise all the modules and then build an exam out of the questions in this
Practice & Revision Kit. Review the exam structure and then group together the
relevant number of MCQs and longer questions from different syllabus areas to
create a practice exam.
Using the practice questions
The best approach is to select a question and then allocate to it the time that you
would have in the real exam. All the practice written response questions in this
Practice & Revision Kit have mark allocations, so you can calculate the amount of time
that you should spend on the question.
However, this is an approximate guide: for example, some MCQs are very short and
just require a factual response, which you either know or you don’t, while others are
more complex, requiring calculations, which will inevitably take more time.

vi BL6 – Management Accounting

Using the suggested solutions
Avoid looking at the answer until you have finished a question. It can be very
tempting to do so, but unless you give the question a proper attempt under exam
conditions you will not know how you would have coped with it in the real exam
scenario.
When you do look at the answer, compare it with your own and give some thought to
why your answer was different, if it was.
In multiple choice questions if you did not reach the correct answer make sure that
you work through the explanation or workings provided, to see where you went
wrong. If you think that you do not understand the principle involved, go back to your
own notes or your study materials and work through and revise the point again, to
ensure that you will understand it if it occurs in the exam.
Passing the Business Level II – Management Accounting
If you have honestly done your revision then you can pass this exam. What you must
do is remain calm and tackle it in a professional manner. There are a number of
points which you should bear in mind.
· You must read the question properly. Students often fail to read the question
properly and miss some of the information. Time spent reading the question a
second time would be time well spent. Make yourself do this, don't just rush into
it in a panic.
· Stick to the timings and answer all questions. Do not spend too long on one
question at the expense of others. The number of extra marks you will gain on
that question will be minimal, and you could have at least obtained the easy
marks on the next question.

Exam techniques vii

 Format of the exam

Mode: Computer based examination

Time: 2 hours
Pass Mark: 50%

The exam comprises of fifty (50) multiple choice, drag & drop, fill in the blanks,
matching questions, etc. of two marks each (including mini scenario based/functional
scenario-based questions).

viii BL6 – Management Accounting

Exam techniques

Using the right techniques in the real exam can make all the difference between
success and failure.
Here are a few pointers:
1. At the start of the exam, skim through the questions and decide in what order
you are going to attempt the exam. You have to write your answers in the
order set out in the exam, but you can attempt the questions in any order that
you like. Some candidates like to attempt the easiest questions first, on the basis
that will enable them to gain the easiest available marks quickly and build up
their confidence.
2. Having established the order that you are going to do the exam, allocate the
time available to the questions and work out at what time you will need to
stop working on one question or batch of questions and move on to the next.
When you reach the end of the allocated time for the question that you are
working on, STOP. It is much easier to gain the straightforward marks for the
next question than to spend a long time working on the previous question in the
hope of gaining one or two final marks.
3. Make sure that you attempt every objective test question. Do not leave any
blank. If you run out of time or are not sure of an answer you should select the
option you think is most suitable. You can come back to the question later if
time permits.
4. Read the question. Read it carefully once, and then read it again to ensure that
you have picked everything up. Make sure that you understand what the
question wants you to do, rather than what you might like the question to be
asking you.
5. If you finish the exam with time to spare, use the rest of the time to review your
answers and to make sure that you answered every objective test question.

Exam techniques ix
 Action verbs checklist

Knowledge Process Verb List Verb Definitions

Tier – 1 Remember Define Describe exactly the nature, scope or meaning
Recall important Draw Produce (a picture or diagram)
information
Identify Recognise, establish or select after
consideration
List Write the connected items one below the other

Relate To establish logical or causal connections

State Express something definitely or clearly

Tier – 2 Comprehension Calculate/Compute Make a mathematical computation

Explain important Discuss Examine in detail by argument showing
information different aspects, for the purpose of arriving at
a conclusion
Explain Make a clear description in detail revealing
relevant facts
Interpret Present in understandable terms or to translate

Recognise To show validity or otherwise, using knowledge

or contextual experience
Record Enter relevant entries in detail

Summarise Give a brief statement of the main points (in

facts or figures)

x BL6 – Management Accounting

Knowledge Process Verb List Verb Definitions
Tier – 3 Application Apply Put to practical use
Use knowledge in a setting Assess Determine the value, nature, ability or quality
other than the one in which
it was learned/solve close- Demonstrate Prove, especially with examples
ended problems Graph Represent by means of a graph

Prepare Make ready for a particular purpose

Prioritise Arrange or do in order of importance

Reconcile Make consistent with another

Solve To find a solution through calculations and/or

explanations
Tier – 4 Analysis Analyse Examine in detail in order to determine the
Draw relations among ideas solution or outcome
and to compare and Compare Examine for the purpose of discovering
contrast/solve open-ended similarities
problems
Contrast Examine in order to show unlikeness or
differences
Differentiate Constitute a difference that distinguishes
something
Outline Make a summary of significant features

Action verbs checklist xi

 Knowledge Process Verb List Verb Definitions
Tier – 5 Evaluate Advise Offer suggestions about the best course of
Formation of judgments and action in a manner suited to the recipient
decisions about the value of Convince To persuade others to believe something using
methods, ideas, people or evidence and/or argument
products
Criticise Form and express a judgment

Evaluate To determine the significance by careful

appraisal
Recommend A suggestion or proposal as to the best course
of action
Resolve Settle or find a solution to a problem or
contentious matter
Validate Check or prove the accuracy

Tier – 6 Synthesis Compile Produce by assembling information collected

Solve unfamiliar problems from various sources
by combining different Design Devise the form or structure according to a plan
aspects to form a unique or
Develop To disclose, discover, perfect or unfold a plan or
novel solution
idea
Propose To form or declare a plan or intention for
consideration or adoption

xii BL6 – Management Accounting

Questions
Questions

2 CA Sri Lanka
 Questions

PART A QUESTIONS: COST ACCOUNTING

Questions 1.1 to 9.19 cover Cost Accounting the subject of Chapters 1–9 of the
Study Text.

1 Introduction to Management Accounting

1.1 Which of the following is not an essential quality of good information?
A It should be relevant for its purposes
B It should be communicated to the right person
C It should be completely accurate
D It should be timely (2 marks)

1.2 Which of the following statements about management accounts is/are true?
(i) They must be stated in purely monetary terms
(ii) Limited companies must, by law, prepare management accounts
(iii) They serve as a future planning tool and are not used as an historical
record
A (i), (ii) and (iii)
B (i) and (ii)
C (ii) only
D None of the statements are correct (2 marks)

1.3 A management control system is

A A possible course of action that might enable an organisation to
achieve its objectives
B A collective term for the hardware and software used to drive a
database system
C A set up that measures and corrects the performance of activities of
subordinates in order to make sure that the objectives of an
organisation are being met and their associated plans are being carried
out
D A system that controls and maximises the profits of an organisation
(2 marks)

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1.4 Which of the following statements are correct?

(i) Strategic information is mainly used by senior management in an
organisation
(ii) Productivity measurements are examples of tactical information
(iii) Operational information is required frequently by its main users
A (i) and (ii) only
B (i) and (iii) only
C (ii) and (iii) only
D (i), (ii) and (iii) (2 marks)

1.5 Which of the following statements are correct?

A Forecasts will always provide a good source of data for historic costs
B Financial accounts provide the best source of data for future costs
C A good source of data for historic costs are the financial accounting
records and the documents that back up these records
D It is a legal requirement to produce management accounts (2 marks)

1.6 Which of the following statements about management accounting is/are

false?
(i) Reports relate to what happened in the past
(ii) Maybe made public
(iii) Gives up to date reports which can be used for controlling the business
A (i) and (ii) only
B (i) and (iii) only
C (ii) and (iii) only
D (i), (ii) and (iii) (2 marks)

1.7 Which of the following do management accountants provide information to

management on?
(i) Costs of goods and services
(ii) Actual costs compared to expected costs
(iii) Expected profits and production plans
A (i) and (ii) only
B (i) and (iii) only
C (ii) and (iii) only
D (i), (ii) and (iii) (2 marks)

4 CA Sri Lanka
 Questions

1.8 Which of the following statements about financial accounts is correct?

A Forecasts will always provide a good source of data for future costs
B Financial accounts provide the best source of data for historic costs
C Are designed to meet the requirements of people inside the business
D It is not a legal requirement to produce financial accounts (2 marks)

1.9 Which of the following is not a type of information?

A Strategic
B Relevant
C Operational
D Tactical (2 marks)

1.10 Choose the correct word to complete the 2 sentences below:

(a) (Data /Information) is the raw material for processing.
(b) (Data/Information) has already been process in such a way to make it
meaningful to the person who receives it. (2 marks)

1.11 Which of the following statements is true?

A Strategic tasks are highly structured
B Operational tasks are short term in timescale
C Tactical information is mostly external
D Operational plans are implemented by top level management
(2 marks)

1.12 Seb works as a supervisor in department B of T Co. He is looking at short-

term, detailed information about expenses in department B.
Jai is looking at long-term loan options from various banks for T Co.
Which levels of information are Seb and Jai working with?
A Seb: Strategic information Jai: Management information
B Seb: Operational information Jai: Strategic information
C Seb: Strategic information Jai: Operational information
D Seb: Management information Jai: Strategic information
(2 marks)

2 Cost Classification
2.1 Which one of the following would be classed as indirect labour?
A Machine operators in a company manufacturing washing machines
B A stores assistant in a factory store
C Plumbers in a construction company

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BL6 | Management Accounting

D A consultant in a firm of management consultants (2 marks)

2.2 Variable costs are conventionally deemed to do which of the following?

A Be constant per unit of output
B Vary per unit of output as production volume changes
C Be constant in total when production volume changes
D Vary, in total, from period to period when production is constant
(2 marks)

2.3 The following is a graph of cost against level of activity

Cost

Level of activity

To which one of the following costs does the graph correspond?

A Electricity bills made up of a standing charge and a variable charge
B Bonus payment to employees when production reaches a certain level
C Salesman's commissions payable per unit up to a maximum amount of
commission
D Bulk discounts on purchases, the discount being given on all units
purchased (2 marks)

6 CA Sri Lanka
 Questions

2.4 The following graphs depict various costs

Rs Rs

Total Total
Cost Cost

Level of activity Level of activity

Graph 1 Graph 2

Rs Rs

Total Total
Cost Cost

Level of activity Level of activity

Graph 3 Graph 4

Which of the graphs shows supervisor salary costs, where one supervisor is
needed for every five employees added to the staff.
A Graph 1
B Graph 2
C Graph 3
D Graph 4 (2 marks)

2.5 For the purposes of costing, costs can be either fixed, variable or
semi-variable within the normal or relevant range of output.
True
False (2 marks)

2.6 A firm has to pay a Rs. 100 per unit royalty to the inventor of a device which
it manufactures and sells.
The royalty charge would be classified in the firm's accounts as a:
A Selling expense
B Direct expense
C Production overhead
D Administrative overhead (2 marks)

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BL6 | Management Accounting

2.7 Which of the following would be classed as indirect labour?

A Assembly workers in a company manufacturing televisions
B A stores assistant in a factory store
C Plasterers in a construction company
D An audit clerk in a firm of auditors (2 marks)

2.8 Which of the following items would most likely be treated as an indirect
cost?
A Wood used to make a chair
B Metal used for the legs of a chair
C Fabric to cover the seat of a chair
D Staples to fix the fabric to the seat of a chair (2 marks)

2.9 Prime cost is:

A All costs incurred in manufacturing a product
B The total of direct costs
C The material cost of a product
D The cost of operating a department (2 marks)

2.10 A company employs four supervisors to oversee the factory production of all
its products. The salaries paid to these supervisors are:
A A direct labour cost
B A direct production expense
C A production overhead
D An administration overhead (2 marks)

2.11 Which of the following best describes a controllable cost?

A A cost which arises from a decision already taken, which cannot, in the
short run, be changed.
B A cost for which the behaviour pattern can be easily analysed to
facilitate valid budgetary control comparisons.
C A cost which can be influenced by its budget holder.
D A specific cost of an activity or business which would be avoided if the
activity or business did not exist. (2 marks)

8 CA Sri Lanka
 Questions

2.12 Which of the following items might be a suitable cost unit within the credit
control department of a company?
(i) Stationery cost
(ii) Customer account
(iii) Cheque received and processed
A Item (i) only
B Item (ii) only
C Item (iii) only
D Items (ii) and (iii) only (2 marks)

2.13 Which of the following best describes a period cost?

A A cost that relates to a time period which is deducted as expenses for
the period and is not included in the stock valuation.
B A cost that can be easily allocated to a particular period, without the
need for arbitrary apportionment between periods.
C A cost that is identified with a unit produced during the period, and is
included in the value of stock. The cost is treated as an expense for the
period when the stock is actually sold.
D A cost that is incurred regularly every period, eg every month or
quarter. (2 marks)

2.14 Fixed costs are conventionally deemed to be:

A Constant per unit of output
B Constant in total when production volume changes
C Outside the control of management
D Those unaffected by inflation (2 marks)

2.15 The following data relate to the overhead expenditure of a contract cleaners
at two activity levels.
Square metres cleaned 12,750 15,100
Overheads Rs. 739,500 Rs. 835,850
What is the estimate of the overheads if 16,200 square metres are to be
cleaned?
A Rs. 664,200
B Rs. 880,950
C Rs. 896,740
D Rs. 939,600 (2 marks)

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BL6 | Management Accounting

The following information relates to questions 2.16 to 2.20

A12k005

Which one of the above graphs illustrates the costs described in questions 2.16 to
2.20?

2.16 A linear variable cost – when the vertical axis represents cost incurred.
A Graph 1
B Graph 2
C Graph 4
D Graph 5 (2 marks)

2.17 A fixed cost – when the vertical axis represents cost incurred.
A Graph 1
B Graph 2
C Graph 3
D Graph 6 (2 marks)

2.18 A linear variable cost – when the vertical axis represents cost per unit.
A Graph 1
B Graph 2
C Graph 3
D Graph 6 (2 marks)

2.19 A semi-variable cost – when the vertical axis represents cost incurred.
A Graph 1
B Graph 2
C Graph 4
D Graph 5 (2 marks)

10 CA Sri Lanka
 Questions

2.20 A step fixed cost – when the vertical axis represents cost incurred.
A Graph 3
B Graph 4
C Graph 5
D Graph 6 (2 marks)

2.21 B LLC has recorded the following data in the two most recent periods.
Total costs Volume of
of production production
Rs 000s Units
13,500 700
18,300 1,100
What is the best estimate of the company's fixed costs per period?
Rs 000s
A 13,500
B 13,200
C 5,100
D 4,800 (2 marks)

2.22 A production worker is paid a salary of Rs. 6500 per month, plus an extra Rs.
50 for each unit produced during the month. This labour cost is best
described as:
A A variable cost
B A fixed cost
C A step cost
D A semi-variable cost (2 marks)

2.23 What type of cost is supervisor salary costs, where one supervisor is needed
for every ten employees added to the staff?
A A fixed cost
B A variable cost
C A mixed cost
D A step cost (2 marks)

2.24 An organisation manufactures a single product. The total cost of making

4,000 units is Rs. 200,000 and the total cost of making 2,000 units is Rs.
400,000. Within this range of activity the total fixed costs remain unchanged.
What is the variable cost per unit of the product?
A Rs. 80
B Rs. 100
C Rs. 125
D Rs. 200 (2 marks)

2.25 Which of the following is the correct definition of a cost unit?

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BL6 | Management Accounting

A The cost per hour of operating a machine

B The cost per unit of electricity consumed
C A unit of product or service in relation to which costs are ascertained
D A measure of work output in a standard hour (2 marks)

2.26 Which of the following items might be a suitable cost unit within the
accounts payable department of a company?
A Postage cost
B Invoice processed
C Customer account
D Purchase orders processed (2 marks)

2.27 A cost centre is:

A A unit of product or service in relation to which costs are ascertained
B An amount of expenditure attributable to an activity
C A production or service location, function, activity or item of
equipment for which costs are accumulated
D A centre for which an individual budget is drawn up (2 marks)

2.28 A cost …………… is a unit of product, service or activity for which costs can be
ascertained.
Fill in the missing word from the choices below:
A object
B centre
C unit (2 marks)

2.29 Identify from the following lists which cost object is associated with the
given business.
(i) A manufacturing business:
A Per item manufactured
B Per day worked
C Per Labour hour
D Per employee
(ii) A passenger transport business:
A Per person transported
B Per labour hour
C Per passenger mile
D Per employee
(iii) An accountancy firm:

12 CA Sri Lanka
 Questions

A Per report produced

B Per client
C Per chargeable hour
D Per accountant (3 marks)

2.30 In the equation Y = a + bX, which is the dependent variable?

A Y
B a
C b
D X (2 marks)

2.31 Delete the wrong words.

Extrapolation involves using a line/fit/outside of best line/fit/outside to
predict a value line/fit/outside the two extreme points of the observed
range. (2 marks)

2.32 Between sales of suntan cream and sales of cold drinks, one would expect
(assuming spending money to be unlimited):
A Positive, but spurious, correlation
B Negative, but spurious, correlation
C Positive correlation indicating direct causation
D Negative correlation indicating direct causation (2 marks)

2.33 Which of the following statements is/are true of the coefficient of

determination?
True False
(a) It is the square of the Pearsonian coefficient of
correlation.
(b) It can never quite equal 1.
(c) If it is high, this proves that variations in one
variable cause variations in the other.
(3 marks)

2.34 Choose the appropriate words from those highlighted.

When using regression analysis/analytical regression for forecasting, the
X variables are the years (or days or months)/the level of sales (or
costs). (2 marks)

The following information relates to questions 2.35 and 2.36

You are given the following data for output at a factory and costs of production
over the past five months.
Month Output Costs

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BL6 | Management Accounting

units Rs'000
x y
1 20 82
2 16 70
3 24 90
4 22 85
5 18 73
2.35 Calculate an equation to determine the expected cost level for any given
output volume. (2 marks)

2.36 Prepare a budget for total costs if output is 22,000 units and identify the
answer from below:
A Rs. 82,000
B Rs. 85,900
C Rs. 86,200
D Rs. 85,200 (2 marks)

The following information relates to questions 2.37 and 2.38

Sales of product B over the 7-year period from year 1 to year 7 were as follows.
Year Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7
Sales of B ('000 units) 22 25 24 26 29 28 30
There is high correlation between time and the volume of sales.
2.37 Calculate the trend line of sales and forecast sales in year 8.
Year 8
A 31,300
B 29,200
C 31,900
D 33,200 (2 marks)

2.38 Calculate the trend line of sales and forecast sales in year 9.
Year 9
A 22,950
B 28,000
C 32,550
D 32,000 (2 marks)

2.39 A rank correlation coefficient is being calculated, using the formula

6å d
2

R=1– . If åd2 = 50 and n = 10, R will be.

( 2
n n –1 )
A –0.30
B 0.69

14 CA Sri Lanka
 Questions

C 0.30
D 0.70 (2 marks)

2.40 The following data give five budget staff performance marks for technical ability
and degree of accuracy.
Technical ability Degree of accuracy
Employee 1 5.9 5.5
Employee 2 5.7 5.6
Employee 3 5.4 5.4
Employee 4 5.2 5.8
Employee 5 6.0 5.9
The rank correlation coefficient between the two performance attributes and
calculated to two decimal places is . (2 marks)

2.41 A soft drinks company has decided to be complete a market survey for a new
drink in comparison with others drinks currently on sale in the market.
Survey participants were asked to rank eight drinks in order of preference
regarding taste, and then again rank them for looks, with a rank of 1
indicating nicest taste and best looks and a rank of 9 being the worst. A rank
correlation coefficient of 0.95 was them calculated using this data. This
means that:
A There appeared to be no correlation between taste and looks in the
drinks surveyed.
B The survey shows that the drinks which taste the nicest are also likely
to be rated highly for looks by consumers.
C The best-looking drinks ranked lowest for taste.
D Nothing, as the rank correlation cannot be used for this kind of survey.
(2 marks)

2.42 correlation means that low values of one variable are

associated with low values of the other, and high values of one variable are
associated with high values of the other. (2 marks)

2.43 The correlation coefficient, r, must always fall within the range
A 0 to +1
B -1 to +1
C -1 to 0
D -100 to +100 (2 marks)

2.44 If Sx = 30, Sy = 62, Sx2 = 238, Sy2 = 1,014, Sxy = 485, n = 4

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BL6 | Management Accounting

What is the correlation coefficient? (to 2 decimal places)

(2 marks)

2.45 East Co suspects that there is a relationship between the number of units
sold and the number of units returned as faulty. x = number of units sold and
y = number of returns.
If åx = 440, åy = 330, åx² = 17,986, åy² = 10,366, åxy = 13,467 and n = 11,
then the value of r, the coefficient of correlation, to 2 decimal places, is

(2 marks)

3 Accounting for Labour Costs

3.1 Which of the following would be classified as indirect labour?
A Assembly workers in a company manufacturing televisions
B A stores assistant in a factory store
C Plasterers in a construction company
D An audit clerk in a firm of auditors (2 marks)

3.2 A job is budgeted to require 3,300 productive hours after incurring 25% idle
time. If the total labour cost budgeted for the job is Rs. 36,300,000 what is
the labour cost per hour?
A Rs. 8,250
B Rs. 8,800
C Rs. 11,000
D Rs. 14,670 (2 marks)

3.3 PR LLC manufactures a single product, M. Budgeted production output of

product M during August is 200 units. Each unit of product M requires six
labour hours for completion and PR LLC anticipates 20% idle time. Labour is
paid at a rate of Rs. 70 per hour.
What would be the direct labour cost for August?
A Rs. 105,000
B Rs. 108,000
C Rs. 150,000
D Rs. 95,000 (2 marks)

3.4 Classify the following labour costs as either direct or indirect.

The basic pay of machine operators (cash paid, tax and relevant taxes) is
a/an …………………. cost. (2 marks)

16 CA Sri Lanka
 Questions

3.5 Classify the following labour costs as either direct or indirect.

The basic pay of supervisors is a/an …………………… cost. (2 marks)

3.6 Overtime premium, i.e. the premium above basic pay, for working overtime
is a/an ………………………. cost. (2 marks)

3.7 Which of the following could lead to an increase in management bonus,

without benefiting the organisation?
(1) A manager holds on to heavily depreciated assets in order to avoid
heavy investment in the period
(2) A manager in a manufacturing division uses absorption costing and
builds up high levels of inventory
(3) A sales manager changes their fixed target to a relative target based on
market share
A 1 and 2 only
B 1, 2 and 3
C 1 only
D 2 and 3 only (2 marks)

3.8 The following data relate to work in the finishing department of a certain
factory.
Normal working day 7 hours
Basic rate of pay per hour Rs. 50
Standard time allowed to produce 1 unit 4 minutes
Premium bonus payable at the basic rate 60% of time saved
On a particular day one employee finishes 180 units. His gross pay for the
day will be
A Rs. 350
B Rs. 500
C Rs. 560
D Rs. 600 (2 marks)

3.9 An employee is paid on a piecework basis. The basis of the piecework

scheme is as follows:
1 to 100 units – Rs. 2.00 per unit
101 to 200 units – Rs. 3.00 per unit
201 to 299 units – Rs. 4.00 per unit
with only the additional units qualifying for the higher rates. Rejected units
do not qualify for payment.
During a particular day the employee produced 210 units of which 17 were
rejected as faulty.

CA Sri Lanka 17
BL6 | Management Accounting

What did the employee earn for their day's work?

A Rs. 479
B Rs. 540
C Rs. 579
D Rs. 630 (2 marks)

3.10 Employee A is a carpenter and normally works 36 hours per week. The
standard rate of pay is Rs. 36 per hour. A premium of 50% of the basic
hourly rate is paid for all overtime hours worked. During the last week of
October, Employee A worked for 42 hours. The overtime hours worked were
for the following reasons:
Machine breakdown: 4 hours
To complete a special job at the request of a customer: 2 hours
How much of Employee A's earnings for the last week of October would have
been treated as direct wages?
A Rs. 1,620
B Rs. 1,296
C Rs. 1,404
D Rs. 1,512 (2 marks)

3.11 Which of the following statements is/are true about group bonus schemes?
(i) Group bonus schemes are appropriate when increased output depends
on a number of people all making extra effort
(ii) With a group bonus scheme, it is easier to award each individual's
performance
(iii) Non-production employees can be rewarded as part of a group
incentive scheme
A (i) only
B (i) and (ii) only
C (i) and (iii) only
D All of them (2 marks)

3.12 A company had 30 direct production employees at the beginning of last year
and 20 direct production employees at the end of the year. During the year, a
total of 15 direct production employees had left the company to work for a
local competitor. The labour turnover rate for last year was:
A 16.7%
B 20.0%
C 25.0%
D 60.0% (2 marks)

18 CA Sri Lanka
 Questions

3.13 Akila works as a member of a three-person team in the assembly department

of a factory. The team is rewarded by a group bonus scheme whereby the
team leader receives 40 per cent of any bonus earned by the team, and the
remaining bonus is shared evenly between Akila and the other team
member. Details of output for one day are given below.
Hours worked by team 8 hours
Team production achieved 80 units
Standard time allowed to produce one unit 9 minutes
Group bonus payable at Rs. 60 per hour 70% of time saved
The bonus element of Jane's pay for this particular day will be
A Rs. 50.40
B Rs. 72.00
C Rs. 100.80
D Rs. 168.00 (2 marks)

3.14 Fill in the gaps from the words listed below:

A manufacturing firm is very busy, and overtime is being worked. The
amount of overtime ……………………. contained in …………………….. wages
would normally be classed as ………………………………………..
Premium, Normal, Indirect, Labour cost, Prime cost, Direct, Factory
overheads (2 marks)

3.15 Job 198 requires 380 active labour hours to complete. It is expected that
there will be five per cent idle time. The wage rate is Rs. 60 per hour. The
labour cost of Job 198 is:
A Rs. 21,660
B Rs. 22,800
C Rs. 23,940
D Rs. 24,000 (2 marks)

3.16 A unit of product L requires 9 active labour hours for completion. The
performance standard for product L allows for ten per cent of total labour
time to be idle, due to machine downtime. The standard wage rate is Rs. 90
per hour. What is the standard labour cost per unit of product L?
A Rs. 729
B Rs. 810
C Rs. 891
D Rs. 900 (2 marks)

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BL6 | Management Accounting

3.17 A manufacturing firm is very busy and overtime is being worked.

The amount of overtime premium contained in direct wages would normally
be classed as:
A Part of prime cost
B Factory overheads
C Direct labour costs
D Administrative overheads (2 marks)

3.18 Kavith is paid Rs. 550 for every unit of product he produces but he has a
guaranteed wage of Rs. 6000 per eight-hour day. In a week he produces the
following number of units:
Monday 12 units
Tuesday 14 units
Wednesday 9 units
Thursday 14 units
Friday 8 units
What is does Kavith earn for the week?
A Rs. 34000
B Rs. 32950
C Rs. 31350
D Rs. 30000 (2 marks)

4 Accounting for Overhead Costs

4.1 A company operates a standard absorption costing system and absorbs fixed
production overheads based on machine hours. The budgeted fixed
production overheads for the company for the previous year were
Rs. 660,000 and budgeted output was 220,000 units using 44,000 machine
hours. During the year, the total of the fixed production overheads debited to
the Fixed Production Overhead Control Account was Rs. 590,000, and the
actual output of 200,000 units used 38,000 machine hours.
Calculate the answer and then complete the missing words in the following
sentence by selecting from the following words:
……………… production overheads for that year were Rs. ………………….
………………. ……………………….
Variable/ Fixed / Semi-variable / Rs. 90,000 under absorbed / Rs. 60,000
under absorbed / Rs. 20,000 under absorbed / Rs. 10,000 over absorbed
(2 marks)

20 CA Sri Lanka
 Questions

4.2 Which of the following statements about overhead absorption rates are true?
(i) They are predetermined in advance for each period
(ii) They are used to charge overheads to products
(iii) They are based on actual data for each period
(iv) They are used to control overhead costs
A (i) and (ii) only
B (i), (ii) and (iv) only
C (ii), (iii) and (iv) only
D (iii) and (iv) only (2 marks)

4.3 A cost centre uses a direct labour hour rate to absorb overheads. Data for the
latest period are as follows:
Budgeted overhead Rs. 257,600
Actual overhead Rs. 235,920
Actual direct labour hours 4,925
Overhead under absorbed Rs. 9,370
How many direct labour hours were budgeted to be worked during the
period?
A 4,925
B 5,378
C 5,600
D This cannot be calculated from the information provided (2 marks)

4.4 A call centre recovers overheads on the basis of the number of calls made.
Budgeted overheads for the latest period were Rs. 1,125,300 but actual
overhead expenditure amounted to Rs. 1,074,150.
During the period 68,200 calls were made and overhead was under
recovered by Rs. 51,150.
Required
Calculate and identify the overhead absorption rate per call made.
A Rs. 25
B Rs. 20
C Rs. 15
D Rs. 14 (2 marks)

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BL6 | Management Accounting

4.5 The following extract of information is available concerning the four cost
centres of EG LLC.
Service
cost
Production cost centres centre
Machinery Finishing Packing Canteen
Number of direct employees 7 6 2 –
Number of indirect employees 3 2 1 4
Overhead allocated and Rs. Rs. Rs. Rs.
apportioned 285,000 183,000 89,600 84,000
The overhead cost of the canteen is to be re-apportioned to the production
cost centres on the basis of the number of employees in each production cost
centre. After the re-apportionment, the total overhead cost of the packing
department, to the nearest Rs, will be
A Rs. 12,000
B Rs. 99,680
C Rs. 100,800
D Rs. 101,600 (2 marks)

4.6 G LLC has two production cost centres (K and L) and two service cost centres
(stores and maintenance). It has been estimated that the service costs
centres do work for each other and the production departments in the
following proportions.
Stores Rs. 140,000 Maintenance Rs. 70,000
Production centre K 45% Production centre K 50%
Production centre L 45% Production centre L 45%
Maintenance 10% Stores 5%
Required
Calculate how much of the service department costs will end up in
Production centre K after repeated distribution.
A Rs. 102,890
B Rs. 84,000
C Rs. 140,000
D Rs. 107,110 (2 marks)

22 CA Sri Lanka
 Questions

4.7 A factory consists of two production cost centres (P and Q) and two service
cost centres (X and Y). The total allocated and apportioned overhead for
each is as follows:
P Q X Y
Rs. 950,000 Rs. 820,000 Rs. 460,000 Rs. 300,000
It has been estimated that each service cost centre does work for the other
cost centres in the following proportions:
P Q X Y
Percentage of service cost centre X to 40 40 – 20
Percentage of service cost centre Y to 30 60 10 –
Reapportionment of service cost centre costs is carried out using a method
that fully recognises the reciprocal service arrangements in the factory,
Required
Calculate the total overhead for production cost centre P.
A Rs. 1,270,000
B Rs. 1,160,000
C Rs. 1,260,000
D Rs. 1,070,000 (2 marks)

4.8 A private hospital has a budgeted annual overhead cost for cleaning of
Rs. 1,250,000. There are 300 beds in the hospital and these are expected to
be in use 95% of the year. The hospital uses a composite cost unit of
occupied bed per night.
Required
Calculate the overhead absorption rate for cleaning.
A Rs. 12.00
B Rs. 13.50
C Rs. 12.02
D Rs. 11.02 (2 marks)

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BL6 | Management Accounting

4.9 Budgeted information relating to a department in JP LLC for the next period
is as follows.
Direct Direct Direct
Production material labour labour Machine
Department overhead cost cost hours hours
Rs'000 Rs'000 Rs'000
1 27,000 67,500 13,500 2,700 45,000
Individual direct labour employees within each department earn differing
rates of pay, according to their skills, grade and experience
What is the most appropriate production overhead absorption rate for
department 1?
A 40% of direct material cost
B 200% of direct labour cost
C Rs. 100 per direct labour hour
D Rs. 600 per machine hour (2 marks)

4.10 The following data is available for department X for the latest period.
Budgeted production overhead Rs. 165,000
Actual production overhead Rs. 165,000
Budgeted machine hours 60,000
Actual machine hours 55,000
Which of the following statements is correct?
A No under or over-absorption of overhead occurred
B Overhead was Rs. 13,750 under-absorbed
C Overhead was Rs. 27,500 under-absorbed
D Overhead was Rs. 27,500 over-absorbed (2 marks)

4.11 A cost centre uses a direct labour hour rate to absorb overheads. Data for the
latest period are as follows:
Budgeted overhead Rs. 25,760
Actual overhead Rs. 23,592
Actual direct labour hours 4,925
Overhead under absorbed Rs. 937
How many direct labour hours were budgeted to be worked during the
period?
A 4,925
B 5,378
C 5,600
D This cannot be calculated from the information provided (2 marks)

24 CA Sri Lanka
 Questions

4.12 Complete the following sentence by selecting the correct words from the list
below:
Actual overheads incurred that are …………………… than the absorbed
………………………………….. and will always result in ……………………………
absorption.
Higher / Overheads /Under (2 marks)

4.13 Data for department Y for the latest period was as follows.
Budgeted direct labour hours 12,300
Actual direct labour hours 11,970
Production overhead absorption rate Rs. 260 per direct labour hour
Production overhead under absorbed Rs. 567,000
Required
Calculate the actual production overhead incurred during the period.
A Rs. 3,379,200
B Rs. 7,952,000
C Rs. 2,692,700
D Rs. 3,679,200 (2 marks)

4.14 Over-absorbed overheads occur when:

A Absorbed overheads exceed actual overheads
B Absorbed overheads exceed budgeted overheads
C Actual overheads exceed absorbed overheads
D Actual overheads exceed budgeted overheads (2 marks)

4.15 Which of the following are acceptable bases for absorbing production
overheads?
(i) Direct labour hours
(ii) Machine hours
(iii) As a percentage of the prime cost
(iv) Per unit
A Method (i) and (ii) only
B Method (iii) and (iv) only
C Method (i), (ii), (iii) and (iv)
D Method (i), (ii) or (iii) only (2 marks)

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BL6 | Management Accounting

4.16 The following extract of information is available concerning the four cost
centres of EG LLC.
Machinery Finishing Canteen Maintenance
Number of employees 8 6 4 2
Overhead costs (Rs'000) 1,000 800 160 80

Using the elimination method and allocating the canteen overheads first,
determine the total overhead cost of the machinery department, to the
nearest Rs, after reappointment is ________________. Use the number of
employees in each department as the basis for appointment. (2 marks)

5 Pricing
5.1 Which one of the following statements is true?
A Marginal cost-plus pricing is also known as full cost-plus pricing.
B Minimum pricing is based on relevant costs.
C Full cost-plus pricing is used for profit maximisation.
D Demand is a main factor in the full cost-plus approach to pricing.
(2 marks)

5.2 Dagny LLC uses a marginal cost-plus pricing system to determine the
selling price for one of its products, Product X.
Product X has the following costs:
Rs
Direct materials 1,200
Direct labour 500
Variable overheads 300
Fixed overheads 4,000
Fixed overheads are Rs. 2,000,000 for the year. Budgeted output and sales
for the year are 500 units and this should be sufficient for Product X to
break even.
What profit mark-up would Dagny LLP need to add to the marginal cost to
allow Dagny LLP to break even?
A 200%
B 300%
C 275%
D 190% (2 marks)

26 CA Sri Lanka
 Questions

5.3 The variable cost of product PL is Rs. 25 per unit. Fixed overheads are Rs.
20,000 per period. Budgeted sales are 4,000 units for next period, at which
level the product will earn a profit of Rs. 40,000.
The profit mark-up of product PL, as a percentage of the variable cost, is
A 25.0%
B 33.3%
C 37.5%
D 60.0% (2 marks)

5.4 Which of the following statements about full cost-plus pricing is/are
correct?
(i) It always ensures that all costs are covered when prices are
determined
(ii) It pays attention to profit maximisation
(iii) The mark-up can be varied
A (i), (ii) and (iii)
B (i) and (ii)
C (i) and (iii)
D (iii) only (2 marks)

5.5 A company calculates the prices of jobs by adding overheads to the prime
cost and adding 30% to total costs as a profit margin. Job number Y256 was
sold for Rs. 16,900 and incurred overheads of Rs. 6940. What was the prime
cost of the job?
A Rs. 4890
B Rs. 6060
C Rs. 9960
D Rs. 13,000 (2 marks)

6 Integrated Accounting
6.1 During production excess direct materials are often returned to the
warehouse. The accounting entry for the return of unused direct material
from production back to stores is:
Debit Credit
A Work in progress account Stores control account
B Stores control account Work in progress account
C Stores control account Overhead control account
D Overhead control account Stores control account
(2 marks)

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BL6 | Management Accounting

6.2 X LLC recorded the following wages costs for direct production workers for
November.
Rs
Basic pay 70,800
Overtime premium 2,000
Holiday pay 500
Gross wages incurred 73,300
The overtime was not worked for any specific job.
The accounting entries for these wages costs would be:
Debit Credit
Rs Rs
A Work in progress account 72,800
Overhead control account 500
Wages control account 73,300
B Work in progress account 70,800
Overhead control account 2,500
Wages control account 73,300
C Wages control account 73,300
Work in progress account 70,800
Overhead control account 2,500
D Wages control account 73,300
Work in progress account 72,800
Overhead control account 500
(2 marks)

6.3 The production overhead control account for RST LLC at the end of the
period looks like this.
PRODUCTION OVERHEAD CONTROL ACCOUNT
Rs Rs
Stores control 22,800 Work in progress 4,048,000
Wages control 180,400 Profit and loss 84,000
Expense creditors 210,000
4,132,000 4,132,000
Which of the following statements are correct?
(i) Indirect material issued from stock was £228,000
(ii) Overhead absorbed during the period was £2,100,000
(iii) Overhead for the period was over absorbed by £84,000
(iv) Indirect wages costs incurred were £1,804,000
A (i), (ii) and (iii)
B (i), (iii) and (iv)
C (i) and (iv)
D All of them (2 marks)

28 CA Sri Lanka
 Questions

6.4 When goods are sold, the accounting entry for the transfer of finished goods
to the Cost of Sales account would be:
Debit Credit
A Finished goods account Cost of sales account
B Cost of sales account Finished goods account
C Stores control account Inventory control account
D Inventory control account Cost of sales account
(2 marks)

The following information relates to questions 6.5 , 6.6 & 6.7:

H LLC manufactures a canned curry. The curry passes through 2 departments –
kitchen and canning.
The details of the overheads for both departments for the month of November are:
Kitchen:
Overhead absorption rate = Rs. 70 per direct labour hour
Direct labour hours worked were 800
Actual cost of production overhead = Rs. 50,000
Canning:
Overhead absorption rate = Rs. 80 per machine hour
Machine hours worked were 400
Actual cost of production overhead = Rs. 35,000
6.5 Complete the Production Overheads Account for the Kitchen Dept for
November – clearly showing the over and under absorption of overheads:
PROD'N OVERHEAD CONTROL ACCOUNT – Kitchen Dept
Rs Rs

(2 marks)

CA Sri Lanka 29
BL6 | Management Accounting

6.6 Complete the Production Overheads Account for the Canning Dept for
November – clearly showing the over and under absorption of overheads:
PROD'N OVERHEAD CONTROL ACCOUNT – Canning Dept
Rs Rs

(2 marks)

6.7 The accounting entries for the under absorption of overheads of the Canning
dept would be:
Debit Credit
A Statement of P/L Prod O'head Control a/c
B Prod O'head Control a/c Statement of P/L
C Gross Profit a/c Prod O'head Control a/c
D Prod O'head Control a/c Cost of Sales a/c
(2 marks)

6.8 During production, the accounting entries for the issue of indirect material
to production would be:
Debit Credit
A Work in progress account Stores control account
B Stores control account Work in progress account
C Stores control account Overhead control account
D Overhead control account Stores control account
(2 marks)

6.9 ABC LLC manufactures a single product and has the following transactions
for finished goods during a particular period:
During the period Rs. 3,900,000 was completed and transferred to finished
goods.
At the start of the period ABC already had a finished goods stock to the value
of Rs. 4,350,000.
During the period ABC made sales of the finished goods to the value of
Rs. 4,950,000 on credit.
Required
What would be the closing finished goods value at the end of the period?
A Rs. 3,500,000
B Rs. 3,900,000
C Rs. 3,100,000
D Rs. 3,300,000 (2 marks)

30 CA Sri Lanka
 Questions

6.10 When production is completed, the accounting entries for the transfer of
completed production to finished goods would be:
Debit Credit
A Work in progress account Inventory control account
B Inventory control account Overhead control account
C Inventory control account Work in progress account
D Overhead control account Stores control account
(2 marks)

7 Job, Batch, Contract & Service Costing

7.1 Which of the following is a feature of job costing?
A Production is carried out in accordance with the wishes of the
customer
B Associated with continuous production of large volumes of low-cost
items
C Establishes the cost of services rendered
D Costs are charged over the units produced in the period (2 marks)

7.2 State which of the following are characteristics of service costing.

(i) High levels of indirect costs as a proportion of total costs
(ii) Use of composite cost units
(iii) Use of equivalent units
A (i) only
B (i) and (ii) only
C (ii) only
D (ii) and (iii) only (2 marks)

7.3 A distribution division of a multinational company has the following

information.
Miles travelled 636,500
Tonnes carried 2,479
Number of drivers 20
Hours worked by drivers 35,520
Tonne-miles carried 375,200
Costs incurred Rs. 562,800,000
Required
Calculate the most appropriate unit cost for the company. (2 marks)

CA Sri Lanka 31
BL6 | Management Accounting

7.4 Which of the following costing methods is most likely to be used by a

company involved in the manufacture of paint?
A Batch costing
B Service costing
C Job costing
D Process costing (2 marks)

7.5 PA LLC operates a job costing system. The company's standard net profit
margin is 20 per cent of sales.
The estimated costs for job 173 are as follows.
Direct materials 5 metres @ Rs. 200 per metre
Direct labour 14 hours @ Rs. 88 per hour
Variable production overheads are recovered at the rate of Rs. 30 per direct
labour hour.
Fixed production overheads for the year are budgeted to be Rs. 2,000,000
and are to be recovered on the basis of the total of 40,000 direct labour
hours for the year.
Other overheads, in relation to selling, distribution and administration, are
recovered at the rate of Rs. 800 per job.
The price to be quoted for job 173 is, to the nearest Rs.
A Rs. 4040 B Rs. 4240 C Rs. 4850 D Rs. 5050
(2 marks)

7.6 A firm makes special assemblies to customers' orders and uses job costing.
The data for a period are:
Job Job
Job number number number
AA10 BB15 CC20
Rs Rs Rs
Opening WIP 26,800 42,790 0
Material added in period 17,275 0 18,500
Labour for period 14,500 3,500 24,600
The budgeted overheads for the period were Rs. 126,000.
What overhead should be added to job number CC20 for the period?
A Rs. 65,157
B Rs. 69,290
C Rs. 72,761
D Rs. 126,000 (2 marks)

32 CA Sri Lanka
 Questions

7.7 Didgit LLC makes special widgets for customers' orders and uses job costing.
The data for a period are:
Job Job
Job number number number
WID01 WID02 WID03
Rs Rs Rs
Opening WIP 26,800 42,790 0
Material added in period 17,275 0 18,500
Labour for period 14,500 3,500 24,600
The budgeted overheads for the period were Rs. 126,000.
Job number WID02 was completed and delivered during the period and the
firm wishes to earn 331/3% profit on sales.
What is the selling price of job number WID02?
A Rs. 69,435
B Rs. 75,505
C Rs. 84,963
D Rs. 258,435 (2 marks)

7.8 Wy NOT LLC produces special assemblies to customers' orders and uses job
costing.
The data for a period are:
Job Job
Job number number number
YN12 YN15 YN20
Rs Rs Rs
Opening WIP 26,800 42,790 0
Material added in period 17,275 0 18,500
Labour for period 14,500 3,500 24,600
The budgeted overheads for the period were Rs. 126,000.
What was the approximate value of closing work-in-progress at the end of
the period?
A Rs. 58,575
B Rs. 101,675
C Rs. 217,323
D Rs. 227,675 (2 marks)

CA Sri Lanka 33
BL6 | Management Accounting

7.9 The following items may be used in costing batches.

(i) Actual material cost
(ii) Actual manufacturing overheads
(iii) Absorbed manufacturing overheads
(iv) Actual labour cost
Which of the above are contained in a typical batch cost?
A (i), (ii) and (iv) only
B (i) and (iv) only
C (i), (iii) and (iv) only
D All four of them (2 marks)

7.10 What would be the most appropriate cost unit for a cake manufacturer?
Cost per:
A Cake
B Batch
C Kg
D Production run (2 marks)

7.11 Which of the following would be appropriate cost units for a passenger
coach company?
(i) Vehicle cost per passenger-kilometre
(ii) Fuel cost for each vehicle per kilometre
(iii) Fixed cost per kilometre
A (i) only
B (i) and (ii) only
C (i) and (iii) only
D All of them (2 marks)

7.12 The following information is available for the Black Hotel for the latest thirty
day period.
Number of rooms available per night 40
Percentage occupancy achieved 65%
Room servicing cost incurred Rs. 39,000
The room servicing cost per occupied room-night last period, to the nearest
Rs, was:
A Rs. 32.5
B Rs. 50
C Rs. 97.5
D Rs. 150 (2 marks)

34 CA Sri Lanka
 Questions

7.13 Which of the following is not a characteristic of service costing?

A High levels of direct costs as a proportion of total costs
B Intangibility of output
C Use of composite cost units
D Can be used for internal services as well as external services
(2 marks)

7.14 Which of the following are likely to use service costing?

(i) A college
(ii) A hotel
(iii) A plumber
A (i), (ii) and (iii)
B (i) and (ii)
C (ii) only
D (iii) only (2 marks)

7.15 Rushani LLC manufactures ring binders which are embossed with the
customer's own logo. A customer has ordered a batch of 300 binders. The
following data illustrate the cost for a typical batch of 100 binders.
Rs'000
Direct materials 300
Direct wages 100
Machine set up 30
Design and artwork 150
580
Direct employees are paid on a piecework basis.
Rushani Co absorbs production overhead at a rate of 20% of direct wages
cost. Five per cent is added to the total production cost of each batch to allow
for selling, distribution and administration overhead.
Rushani Co requires a profit margin of 25% of sales value.
Required
Calculate the selling price for a batch of 300 binders.
A Rs. 960,000
B Rs. 2,016,000
C Rs. 1,980,000
D Rs. 2,200,000 (2 marks)

CA Sri Lanka 35
BL6 | Management Accounting

7.16 AL LLC operates a job costing system. The company's standard net profit
margin is 20% of sales value.
The estimated costs for job B124 are as follows.
Direct materials 3kg @ Rs. 50 per kg
Direct labour 4 hours @ Rs. 90 per hour
Production overheads are budgeted to be Rs. 2,400,000 for the period, to be
recovered on the basis of a total of 30,000 labour hours.
Other overheads, related to selling, distribution and administration, are
budgeted to be Rs. 1,500,000 for the period. They are to be recovered on the
basis of the total budgeted production cost of Rs. 7,500,000 for the period.
Required
Calculate the price to be quoted for job B124.
A Rs. 1,245
B Rs. 1,345
C Rs. 1,145
D Rs. 1,645 (2 marks)

7.17 A manufacturer of chocolate produces batches of 40,000 units of their luxury

boxed chocolates. The direct costs per batch are:
Rs
Materials 750,000
Labour 1,000 hours 60,000
Overheads are to be absorbed at a rate of Rs. 150
What is the cost of a tin of tomatoes?
A Rs. 24
B Rs. 20
C Rs. 18
D Rs. 30 (2 marks)

36 CA Sri Lanka
 Questions

7.18 Dean is a company that manufactures clothing to order and has the following
budgeted overheads for the year, based on normal activity levels.
Production departments Budgeted overheads Budgeted activity
Rs
Cutting 600,000 1,500 labour hours
Sewing and Assembly 1,000,000 1,000 labour hours
Selling and administrative overheads are 10% of factory cost. An order for
250 patterned t shirts has been placed for a well-known department store.
The Batch will be known as Batch 46 and have incurred the following costs.
Materials Rs. 120,000
Labour 100 hours in the cutting Department at Rs. 60 per hour
200 hours in the Sewing and Assembly Department at Rs. 70
per hour
Rs. 5,000 was paid for the hire of a bespoke sewing machine that can apply
the departments logo.
Required
Calculate the cost per unit for Batch 46 and select the correct answer from
below:
A Rs. 3,000
B Rs. 1,950
C Rs. 2,750
D Rs. 2,650 (2 marks)

8 Process Costing
8.1 A company makes a single product, which passes through one process.
Details of the process account for the period were as follows:
Rs
Material cost – 20,000kg 26,000 Output 18,800kg
Labour cost 12,000 Normal losses 5% of input
Production overhead cost 5,700
There was no work-in-progress at the beginning or end of the period.
Process losses have no value. The cost of the abnormal loss (to the nearest R)
is
A Rs. 437
B Rs. 441
C Rs. 460
D Rs. 465 (2 marks)

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8.2 A product is manufactured as a result of two processes, 1 and 2. Details of

process 2 for the latest period were as follows.
Opening work in progress Nil
Materials transferred from process 1 20,000kg valued at Rs. 816,000
Labour and overhead costs Rs. 168,480
Output transferred to finished goods 16,000kg
Closing work in progress 1,800kg
Normal loss is 10% of input and losses have a scrap value of Rs. 3 per kg.
Closing work in progress is 100% complete for material, and 75% complete
for both labour and overheads.
Required
Calculate the value of the closing work in progress for the period.
(2 marks)

8.3 A biscuit manufacturer uses process costing. The normal loss during the
process is 10% and these can be sold to staff for Rs. 30 per kg. Last month
there was no opening or closing work in progress.
Ingredients input 6,000kg @ Rs. 300 per kg
Labour hours 2,800 hours @ Rs. 50 per hour
Good output 5,600kg
Required
Calculate the output value per unit for the month.
A Rs. 348
B Rs. 226
C Rs. 258
D Rs. 326 (2 marks)

8.4 A company manufactures two joint products, P and R, in a common process.

Data for June are as follows.
Rs
Opening inventory 100,000
Direct materials added 1,000,000
Conversion costs 1,200,000
Closing inventory 300,000

Production Sales Sales price

Units Units Rs per unit
P 4,000 5,000 500
R 6,000 5,000 1,000

38 CA Sri Lanka
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If costs are apportioned between joint products on a sales value basis, what
was the cost per unit of product R in June?
A Rs. 125
B Rs. 222
C Rs. 250
D Rs. 275 (2 marks)

8.5 Which of the following costing methods is most likely to be used by a

company involved in the manufacture of liquid soap?
A Batch costing
B Service costing
C Job costing
D Process costing (2 marks)

8.6 A chemical process has a normal wastage of 10% of input. In a period,

2,500 kg of material were input and there was an abnormal loss of 75 kg.
What quantity of good production was achieved?
A 2,175 kg
B 2,250 kg
C 2,325 kg
D 2,425 kg (2 marks)

8.7 A company manufactures Chemical X, in a single process. At the start of the

month there was no work-in-progress. During the month 300 litres of raw
material were input into the process at a total cost of Rs. 6,000. Conversion
costs during the month amounted to Rs. 4,500. At the end of the month 250
litres of Chemical X were transferred to finished goods inventory. The
remaining work-in-progress was 100% complete with respect to materials
and 50% complete with respect to conversion costs. There were no losses in
the process and there is no scrap value available during months when losses
occur.
What are the equivalent units for closing work-in-progress at the end of the
month?
Material Conversion costs
A 25 litres 25 litres
B 25 litres 50 litres
C 50 litres 25 litres
D 50 litres 50 litres
(2 marks)

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MNP
A company manufactures three joint products (M, N and P) from the same
common process. The following process account relates to the common process
last month and is typical of the monthly results of operating this process:
COMMON PROCESS ACCOUNT
Litres Rs Litres Rs
Opening work in
process 1,000 5,320 Normal loss 10,000 20,000
Materials 100,000 250,000 Output M 25,000 141,875
Conversion costs: Output N 15,000 85,125
Variable 100,000 Output P 45,000 255,375
Fixed 180,000 Closing work in
process 800 3,533
Abnormal loss 5,200 29,412
101,000 535,320 101,000 535,320
Each one of the products can be sold immediately after the common process, but
each one of them can be further processed individually before being sold. The
following further processing costs and selling prices per litre are expected:
Selling price after Selling price after Further variable
Product common process further processing processing cost
Rs/litre Rs/litre Rs/litre
M 6.25 8.40 1.75
N 5.20 6.45 0.95
P 6.80 7.45 0.85
Required
8.8 Explain the method used to apportion the common costs between the
products M, N and P and comment on its acceptability, and why it is
necessary to apportion the common costs between each of the products.
(2 marks)

8.9 Explain the viability of the common process and determine the optimal
processing plan for each of the three products, showing appropriate
calculations. (2 marks)

8.10 What is the net revenue at the end of the common process?
A Rs. 58,875
B Rs. 59,875
C Rs. 57,875
D Rs. 56,875 (2 marks)

40 CA Sri Lanka
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8.11 Z LLC manufactures three joint products (M, N and P) from the same
common process. The following process account relates to the common
process last month and is typical of the monthly results of operating this
process:
COMMON PROCESS ACCOUNT
Litres Rs Litres Rs
Opening work in
process 1,000 5,320 Normal loss 10,000 20,000
Materials 100,000 250,000 Output M 25,000 141,875
Conversion costs: Output N 15,000 85,125
Variable 100,000 Output P 45,000 255,375
Fixed 180,000 Closing work
in process 800 3,533
Abnormal loss 5,200 29,412
101,000 535,320 101,000 535,320
Each one of the products can be sold immediately after the common process,
but each one of them can be further processed individually before being sold.
Required
Identify the value per litre from the common process for Product M.
A Rs. 5.995
B Rs. 5.975
C Rs. 5.695
D Rs. 5.675 (2 marks)

8.12 PR LLC manufactures two joint products, P and R, in a common process. Data
for June are as follows.
Rs.
Opening stock 100,000
Direct materials added 1,000,000
Conversion costs 1,200,000
Closing stock 300,000

Production Sales Sales price

Units Units Rs. per unit
Product P 4,000 5,000 500
Product R 6,000 5,000 1,000
(2 marks)
If costs are apportioned between joint products on a physical unit basis,
what was the total cost of Product P production in June?
A Rs. 800,000
B Rs. 880,000
C Rs. 1,000,000
D Rs. 1,200,000 (2 marks)

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8.13 Which of the following statements is/are correct?

(i) A by-product is a product produced at the same time as other products
which has a relatively low volume compared with the other products.
(ii) Since a by-product is a saleable item it should be separately costed in
the process account, and should absorb some of the process costs.
(iii) Costs incurred prior to the point of separation are known as common
or joint costs.
A (i) and (ii)
B (i) and (iii)
C (ii) and (iii)
D (iii) only (2 marks)

8.14 EQ LLC manufactures two joint products and one by-product in a single
process. Data for November are as follows.
Rs
Raw material input 216,000
Conversion costs 72,000
There were no stocks at the beginning or end of the period.
Output Sales price
Units Rs per unit
Joint product E 21,000 15
Joint product Q 18,000 10
By-product X 2,000 2
By-product sales revenue is credited to the process account. Joint costs are
apportioned on a sales value basis. What were the full production costs of
product Q in November (to the nearest Rs)?
A Rs. 102,445
B Rs. 103,273
C Rs. 104,727
D Rs. 180,727 (2 marks)

8.15 JW LLC manufactures three joint products and one by-product from a single
process.
Data for May are as follows.

Opening and closing stocks Nil

Raw materials input Rs. 180,000
Conversion costs Rs. 50,000

42 CA Sri Lanka
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Output
Sales price
Units Rs per unit
Joint product L 3,000 32
M 2,000 42
N 4,000 38
By-product R 1,000 2
By-product sales revenue is credited to the sales account. Joint costs are
apportioned on a sales value basis.
What were the full production costs of product M in May (to the nearest Rs)?
A Rs. 57,687
B Rs. 57,844
C Rs. 58,193
D Rs. 66,506 (2 marks)

9 Marginal & Absorption Costing

9.1 When comparing the profits reported under absorption costing and
marginal costing during a period when the level of inventory increased:
A Absorption costing profits will be higher and closing inventory
valuations lower than those under marginal costing.
B Absorption costing profits will be higher and closing inventory
valuations higher than those under marginal costing.
C Marginal costing profits will be higher and closing inventory valuations
lower than those under absorption costing.
D Marginal costing profits will be higher and closing inventory valuations
higher than those under absorption costing. (2 marks)

9.2 Summary results for Y LLC for March are shown below.
Rs'000 Units
Sales revenue 820
Variable production costs 300
Variable selling costs 105
Fixed production costs 180
Fixed selling costs 110
Production in March 1,000
Opening inventory 0
Closing inventory 150

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Using marginal costing, the profit for March was:

A Rs. 170,000
B Rs. 185,750
C Rs. 197,000
D Rs. 229,250 (2 marks)

9.3 PH LLC produces a single product and currently uses absorption costing for
its internal management accounting reports. The fixed production overhead
absorption rate is Rs. 34 per unit. Opening inventories for the year were 100
units and closing inventories were 180 units. The company's management
accountant is considering a switch to marginal costing as the inventory
valuation basis.
If marginal costing were used, the marginal costing profit for the year,
compared with the profit calculated by absorption costing, would be:
A Rs. 2,720 lower
B Rs. 2,720 higher
C Rs. 3,400 lower
D Rs. 3,400 higher (2 marks)

9.4 The following data is available for period 9.

Opening stock 10,000 units
Closing stock 8,000 units
Absorption costing profit Rs. 2,800,000
The profit for period 9 using marginal costing would be:
A Rs. 2,780,000
B Rs. 2,800,000
C Rs. 2,820,000
D Impossible to calculate without more information (2 marks)

9.5 The overhead absorption rate for product T is Rs. 40 per machine hour.
Each unit of T requires 3 machine hours.
Stocks of product T last period were:
Units
Opening stock 2,400
Closing stock 2,700
Compared with the marginal costing profit for the period, the absorption
costing profit for product T will be:
A Rs. 12,000 higher
B Rs. 36,000 higher
C Rs. 12,000 lower
D Rs. 36,000 lower (2 marks)

44 CA Sri Lanka
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9.6 In a period where opening stocks were 15,000 units and closing stocks were
20,000 units, a firm had a profit of Rs. 1,300,000 using absorption costing. If
the fixed overhead absorption rate was Rs. 80 per unit, the profit using
marginal costing would be:
A Rs. 900,000
B Rs. 1,300,000
C Rs. 1,700,000
D Impossible to calculate without more information (2 marks)

The following information relates to questions 9.7 and 9.8

Cost and selling price details for product Z are as follows.
Rs per unit
Direct materials 60
Direct labour 75
Variable overhead 25
Fixed overhead absorption rate 50
210
Profit 90
Selling price 300
Budgeted production for the month was 5,000 units although the company
managed to produce 5,800 units, selling 5,200 of them and incurring fixed
overhead costs of Rs. 274,000.
9.7 The marginal costing profit for the month is:
A Rs. 454,000
B Rs. 468,000
C Rs. 538,000
D Rs. 728,000 (2 marks)

9.8 The absorption costing profit for the month is:

A Rs. 452,000
B Rs. 454,000
C Rs. 468,000
D Rs. 484,000 (2 marks)

9.9 In a period, a company had opening stock of 31,000 units and closing stock
of 34,000 units. Profits based on marginal costing were Rs. 850,500 and on
absorption costing were Rs. 955,500.
If the budgeted total fixed costs for the company was Rs. 837,500, what was
the budgeted level of activity in units?
A 32,500
B 52,500

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C 65,000
D 105,000 (2 marks)

9.10 A company had opening stock of 48,500 units and closing stock of 45,500
units. Profits based on marginal costing were Rs. 315,250 and on absorption
costing were Rs. 288,250. What is the fixed overhead absorption rate per unit?
A Rs. 5.94
B Rs. 6.34
C Rs. 6.50
D Rs. 9.00 (2 marks)

9.11 Absorption costing is concerned with which of the following?

A Direct materials
B Direct labour
C Fixed costs
D Variable and fixed costs (2 marks)

9.12 A company made 17,500 units at a total cost of Rs. 160 each. Three
quarters of the costs were variable and one quarter fixed. 15,000 units
were sold at Rs. 250 each. There were no opening stocks.
By how much will the profit calculated using absorption costing principles
differ from the profit if marginal costing principles had been used?
A The absorption costing profit would be Rs. 100,000 less
B The absorption costing profit would be Rs. 100,000 greater
C The absorption costing profit would be Rs. 300,000 greater
D The absorption costing profit would be Rs. 400,000 greater
(2 marks)

9.13 A company manufactures and sells a single product. For this month the
budgeted fixed production overheads are Rs. 480,000, budgeted production
is 12,000 units and budgeted sales are 11,720 units.
The company currently uses absorption costing.
If the company used marginal costing principles instead of absorption
costing for this month, what would be the effect on the budgeted profit?
A Rs. 11,200 higher
B Rs. 11,200 lower
C Rs. 39,200 higher
D Rs. 39,200 lower (2 marks)

46 CA Sri Lanka
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9.14 The following information relates to a manufacturing company for next

period:
Units Rs
Production 14,000 Fixed prod'n costs 630,000
Sales 12,000 Fixed selling costs 120,000
Using absorption costing the profit for next period has been calculated as
Rs. 360,000.
What would the profit for the next period be using marginal costing?
A Rs. 250,000
B Rs. 270,000
C Rs. 450,000
D Rs. 470,000 (2 marks)

9.15 At the beginning of May 20X3, LB held an inventory of 1,680 units of

product C. On 30 April 20X4 the inventory level was 1,120 units. The
standard cost of product C is as follows:
Rs
Material (15 kg ´ Rs. 60) 900
Labour (4 hours ´ Rs. 110) 440
Variable overhead (4 hours ´ Rs. 200) 800
Fixed overhead (4 hours ´ Rs. 320) 1,280
3,420
The profit reported in the management accounts for the 12 months ended
30 April 20X4 was Rs. 12,197,120. If LB used marginal costing, what profit
would have been reported for the period?
A Rs. 11,480,320
B Rs. 12,197,120
C Rs. 12,913,920
D It cannot be determined from the information provided (2 marks)

9.16 J LLCo uses absorption costing and had no opening inventory at the start of
the 20X3. The following information is available for the year ended
31 December 20X3.
Sales 130,000 units
Production 150,000 units
Selling price per unit Rs. 240
Manufacturing variable cost per unit Rs. 150
Selling and distribution variable cost per unit Rs. 5
Manufacturing fixed cost Rs. 2,250,000
Selling and distribution fixed cost Rs. 562,000

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What was the net profit for the year ended 31 December 20X3?
A Rs. 7,212,310
B Rs. 5,613,350
C Rs. 9,251,700
D Rs. 8,537,500 (2 marks)

9.17 A company's normal output is 1,000 units each period and budgeted fixed
costs are incurred evenly throughout the year. The following production
levels and associated production costs were recorded for two recent periods.
Period no. Production (units) Production costs
Rs
6 1,210 3,394
9 990 3,086
In a period when production volume was 1,040 units and sales volume was
1,200 units a profit of Rs. 8,160 was reported using marginal costing.
Required
Calculate the profit that would be reported for the period using an
absorption costing system.
A Rs. 7,888
B Rs. 8,777
C Rs. 9,888
D Rs. 8,888 (2 marks)

9.18 Dayan LLC uses absorption costing and had no opening inventory at the start
of the 2013. The following information is available for the year ended
31 December 2013.
Sales 130,000 units
Production 150,000 units
Selling price per unit Rs. 240
Manufacturing variable cost per unit Rs. 150
Selling and distribution variable cost per unit Rs. 5
Manufacturing fixed cost Rs. 2,250,000
Selling and distribution fixed cost Rs. 562,000
What was the net profit for the year ended 31 December 2013?
A Rs. 8,530,000
B Rs. 8,538,000
C Rs. 8,500,750
D Rs. 8,595,700 (2 marks)

48 CA Sri Lanka
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9.19 The overhead absorption rate for product T is Rs. 400 per machine hour.
Each unit of T requires 3 machine hours. Inventories of product T last period
were:
Units
Opening inventory 2,400
Closing inventory 2,700
Compared with the marginal costing profit for the period, the absorption
costing profit for product T will be which of the following?
A Rs. 120,000 higher
B Rs. 360,000 higher
C Rs. 120,000 lower
D Rs. 360,000 lower (2 marks)

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PART B QUESTIONS: PLANNING & CONTROLLING

Questions 10.1 to 11.39 cover Planning & Controlling the subject of
Chapters 10-11 of the Study Text.

10 Standard Costing & Variance Analysis

10.1 Which one of the following would not explain a favourable direct materials
usage variance?
A Using a higher quality of materials than that specified in the standard.
B A reduction in materials wastage rates.
C An increase in suppliers' quality control checks.
D Achieving a lower output volume than budgeted. (2 marks)

10.2 X40 is one of many items produced by the manufacturing division. Its
standard cost is based on estimated production of 10,000 units per month.
The standard cost schedule for one unit of X40 shows that two hours of
direct labour are required at Rs. 150 per labour hour. The variable overhead
rate is Rs. 60 per direct labour hour. During April, 11,000 units were
produced; 24,000 direct labour hours were worked and charged;
Rs. 3,360,000 was spent on direct labour; and Rs. 1,800,000 was spent on
variable overheads.
The direct labour rate variance for April is:
A Rs. 200,000 Favourable
B Rs. 220,000 Favourable
C Rs. 240,000 Adverse
D Rs. 240,000 Favourable (2 marks)

10.3 Which of the following best describes a basic standard?

A A standard set at an ideal level, which makes no allowance for normal
losses, waste and machine downtime.
B A standard which assumes an efficient level of operation, but which
includes allowances for factors such as normal loss, waste and machine
downtime.
C A standard which is kept unchanged over a period of time.
D A standard which is based on current price levels. (2 marks)

50 CA Sri Lanka
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10.4 The budgeted selling price of one of C's range of chocolate bars was Rs. 600
per bar. At the beginning of the budget period market prices of cocoa
increased significantly and C decided to increase the selling price of the
chocolate bar by 10% for the whole period. C also decided to increase the
amount spent on marketing and as a result actual sales volumes increased to
15,750 bars which was 5% above the budgeted volume. The standard
contribution per bar was Rs. 200 however a contribution of Rs. 225 per bar
was actually achieved.
The sales price variance for the period was:
A Rs. 945,540 A
B Rs. 945,540 F
C Rs. 900,000 A
D Rs. 900,000 F (2 marks)

10.5 The budgeted selling price of one of C's range of chocolate bars was Rs. 6 per
bar. At the beginning of the budget period market prices of cocoa increased
significantly and C decided to increase the selling price of the chocolate bar
by 10% for the whole period. C also decided to increase the amount spent on
marketing and as a result actual sales volumes increased to 15,750 bars
which was 5% above the budgeted volume. The standard contribution per
bar was Rs. 2.00 however a contribution of Rs. 2.25 per bar was actually
achieved.
The sales volume contribution variance for the period was:
A Rs. 1,500.00 F
B Rs. 3,937.50 F
C Rs. 3,750.00 F
D Rs. 1,687.50 F (2 marks)

10.6 A company operates a standard absorption costing system. Details of

budgeted and actual figures for February are given below.
Budget Actual
Production (units) 29,000 26,000
Direct labour hours per unit 3.0 2.8
Direct labour cost per hour Rs. 100 Rs. 104
The labour rate variance for the period was:
A Rs. 348,000 A
B Rs. 348,000 F
C Rs. 291,200 A
D Rs. 312,000 A (2 marks)

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10.7 A company operates a standard absorption costing system. Details of

budgeted and actual figures for February are given below.
Budget Actual
Production (units) 29,000 26,000
Direct labour hours per unit 3.0 2.8
Direct labour cost per hour Rs. 100 Rs. 104
The labour efficiency variance for the period was:
A Rs. 580,000 F
B Rs. 603,200 F
C Rs. 520,000 F
D Rs. 540,800 F (2 marks)

10.8 AD Ltd manufactures and sells a single product, E, and uses a standard
absorption costing system. Standard cost and selling price details for
product E are as follows.
Rs per unit
Variable cost 80
Fixed cost 20
100
Standard profit 50
Standard selling price 150
The sales volume variance reported for last period was Rs. 90,000 adverse.
AD Ltd is considering using standard marginal costing as the basis for
variance reporting in future.
Required
What would be the correct sales volume variance to be shown in a marginal
costing operating statement for last period?
A Rs. 126,000 F
B Rs. 113,000 F
C Rs. 126,000 A
D Rs. 113,000 A (2 marks)

52 CA Sri Lanka
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10.9 The following details have been extracted from the company's accounting
records for August.
Budget Actual
Output of RG 800 units 890 units
Materials 4,000 kg 4,375 kg
Cost per kg Rs. 200 Rs. 216
Required
Calculate the total materials cost variance for August.
A Rs. 55,000 F
B Rs. 66,000 F
C Rs. 50,000 A
D Rs. 55,000 A (2 marks)

10.10 A furniture company manufactures high quality dining room furniture that
is sold to major retail stores.
Extracts from the budget for last year are given below:
Tables
Sales quantity (units) 8,000
Average selling price Rs. 2,200
Direct material cost per unit Rs. 1,000
Direct labour cost per unit Rs. 400
Variable overhead cost per unit Rs. 40
Actual results for last year were as follows:
Tables
Sales quantity (units) 7,200
Average selling price Rs. 2,400
Direct material cost per unit Rs. 1,100
Direct labour cost per unit Rs. 450
Variable overhead cost per unit Rs. 60
Required
Calculate the sales volume contribution variance
A Rs. 912,000 F
B Rs. 792,000 F
C Rs. 816,000 A
D Rs. 912,000 A (2 marks)

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10.11 What is an attainable standard?

A A standard which includes no allowance for losses, waste and
inefficiencies. It represents the level of performance which is
attainable under perfect operating conditions
B A standard which includes some allowance for losses, waste and
inefficiencies. It represents the level of performance which is
attainable under efficient operating conditions
C A standard which is based on currently attainable operating
conditions
D A standard which is kept unchanged, to show the trend in costs
(2 marks)

10.12 Which of the following statements is correct?

A The operating standards set for production should be the most ideal
possible.
B The operating standards set for production should be the minimal
level.
C The operating standards set for production should be the attainable
level.
D The operating standards set for production should be the maximum
level. (2 marks)

10.13 Which of the following would not be directly relevant to the determination
of standard labour times per unit of output?
A The type of performance standard to be used
B The volume of output from the production budget
C Technical specifications of the proposed production methods
D The results of work study exercises (2 marks)

10.14 CC LLC manufactures a carbonated drink, which is sold in 1 litre bottles.

During the bottling process there is a 20% loss of liquid input due to
spillage and evaporation. The standard usage of liquid per bottle is
A 0.80 litres
B 1.00 litres
C 1.20 litres
D 1.25 litres (2 marks)

54 CA Sri Lanka
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10.15 Which of the following best describes management by exception?

A Using management reports to highlight exceptionally good
performance, so that favourable results can be built upon to improve
future outcomes.
B Sending management reports only to those managers who are able to
act on the information contained within the reports.
C Focusing management reports on areas which require attention and
ignoring those which appear to be performing within acceptable
limits.
D Appointing and promoting only exceptional managers to areas of
responsibility within the organisation. (2 marks)

10.16 Standard costing provides which of the following?

(i) Targets and measures of performance
(ii) Information for budgeting
(iii) Simplification of stock control systems
(iv) Actual future costs
A (i), (ii) and (iii) only
B (ii), (iii) and (iv) only
C (i), (iii) and (iv) only
D (i), (ii) and (iv) only (2 marks)

10.17 A unit of product L requires 9 active labour hours for completion. The
performance standard for product L allows for ten per cent of total labour
time to be idle, due to machine downtime. The standard wage rate is Rs. 90
per hour. What is the standard labour cost per unit of product L?
A Rs. 729
B Rs. 810
C Rs. 891
D Rs. 900 (2 marks)

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10.18 Which of the following criticisms of standard costing apply in all

circumstances?
(i) Standard costing can only be used where all operations are repetitive
and output is homogeneous.
(ii) Standard costing systems cannot be used in environments which are
prone to change. They assume stable conditions.
(iii) Standard costing systems assume that performance to standard is
acceptable. They do not encourage continuous improvement.
A Criticism (i)
B Criticism (ii)
C Criticism (iii)
D None of them (2 marks)

10.19 SM LLC manufactures a single product L, for which the standard material
cost is as follows:
Rs. per unit
Material 14 kg ´ Rs. 30 420
During July, 800 units of L were manufactured, 12,000 kg of material were
purchased for Rs. 336,000, of which 11,500 kg were issued to production.
SM LLC values all stock at standard cost.
The material price and usage variances for July were:
Price Usage
A Rs. 23,000 (F) Rs. 9,000 (A)
B Rs. 23,000 (F) Rs. 3,000 (A)
C Rs. 24,000 (F) Rs. 9,000 (A)
D Rs. 24,000 (F) Rs. 8,400 (A)
(2 marks)

10.20 Nalin LLC expected to produce 200 units of its product, the Bone, in 20X3.
In fact, 260 units were produced. The standard labour cost per unit was
Rs. 700 (10 hours at a rate of Rs. 70 per hour). The actual labour cost was
Rs. 186,000 and the labour force worked 2,200 hours although they were
paid for 2,300 hours.
What is the direct labour rate variance for Nalin LLC in 20X3?
A Rs. 4,000 (A)
B Rs. 25,000 (F)
C Rs. 25,000 (A)
D Rs. 32,000 (A) (2 marks)

56 CA Sri Lanka
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10.21 Dharma LLC expected to produce 200 units of its product, the Dragon, in
20X6. In fact, 260 units were produced. The standard labour cost per unit
was Rs. 700 (10 hours at a rate of Rs. 70 per hour). The actual labour cost
was Rs. 186,000 and the labour force worked 2,200 hours although they
were paid for 2,300 hours.
What is the direct labour efficiency variance for Dharma LLC in 20X6?
A Rs. 4,000 (A)
B Rs. 21,000 (F)
C Rs. 28,000 (A)
D Rs. 28,000 (F) (2 marks)

10.22 Iranga LLC expected to produce 200 units of its product, the Goldfinch, in
20X9. In fact, 260 units were produced. The standard labour cost per unit
was Rs. 700 (10 hours at a rate of Rs. 70 per hour). The actual labour cost
was Rs. 186,000 and the labour force worked 2,200 hours although they
were paid for 2,300 hours.
What is the idle time variance?
A Rs. 7,000 (F)
B Rs. 7,000 (A)
C Rs. 8,090 (A)
D Rs. 8,090 (F) (2 marks)

10.23 Extracts from D LLC's records from last period are as follows.
Budget Actual
Production 1,925 units 2,070 units
Variable production overhead cost Rs. 115,500 Rs. 149,040
Labour hours worked 5,775 8,280
The variable production overhead variances for last period are:
Expenditure Efficiency
A Rs. 16,560 (F) Rs. 20,700 (A)
B Rs. 16,560 (F) Rs. 37,260 (A)
C Rs. 16,560 (F) Rs. 41,400 (A)
D Rs. 33,540 (A) Rs. 41,400 (A) (2 marks)

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10.24 Which of the following would help to explain a favourable direct material
price variance?
(i) The standard price per unit of direct material was unrealistically high
(ii) Output quantity was greater than budgeted and it was possible to
obtain bulk purchase discounts
(iii) The material purchased was of a higher quality than standard
A (i), (ii) and (iii)
B (i) and (ii) only
C (ii) and (iii) only
D (i) and (iii) only (2 marks)

10.25 Which of the following would help to explain a favourable direct labour
efficiency variance?
(i) Employees were of a lower skill level than specified in the standard
(ii) Better quality material was easier to process
(iii) Suggestions for improved working methods were implemented
during the period
A (i), (ii) and (iii)
B (i) and (ii) only
C (ii) and (iii) only
D (i) and (iii) only (2 marks)

10.26 Which of the following statements is correct?

A An adverse direct material cost variance will always be a combination
of an adverse material price variance and an adverse material usage
variance
B An adverse direct material cost variance will always be a combination
of an adverse material price variance and a favourable material usage
variance
C An adverse direct material cost variance can be a combination of a
favourable material price variance and a favourable material usage
variance
D An adverse direct material cost variance can be a combination of a
favourable material price variance and an adverse material usage
variance (2 marks)

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10.27 Which of the following situations is most likely to result in a favourable

selling price variance?
A The sales director decided to change from the planned policy of
market skimming pricing to one of market penetration pricing.
B Fewer customers than expected took advantage of the early payment
discounts offered.
C Competitors charged lower prices than expected, therefore selling
prices had to be reduced in order to compete effectively.
D Demand for the product was higher than expected and prices could be
raised without adverse effects on sales volumes. (2 marks)

10.28 JF LLC manufactures a single product. An extract from a variance control

report together with relevant standard cost data is shown below.
Standard selling price per unit Rs. 700
Standard direct material cost (5kg ´ Rs. 20 per kg) Rs. 100 per unit
Budgeted total material cost of sales Rs. 23,000 per mth
Budgeted profit margin Rs. 69,000 per mth
Actual results for February
Sales revenue Rs. 152,000
Total direct material cost Rs. 24,000
Direct material price variance Rs. 8,000 adv
Direct material usage variance Rs. 4,000 fav
There was no change in stock levels during the month.
What was the actual production in February?
A 200 units
B 217 units
C 240 units
D 280 units (2 marks)

10.29 AG LLC manufactures a single product. An extract from a variance control

report together with relevant standard cost data is shown below.
Standard selling price per unit Rs. 700
Standard direct material cost (5kg ´ Rs. 20 per kg) Rs. 100 per unit
Budgeted total material cost of sales Rs. 23,000 per mth
Budgeted profit margin Rs. 69,000 per mth
Actual results for October
Sales revenue Rs. 152,000
Total direct material cost Rs. 24,000
Direct material price variance Rs. 8,000 adv
Direct material usage variance Rs. 4,000 fav

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There was no change in stock levels during the month.

What was the actual usage of direct material during October?
A 800 kg
B 1,000 kg
C 1,200 kg
D None of the above (2 marks)

10.30 BFG LLC manufactures a single product. An extract from a variance control
report together with relevant standard cost data is shown below.
Standard selling price per unit Rs. 700
Standard direct material cost (5kg ´ Rs. 20 per kg) Rs. 100 per unit
Budgeted total material cost of sales Rs. 23,000 per mth
Budgeted profit margin Rs. 69,000 per mth
Actual results for January
Sales revenue Rs. 152,000
Total direct material cost Rs. 24,000
Direct material price variance Rs. 8,000 adv
Direct material usage variance Rs. 4,000 fav
There was no change in stock levels during the month.
What was the selling price variance for January?
A Rs. 1,200 (F)
B Rs. 9,000 (A)
C Rs. 12,000 (A)
D Rs. 12,000 (F) (2 marks)

10.31 Jegan LLC manufactures a single product. An extract from a variance

control report together with relevant standard cost data is shown below.
Standard selling price per unit Rs. 700
Standard direct material cost (5kg ´ Rs. 20 per kg) Rs. 100 per unit
Budgeted total material cost of sales Rs. 23,000 per mth
Budgeted profit margin Rs. 69,000 per mth
Actual results for April
Sales revenue Rs. 152,000
Total direct material cost Rs. 24,000
Direct material price variance Rs. 8,000 adv
Direct material usage variance Rs. 4,000 fav
There was no change in stock levels during the month.
What was the sales volume variance for April?
A Rs. 9,000 (F)
B Rs. 12,000 (F)
C Rs. 9,000 (A)
D Rs. 21,000 (A) (2 marks)

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10.32 In a period 12,250 units were made and there was a favourable labour
efficiency variance of Rs. 112,500. If 41,000 labour hours were worked and
the standard wage rate was Rs. 60 per hour, how many standard hours (to
two decimal places) were allowed per unit?
A 3.19
B 3.35
C 3.50
D 6.00 (2 marks)

10.33 XY LLC purchased 6,850 kgs of material at a total cost of Rs. 219,200. The
material price variance was Rs. 13,700 favourable. The standard price
per kg was:
A Rs. 20
B Rs. 30
C Rs. 32
D Rs. 34 (2 marks)

10.34 The following data relates to one of W LLC products.

Rs per unit Rs per unit
Selling price 270
Variable costs 120
Fixed costs 90
210
Profit 60
Budgeted sales for control period 7 were 2,400 units, but actual sales were
2,550 units. The revenue earned from these sales was Rs. 673,200.
Profit reconciliation statements are drawn up using marginal costing
principles. What sales variances would be included in such a statement for
period 7?
Price Volume
A Rs. 15,300 (A) Rs. 9,000 (F)
B Rs. 15,300 (A) Rs. 22,500 (F)
C Rs. 15,300 (A) Rs. 22,500 (A)
D Rs. 15,300 (F) Rs. 22,500 (F) (2 marks)

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10.35 Standard costing provides which of the following?

(i) Targets and measures of performance
(ii) Information for budgeting
(iii) Simplification of stock control systems
(iv) Actual future costs
A (i), (ii) and (iii) only
B (ii), (iii) and (iv) only
C (i), (iii) and (iv) only
D (i), (ii) and (iv) only (2 marks)

10.36 Capacity levels used in setting standard absorption rates for production
overheads are often related to performance standards.
To which performance standard is budgeted capacity often associated?
A Basic standard
B Attainable standard
C Ideal standard
D Current standard (2 marks)

The following information relates to Questions 10.37.

PQR LLC operates a standard absorption costing system. Details of budgeted and
actual figures are as follows:
Budget Actual
Sales volume (units) 100,000 110,000
Selling price per unit Rs. 10 Rs. 9.50
Variable cost per unit Rs. 5 Rs. 5.25
Total cost per unit Rs. 8 Rs. 8.30
10.37 Calculate and identify the sales price variance.
A 55,000 A
B 65,000 A
C 55,000 F
D 65,000 F (2 marks)

10.38 When opening inventories were 18,500 litres and closing inventories
16,750 litres, a firm had a profit of Rs. 162,100 using marginal costing.
Required
Calculate the profit using absorption costing assuming that the fixed
overhead absorption rate was Rs. 30 per litre.
A Rs. 101,850 B Rs. 109,600 C Rs. 117,350 D Rs. 102,350
(2 marks)

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10.39 Last month a manufacturing company's profit was Rs. 1,000,000 calculated
using absorption costing principles. If marginal costing principles had been
used, a loss of Rs. 1,500,000 would have occurred. The company's fixed
production cost is Rs. 1,000 per unit. Sales last month were 5,000 units.
Required
Calculate last month's production (in units).
A 8,500 B 9,500 C 10,500 D 7,500
(2 marks)

10.40 Suppose that a company budgets to sell 8,000 units of product J for
Rs. 1,200 per unit. The standard variable cost per unit is Rs. 700. Actual
sales were 7,700 units, at Rs. 1,250 per unit.
Calculate the sales volume contribution variance.
A Rs. 175,000
B Rs. 190,000
C Rs. 170,000
D Rs. 150,000 (2 marks)

The following information relates to Questions 10.41 & 10.42

Jasper LLC has the following budget and actual figures for 20X4.
Budget Actual
Sales units 600 620

Selling price per unit Rs Rs

3,000 2,900
Standard variable cost of production = Rs. 2,800 per unit.
10.41 Calculate the selling price variance
A Rs. 61,000
B Rs. 65,000
C Rs. 63,000
D Rs. 62,000 (2 marks)

10.42 Calculate the sales volume contribution variance.

A Rs. 3,500
B Rs. 4,250
C Rs. 4,000
D Rs. 3,750 (2 marks)

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10.43 The budgeted contribution for HMF Co for June was Rs. 290,000. The
following variances occurred during the month.

Total direct labour variance Rs. 11,323 Favourable

Total variable overhead variance Rs. 21,665 Adverse
Selling price variance Rs. 21,875 Favourable
Fixed overhead volume variance Rs. 12,500 Adverse
Sales volume variance Rs. 36,250 Adverse
Total direct materials variance Rs. 6,335 Adverse
What was the actual contribution for the month?
A Rs. 252,923
B Rs. 258,948
C Rs. 321,052
D Rs. 327,077

10.44 T Company has budgeted to produce 10,000 units of product D12. During
September 20X3, 11,000 units were produced and 8,000 hours of labour
were worked. The actual September variable overhead amounted to Rs.
1,320,000 and a Rs. 120,000 adverse overhead variance was reported.
What is the standard variable overhead rate?
A Rs. 109 per labour hour
B Rs. 120 per labour hour
C Rs. 150 per labour hour
D Rs. 180 per labour hour

11 Budgeting, Preparation and Control

11.1 BDL LLC is currently preparing its cash budget for the year to 31 March
20X8. An extract from its sales budget for the same year shows the following
sales values.
Rs
March 60,000
April 70,000
May 55,000
June 65,000
40% of its sales are expected to be for cash. Of its credit sales, 70% are
expected to pay in the month after sale and take a 2% discount; 27% are
expected to pay in the second month after the sale, and the remaining 3%
are expected to be bad debts.

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What is the value of sales receipts to be shown in the cash budget for
May 20X7?
A Rs. 60,595
B Rs. 60,532
C Rs. 70,532
D Rs. 70,595 (2 marks)

11.2 Q LLC has prepared the following regression equation as a basis for
estimating sales (Y) in units for period X.
Y = 27X - 24
Quarterly seasonal variations affecting Q Ltd's sales levels are as follows.
Q1 Q2 Q3 Q4
-25% -25% +15% +35%
Period 12 is in quarter 4.
Required
What is the forecast sales level for period 12.
A 500 Units
B 623 Units
C 435 Units
D 405 Units (2 marks)

11.3 The overhead costs of RP LLC have been found to be accurately represented
by the formula
y = Rs. 10,000 + Rs. 0.25x
where y is the monthly cost and x represents the activity level measured as
the number of orders.
Monthly activity levels of orders may be estimated using a combined
regression analysis and time series model:
a = 100,000 + 30b
where a represents the de-seasonalised monthly activity level and b
represents the month number.
In month 240, the seasonal index value is 108.
Required
Calculate the overhead cost for RP LLC for month 240 to the nearest
Rs. 1,000.
A Rs. 40,000
B Rs. 39,000

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C Rs. 38,000
D Rs. 37,000 (2 marks)

11.4 Which of the following are necessary if forecasts obtained from a time series
analysis are to be reliable?
I There must be no unforeseen events.
II The model used must fit the past data.
III The trend must be increasing.
IV There must be no seasonal variation.
A I only
B I and II only
C I, II and III only
D I, II, III and IV (2 marks)

11.5 What is the purpose of seasonally adjusting the values in a time series?
A To obtain an instant estimate of the degree of seasonal variation
B To obtain an instant estimate of the trend
C To ensure that seasonal components total zero
D To take the first step in a time series analysis of the data (2 marks)

11.6 An extract from a company's sales budget is as follows:

Rs
October 224,000
November 390,000
December 402,000
Ten per cent of sales are paid for immediately in cash. Of the credit
customers, 30 per cent pay in the month following the sale and are entitled
to a 1 per cent discount. The remaining customers pay two months after
the sale is made.
What is the value of sales receipts shown in the company's cash budget for
December?
A Rs. 285,567
B Rs. 286,620
C Rs. 290,430
D Rs. 312,830 (2 marks)

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11.7 Over an 18-month period, sales have been found to have an underlying
linear trend of y = 7.112 + 3.949x, where y is the number of items sold and
x represents the month. Monthly deviations from trend have been
calculated and month 19 is expected to be 1.12 times the trend value.
Required
Calculate and identify the seasonally adjusted trend.
A 98
B 90
C 92
D 96 (2marks)

11.8 A flexible budget is a budget that:

A Is changed during the budget period according to changed
circumstances.
B Is continuously updated by adding a further accounting period when
the earliest accounting period has expired.
C Results from the participation of budget holders.
D Recognises different cost behaviour patterns and is designed to
change as the volume of activity changes. (2 marks)

11.9 Which of the following statements is/are correct?

I Fixed budgets are not useful for control purposes.
II A prerequisite of flexible budgeting is a knowledge of cost behaviour
patterns.
III Budgetary control procedures are useful only to maintain control
over an organisation's expenditure.
A (I), (II) and (III)
B (I) and (II) only
C (II) and (III) only
D (II) only (2 marks)

11.10 Which two of the following are adverse consequences of a 'bottom up'
approach to budgeting?
A In general they are unrealistic.
B Managers may introduce budgetary slack.
C Managers may set easy budgets to ensure they are achievable.
D Specific resource requirements may be overlooked. (2 marks)

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11.11 What does the statement 'sales is the principal budget factor' mean?
A The level of sales will determine the level of cash at the end of the
period.
B The level of sales will determine the level of profit at the end of the
period.
C The company's activities are limited by the level of sales it can
achieve.
D Sales is the largest item in the budget. (2 marks)

11.12 Which of the following statements about setting budget targets is/are
correct?
(1) Setting 'ideal standards' as targets for achievement should motivate
employees to perform to the best of their ability.
(2) Setting low standards as targets for achievement should motivate
employees because they should usually achieve or exceed the target.
A 1 only is correct
B 2 only is correct
C Neither 1 nor 2 is correct
D Both 1 and 2 are correct (2 marks)

11.13 A control system that reacts to changes in the business environment,

usually to maintain a desired state of operations, is known as:
A Feedback control
B Feedforward control
C A rolling budget
D Top-down control (2 marks)

11.14 In which one of the following ways might a budgetary control not act as a
disincentive to management to achieve targeted performance?
A Targets are too strict
B Budgets are imposed by senior management
C Targets are not communicated
D Control reports are provided too late (2 marks)

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X LLC
X LLC manufactures specialist insulating products that are used in both residential
and commercial buildings. One of the products, Product W, is made using two
different raw materials. The company is now preparing its budgets for the next
four quarters. The following information has been identified for Product W:
Sales
Selling price Rs. 2,200 per unit
Sales demand
Quarter 1 2,250 units
Quarter 2 2,050 units
Quarter 3 1,650 units
Quarter 4 2,050 units
Quarter 5 1,250 units
Quarter 6 2,050 units
Materials
A 5kg per unit @ Rs. 40 per kg
B 3kg per unit @ Rs. 70 per kg
Inventory holding policy
Closing inventory of finished goods 30% of the following quarter's sales demand
Closing inventory of materials 45% of the following quarter's materials usage
The management team are concerned that X plc has recently faced increasing
competition in the market place for Product W. As a consequence, there have been
issues concerning the availability and costs of the specialised materials needed to
manufacture Product W, and there is concern that this might cause problems in
the current budget setting process.
Required: Prepare the following budgets for each quarter for X plc:
11.15 What is the total Production budget in units?
A 7,000 units
B 7,700 units
C 7,900 units
D 8,000 units (2 marks)

11.16 What is the total overall cost?

A Rs. 155,085
B Rs. 165,095
C Rs. 145,085
D Rs. 165,995 (2 marks)

11.17 X Plc has just been informed that Material A may be in short supply during
the year for which it is preparing budgets. Complete the following sentence
using the correct words selected from below:

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Material A which may be in short supply during the year is referred to as

the ………………………………… factor, key or …………………………….. factor. It is
the factor that limits the activities of the organisation. The scarcity of
material A will mean that there is a …………………..to how many ………………….
can be ………………………………...
Principal / limit / limiting budgeting / units / key factor/ produce /
resources / maximise (2 marks)

11.18 The sales manager has prepared a work force plan to ensure that sales
quotas for the forthcoming year are achieved. This is an example of:
A Strategic planning
B Tactical planning
C Operational planning
D Corporate planning (2 marks)

11.19 What does the master budget comprise?

A The budgeted statement of profit or loss
B The budgeted cash flow, budgeted statement of profit or loss and
budgeted statement of financial position (balance sheet)
C The entire set of budgets prepared
D The budgeted cash flow (2 marks)

11.20 MIB LLC manufactures two products, W and S, which use the same raw
materials, R and T. One unit of W uses 3 litres of R and 4 kilograms of T.
One unit of S uses 5 litres of R and 2 kilograms of T. A litre of R is expected
to cost Rs. 3,000 and a kilogram of T Rs. 7,000.
Budgeted sales for 20X2 are 8,000 units of W and 6,000 units of S; finished
goods in inventory at 1 January 20X2 are 1,500 units of W and 300 units of
S, and the company plans to hold inventories of 600 units of each product
at 31 December 20X2.
Inventories of raw material are 6,000 litres of R and 2,800 kilograms of T at
1 January, and the company plans to hold 5,000 litres and 3,500 kilograms
respectively at 31 December 20X2.
The warehouse and stores managers have suggested that a provision
should be made for damages and deterioration of items held in store, as
follows.
Product W: loss of 50 units
Product S: loss of 100 units
Material R: loss of 500 litres
Material T: loss of 200 kilograms
Required

70 CA Sri Lanka
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Prepare a material purchases budget for the year 20X2 and identify the
total purchases cost
A Rs. 499,250,000
B Rs. 454, 950,000
C Rs. 552,295,000
D Rs. 454,600,000 (2 marks)

The following information relates to Questions 11.21 to 11.25

BB LLC, the company produces three products X, Y and Z. For the coming
accounting period budgets are to be prepared based on the following information.
Budgeted sales
Product X 2,000 at Rs. 100 each
Product Y 4,000 at Rs. 130 each
Product Z 3,000 at Rs. 150 each
Budgeted usage of raw material
RM11 RM22 RM33
Product X 5 2 -
Product Y 3 2 2
Product Z 2 1 3
Cost per unit of material Rs. 5 Rs. 3 Rs. 4
Finished inventories budget
Product Product Product
X Y Z
Opening 500 800 700
Closing 600 1,000 800
Raw materials inventory budget
RM11 RM22 RM33
Opening 21,000 10,000 16,000
Closing 18,000 9,000 12,000

Product Product Product

X Y Z
Expected hours per unit 4 6 8
Expected hourly rate (labour) Rs. 9 Rs. 9 Rs. 9

11.21 Product X Product Y Product Z Total

Sales quantity
Sales value Rs. Rs. Rs. Rs.

What is the total sales value?

A Rs. 1,1000,000

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B Rs. 1,170,000
C Rs. 2,500,200
D Rs. 2,000,000 (2 marks)

11.22
Product X Product Y Product Z
Units Units Units

Budgeted production
(2 marks)

11.23
RM11 RM22 RM33
Units Units Units

Budgeted material usage

(2 marks)

11.24
RM11 RM22 RM33

Budgeted material purchases Rs. Rs. Rs.

(2 marks)

11.25
Budgeted total wages Rs.

A Rs. 500,252
B Rs. 520,650
C Rs. 525,600
D Rs. 520, 980 (2 marks)

11.26 What is budgetary slack?

A The difference between the costs built into the budget and the costs
actually incurred
B The difference between the minimum necessary costs and the costs
actually incurred
C The sum of the minimum necessary costs and the costs built into the
budget
D The difference between the flexible budget and the costs actually
incurred (2 marks)

11.27 Which of the following is unlikely to be contained with a budget manual?

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A Organisational structures
B Objectives of the budgetary process
C Selling overhead budget
D Administrative details of budget preparation (2 marks)

11.28 What does the statement 'sales is the principal budget factor' mean?
A The level of sales will determine the level of cash at the end of the
period.
B The level of sales will determine the level of profit at the end of the
period.
C The company's activities are limited by the level of sales it can
achieve.
D Sales is the largest item in the budget. (2 marks)

11.29 State who is likely to serve on a budget committee and explain the
purposes of such a committee.
A Sales, marketing, administration, finance and factory staff
B Production, Sales and marketing, personnel, Distribution and
purchasing
C Production, finance, stores officer and cashier
D Delivery driver, Distribution, Cleaner, Director and supervisor
(2 marks)

11.30 Which of the following describes strategic planning and information?

A Strategic planning and information often relates to long-term
objectives and management performance, and to matters that are
both internal and external to the organisation.
B Strategic planning and information often relates to long-term
objectives and performance, and to matters that are external to the
organisation.
C Strategic information always relates to short-term decisions and
performance, and to matters that are internal to the organisation
D Strategic planning and information often relates to short-term
objectives and performance, and to matters that are internal to the
organisation. (2 marks)

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11.31 What type of operational information is provided to management?

A Throughput times, machine failures, downtime, bottlenecks,
complaints
B Sales demand, inventory levels, sales and purchase returns,
complaints
C Inventory levels, Staff numbers, competition, value of goodwill
D Sales demand, inventory levels, throughput times, balance of the
purchase ledger (2 marks)

11.32 Which of the following describes tactical planning and information?

A Tactical planning and information is always associated with planning
and control activities within the management team. It is information
to help the factory workers make decisions for planning, or for
monitoring each other's performance against previous periods, and
also to manage wage increases and annual leave entitlement.
B Tactical planning and information is generally associated with
planning and control activities within the framework of five-year
business plans. It is information to help management make decisions
for planning, or for monitoring potential performance against the
budget expectation, and to manage sales revenue achieved by the
business.
C Tactical planning and information is never associated with planning
and control activities within the framework of annual budgets or
plans. It is information to help management make decisions for
planning, or for monitoring actual performance against the actual
expectation, and also to manage all budget cuts within the
organisation.
D Tactical planning and information is generally associated with
planning and control activities within the framework of annual
budgets or plans. It is information to help management make
decisions for planning, or for monitoring actual performance against
the budget expectation, and also to manage spending and efficiency
within the organisation. (2 marks)

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11.33 The following budget was prepared by F LLC at the start of the accounting
period:
Original
budget
Sales units 600
Rs'000
Sales revenue 54,000
Direct material 16,200
Direct labour 6,000
Variable overhead 3,000
Fixed overheard 15,000
Profit 13,800
If actual sales are 550 units, the flexed budgeted profit is:
A Rs. 8,400,000
B Rs. 11,400,000
C Rs. 12,650,000
D Rs. 13,800,000 (2 marks)

11.34 The following details have been extracted from the receivables' records of R
LLC:
Invoices paid in the month of sale 25%
Invoice paid in the first month after sale 70%
Invoices paid in the second month after sale 5%
Credit sales for July to September are budgeted as follows:
July Rs. 500,000
August Rs. 600,000
September Rs. 560,000
Customers who pay in the month of sale receive a settlement discount of
5%.
The budgeted amount due to be received from customers in
September is:
Rs. (2 marks)

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11.35 F Co has realised that it will have a temporary cash shortage before it
receives the money for a very large order.
Which one of the following actions would be appropriate for F Co to take?
A Replace non-current assets
B Arrange an overdraft
C Pay suppliers early
D Increase inventory (2 marks)

11.36 The following details have been extracted from the sales receivables
records.
Invoices paid in the same month 0%
Invoices paid in the month after sale 60%
Invoices paid in the second month after sale 20%
Invoices paid in the third month after sale 15%
Bad debt 5%
Credit sales for June, July and August are budgeted as follows:
June Rs. 100,000
July Rs. 150,000
August Rs. 130,000
Customers paying in the month after sale are entitled to deduct a 2%
settlement discount. Invoices are issued on the last day of the month.
The amount to be to be received in September from credit sales and be
included in the cash budget is:
A Rs. 115,190
B Rs. 116,750
C Rs. 123,000
D Rs. 121,440 (2 marks)

11.37 A company has budgeted a total cash deficit of Rs. 2,000,000 at the end of
the next twelve months. Which of the following the best course of action to
manage the expected long term cash deficit.
A Arrange a short term overdraft to match the forecast long term cash
deficit
B Look for production efficiencies to reduce costs and improve
cashflows
C Arrange a long term loan with the bank to match the forecast long
term cash deficit
D No action is required, as the company may sell more units than it has
budgeted for. (2 marks)

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The following information relates to Questions 11.38 to 11.39

M Co's budgetary control report for last month is as follows:
Fixed budget Flexed budget Actual results
Rs Rs Rs
Sales 72,500 74,275 73,600
Direct costs 61,100 64,155 67,130
Contribution 11,400 10,120 6,470

11.38 The sales price variance for the last month was:
A Rs. 1,775 Favourable
B Rs. 1,775 Adverse
C Rs. 675 Favourable
D Rs. 675 Adverse
(2 marks)

11.39 The direct costs volume variance for the last month was:
A Rs. 3,055 Favourable
B Rs. 3,055 Adverse
C Rs. 2,975 Favourable
D Rs. 2,975 Adverse
(2 marks)

PART C QUESTIONS: DECISION MAKING

Questions 12.1 to 13.23 cover Decision Making the subject of Chapters 12-13 of
the Study Text.

12 Short-term Decision Making

12.1 Z LLC currently sells products Aye, Bee and Cee in equal quantities and at the
same selling price per unit. The contribution to sales ratio for product Aye is
40%, for product Bee it is 50% and the total is 48%. If fixed costs are
unaffected by mix and are currently 20% of sales, the effect of changing the
product mix to Aye 40%, Bee 25% and Cee 35% is that the total
contribution/total sales ratio changes to:

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A 40%
B 54%
C 47.4%
D 32% (2 marks)

12.2 J LLC produces and sells two products. The O sells for Rs. 12 per unit and has
a total variable cost of Rs. 7.90, while the H sells for Rs. 17 per unit and has a
total variable cost of Rs. 11.20. For every four units of O sold, three of H are
sold. J LLC's fixed costs are Rs. 131,820 per period. Budgeted sales revenue
for the next period is Rs. 398,500.
Required
Calculate the margin of safety.
A 11,000
B 12,400
C 12,800
D 11,900 (2 marks)

12.3 A company makes and sells three products, A, B and C. The products are sold
in the proportions A:B:C = 1:1:4.
Monthly fixed costs are Rs. 55,100 and product details are as follows:
Product Selling price Variable cost
Rs per unit Rs per unit
A 47 25
B 39 20
C 28 11
The company wishes to earn a profit of Rs. 43,000 next month. What is the
required sales value of product A in order to achieve this target profit?
A Rs. 42,000
B Rs. 41,900
C Rs. 42,300
D Rs. 43,500 (2 marks)

The following data relates to Questions 12.4

12.4 HG LLC manufactures four products. The unit cost, selling price and
bottleneck resource details per unit are as follows:
Product W Product X Product Y Product Z

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Rs Rs Rs Rs
Selling price 56 67 89 96
Material 22 31 38 46
Labour 15 20 18 24
Variable overhead 12 15 18 15
Fixed overhead 4 2 8 7
Minutes Minutes Minutes Minutes
Bottleneck resource time 10 10 15 15
Assuming that labour is a unit variable cost, if the products are ranked
according to their contribution to sales ratios, the most profitable product is:
A W
B X
C Y
D Z (2 marks)

12.5 PJ LLC manufactures four products. The unit cost, selling price and
bottleneck resource details per unit are as follows:
Product A Product B Product C Product D
Rs Rs Rs Rs
Selling price 56 67 89 96
Material 22 31 38 46
Labour 15 20 18 24
Variable overhead 12 15 18 15
Fixed overhead 4 2 8 7
Minutes Minutes Minutes Minutes
Bottleneck resource time 10 10 15 15
Assuming that labour is a unit variable cost, if budgeted unit sales are in the
ratio A:2, B:3, C:3, D:4 and monthly fixed costs are budgeted to be Rs. 15,000,
the number of units of W that would be sold at the budgeted breakeven point
is nearest to:
A 106 units
B 142 units
C 212 units
D 283 units (2 marks)

12.6 PER LLC sells three products. The budgeted fixed cost for the period is
Rs. 648,000. The budgeted contribution to sales ratio (C/S ratio) and sales
mix are as follows:
Product C/S ratio Mix
P 27% 30%
E 56% 20%
R 38% 50%
The breakeven sales revenue is nearest to:

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A Rs. 248,000
B Rs. 1,606,700
C Rs. 1,692,000
D Rs. 1,522,700 (2 marks)

12.7 The following details relate to three services provided by JHN LLC.
Service J Service H Service N
Rs Rs Rs
Fee charged to customers 84 122 145
Unit service costs:
Direct materials 12 23 22
Direct labour 15 20 25
Variable overhead 12 16 20
Fixed overhead 20 42 40
All three services use the same type of direct labour, which is paid Rs. 30
per hour.
The fixed overheads are general fixed overheads that have been absorbed
on the basis of machine hours.
If direct labour is a scarce resource, the most and least profitable uses of it
are:
Most profitable Least profitable
A H J
B H N
C N J
D N H
(2 marks)

12.8 A LLC has three options for machine B. One of these options involves
modifying the machine now at a cost of Rs. 7,200, which will mean that the
company does not have to hire an alternative machine at a cost of
Rs. 19,800. This modification would mean that machine B would have to be
disposed of in one year's time at a cost of Rs. 4,000. Ignoring the time value
of money, calculate the relevant cost of this option.
A Rs. 8,400
B Rs. 8,900
C Rs. 8,600
D Rs. 9,000 (2 marks)

12.9 What is the relevant cost of the product units in a decision about the
disposal of existing product units no longer required?
A Net realisable value
B Replacement cost
C Variable cost
D Full cost (2 marks)

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12.10 BS LLC has been asked to carry out a systems amendment for L LLC. The
amendment will require 400 programmer hours, and BS LLC has only one
programmer who is capable of doing the job.
The programmer is paid Rs. 400 per hour. Employers' Social Security
contributions and pension contributions are 20% of salary. Other
overheads are absorbed by adding 200% to direct salaries.
The programmer is scheduled to start work on a project for another
customer, M LLC, the revenue from which is Rs. 600,000 and non-salary
direct costs are Rs. 15,000. This job will also take 400 hours. If the
programmer is assigned to the L LLC job, BS LLC will have to hire another
programmer to carry out the M LLC job at a cost of Rs. 220,000.
The relevant cost of the programmer's time if BS LLC carries out the
systems amendment for L LLC is Rs. 190,200.
True
False (2 marks)

12.11 Which of the following are non-relevant costs?

I Avoidable costs
II Opportunity costs
III Notional costs
IV Sunk costs
A All of them
B IV only
C None of them
D III and IV (2 marks)

12.12 In the short-term decision-making context, which ONE of the following

would be a relevant cost?
A Specific development costs already incurred
B The cost of special material which will be purchased
C Depreciation on existing fixed assets
D The original cost of raw materials currently in stock which will be
used on the project (2 marks)

12.13 Ayomi is to set up a small hairdressing business at home. She anticipates

working a 35-hour week and taking four weeks' holiday per year. Her
expenses for materials and overheads are expected to be Rs. 30,000 per
year, and she has set herself a target profit of Rs. 180,000 for the first year.
Assuming that only 90% of her working time will be chargeable to clients,
what price should she charge for a 'colour and cut' which would take
3 hours?
A Rs. 139

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B Rs. 357
C Rs. 375
D Rs. 417 (2 marks)

The following data relates to Questions 12.14 & 12.15

Expected sales 10,000 units at Rs. 8,000 = Rs. 80 million

Variable cost Rs. 5,000 per unit
Fixed costs Rs. 21 million
12.14 Compute the breakeven point in units.
A 7,500 units
B 6,750 units
C 7,200 units
D 7,000 units (2 marks)

12.15 Compute the breakeven point in revenue.

A Rs. 54 million
B Rs. 56 million
C Rs. 58 million
D Rs. 60 million (2 marks)

The following data relates to Questions 12.16 & 12.17

Dandy LLC makes and sells a product which has a variable cost of Rs. 30 and which
sells for Rs. 40. Budgeted fixed costs are Rs. 70,000 and budgeted sales are 8,000
units.
12.16 Calculate the breakeven point
A 7,000 units
B 7,050 units
C 7,100 units
D 6,950 units (2 marks)

12.17 Calculate the margin of safety.

A 900 units
B 1,000 units
C 1,100 units
D 1,200 units (2 marks)

12.18 SG LLC makes and sells a single product, for which variable costs are as
follows.

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Rs'000
Direct materials 10
Direct labour 8
Variable production overhead 6
24
The sales price is Rs. 30,000 per unit, and fixed costs per annum are
Rs. 68 million. The company wishes to make a profit of Rs. 16 million per
annum.
Determine the sales in units required to achieve this profit.
A 13,000 units
B 14,000 units
C 15,000 units
D 16,000 units (2 marks)

12.19 SLB wishes to sell 14,000 units of its product, which has a variable cost of
Rs. 15 to make and sell.
Fixed costs are Rs. 47,000 and the required profit is Rs. 23,000.
Calculate the required sales price per unit.
A Rs. 22
B Rs. 18
C Rs. 20
D Rs. 24 (2 marks)

12.20 Match the following labels to (a), (b), (c) and (d) marked on the breakeven
chart below:
Fixed costs Margin of Budgeted Budgeted variable
safety profit costs

Rs.000

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(2 marks)

The following data relates to Questions 12.21 to & 12.22

BGG manufactures and sells a single product. The profit statement for May is as
follows.
Rs'000
Sales value 80,000
Variable cost of sales 48,000
Contribution 32,000
Fixed costs 15,000
Profit 17,000
The management accountant has used the data for May to draw the following
profit/volume chart.

Rs'000'000

Sales revenue
Rs'000'000

12.21 The monetary values indicated on the chart as A, B and C are:

A Rs.

B Rs.
C Rs. (2 marks)

12.22 The term used to describe the distance D on the chart is:
A Margin of safety
B Breakeven point
C Target profit
D Contribution (2 marks)

12.23 For the whole of the current year, BGG's budgets to achieve a sales value of
Rs. 900,000,000. Assuming that the unit variable costs and selling price
achieved will be the same as that achieved during May, and that fixed costs
for the year will be Rs. 180,000,000, the profit for the whole year will be:
A Rs. 180,000
B Rs. 18,000,000
C Rs. 1,800,000
D Rs. 180,000,000 (2 marks)

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12.24 The annual margin of safety for BGG's product is:

A 55% of budgeted sales
B 45% of budgeted sales
C 40% of budgeted sales
D 50% of budgeted sales (2 marks)

The following data relates to Questions 12.25 to & 12.26

Suits makes two products, the Trouser and the Jacket. Unit variable costs are as
follows.
Trouser Jacket
Rs'000 Rs'000
Direct materials 1 3
Direct labour (K3,000 per hour) 6 3
Variable overhead 1 1
8 7
The sales price per unit is Rs. 14,000 per Trouser and Rs. 11,000 per Jacket. During
July the available direct labour is limited to 8,000 hours. Sales demand in July is
expected to be as follows.
Trouser 3,000 units
Jacket 5,000 units
Required
Determine the production budget that will maximise profit, assuming that fixed
costs per month are
Rs. 20 million and that there is no opening inventory of finished goods or work in
progress.
12.25 Which is the scarce resource?
A Labour
B Materials (2 marks)

12.26 Identify the contribution earned per unit of scarce resource for Trousers.
A Rs. 3,500
B Rs. 2,900
C Rs. 3,000
D Rs. 3,250 (2 marks)

12.27 Determine the budgeted production and sales and identify the overall
profit achieved.
A Rs. 8,950,000
B Rs. 9,000,000
C Rs. 9,000,500

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D Rs. 8,000,000 (2 marks)

The following data relates to Questions 12.28 & 12.29

JG manufactures two products, the D and the E, using the same material for each.
Annual demand for the D is 9,000 units, while demand for the E is 12,000 units.
The variable production cost per unit of the D is Rs. 10,000, that of the E
Rs. 15,000. The D requires 3.5 kg of raw material per unit, the E requires 8 kg of
raw material per unit. Supply of raw material will be limited to 87,500 kg during
the year.
A sub-contractor has quoted prices of Rs. 17,000 per unit for the D and Rs. 25,000
per unit for the E to supply the product. How many of each product should JG
manufacture in order to maximise profits?
12.28 How many units of D should SG manufacture?
A 8,500 units
B 9,600 units
C 9,200 units
D 9,000 units (2 marks)

12.29 How many units of E should SG manufacture?

A 7,000 units
B 6,000 units
C 6,500 units
D 7,500 units (2 marks)

12.30 Which of the following is not an assumption typically made in relevant

costing?
A Cost behaviour patterns are known.
B The amount of fixed costs, unit variable costs, sales prices and sales
demand are known with certainty.
C The objective of decision making in the short run is to maximise
satisfaction.
D There is no scarcity of resources. (2 marks)

12.31 What is the relevant cost of the product units in a decision about the
disposal of existing product units no longer required?
A Net realisable value
B Replacement cost
C Variable cost
D Full cost (2 marks)

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12.32 BS LLC has been asked to carry out a systems amendment for L LLC. The
amendment will require 400 programmer hours, and BS LLC has only one
programmer who is capable of doing the job.
The programmer is paid Rs. 40 per hour. Pension contributions are 20% of
salary. Other overheads are absorbed by adding 200% to direct salaries.
The programmer is scheduled to start work on a project for another
customer, M Inc, the revenue from which is Rs. 60,000 and non-salary
direct costs are Rs. 1,500. This job will also take 400 hours. If the
programmer is assigned to the L LLC job, BS LLC will have to hire another
programmer to carry out the M Inc job at a cost of Rs. 22,000.
The relevant cost of the programmer's time if BS LLC carries out the
systems amendment for L LLC is Rs. 19,200.
A True
B False
(2 marks)

12.33 Which of the following are non-relevant costs?

I Avoidable costs
II Opportunity costs
III Notional costs
IV Sunk costs
A All of them
B IV only
C None of them
D III and IV (2 marks)

12.34 A LLC has three options for machine B. One of these options involves
modifying the machine now at a cost of Rs. 7,200,000 which will mean that
the company does not have to hire an alternative machine at a cost of
Rs. 19,800,000. This modification would mean that machine B would have
to be disposed of in one year's time at a cost of Rs. 4,000,000. Ignoring the
time value of money, calculate the relevant cost of this option.
A Rs. 8,000,000
B Rs. 8,400,000
C Rs. 8,600,000
D Rs. 8,900,000 (2 marks)

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12.35 C LLC is in the process of preparing a quotation for a special job for a
customer. The job will require 700 units of material N. 400 units are
already in stock at a book value of Rs. 50,000 per unit. The net realisable
value per unit is Rs. 20,000. The replacement price per unit is Rs. 60,000.
The material is in stock as the result of previous overbuying. No other use
can be found for material N.
Required
Calculate the relevant cost of material N for this special job.
A Rs. 26,000,000
B Rs. 25,000,000
C Rs. 26,500,000
D Rs. 24,000,000 (2 marks)

13 Long-term Decision Making

13.1 B Ltd has identified two mutually exclusive projects which have an
equivalent effect on the risk profile of the company. Project 1 has a payback
period of 3.7 years, an NPV of Rs. 16,100, an internal rate of return of 15%
and an average accounting rate of return of 16%. Project 2 has a payback
period of 4.7 years, an NPV of Rs. 14,900, an internal rate of return of 19%
and an average accounting rate of return of 17%. The cost of capital is 10%.
Assuming that the directors wish to maximise shareholder wealth and no
shortage of capital is expected, which project should the company choose?
A Project 1 because it has the shorter payback period
B Project 1 because it has the higher net present value
C Project 2 because it has the higher internal rate of return
D Project 2 because it has the higher accounting rate of return
(2 marks)

13.2 In a comparison of the NPV and IRR techniques, which of the following
statements is true?
A Both methods give the same accept or reject decision, regardless of the
pattern of the cash flows.
B IRR is technically superior to NPV and easier to calculate.
C The NPV approach is superior if discount rates are expected to vary
over the life of the project.
D NPV and accounting ROCE can be confused. (2 marks)

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13.3 What is the present value of Rs. 5,000 in perpetuity at a discount rate of 10%?
A Rs. 500
B Rs. 5,500
C Rs. 4,545
D Rs. 50,000 (2 marks)

13.4 What are the disadvantages of the payback method of investment appraisal?
I It tends to maximise financial and business risk.
II It is a fairly complex technique and not easy to understand.
III It cannot be used when there is a capital rationing situation.
A None of the above
B All of the above
C I only
D II and III (2 marks)

13.5 What is the present value of a perpetuity of Rs. 8,652 per year given an
interest rate of 7%, assuming that the first cash flow occurs today?
A Rs. 123,600
B Rs. 60,564
C Rs. 12,360
D Rs. 922,875 (2 marks)

13.6 Avanthi will receive an annuity starting after three years. It will pay her
Rs. 1,500,000 per year for three years and her cost of capital is 10%.
Using the annuity rates below, calculate the present value of the annuity.
Year Annuity rate 10%
1 0.909
2 1.736
3 2.487
4 3.170
5 3.791
6 4.355
A Rs. 1,778,000
B Rs. 2,802,000
C Rs. 4,755,000
D Rs. 10,263,000 (2 marks)

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13.7 Which of the following are problems in using net present value to appraise
an investment?
I The difficulty of estimating future cash flows
II The difficulty of selecting an appropriate discount rate
III It does not take account of inflation
IV The concept of net present value is difficult for non-accountants to
understand
A I and II only
B I, II and III only
C I, II and IV only
D I, II, III and IV (2 marks)

13.8 What is the 'internal rate of return' of an investment?

A The discount rate at which the investment should be appraised
B The rate charged on loans used to finance the investment
C The probability of making a profit on the investment
D The discount rate at which the net present value of the investment is
zero (2 marks)

13.9 A company is considering investing in a manufacturing project that would

have a three-year life span. The investment would involve an immediate
cash outflow of Rs. 500,000 and have no residual value. In each of the three
years, 4,000 units would be produced and sold. The contribution per unit,
based on current prices, is Rs. 50. The company has an annual cost of
capital of 8%. Ignore inflation
Required
Calculate the net present value of the project (to the nearest Rs. 500).
A Rs. 15,000
B Rs. 17,000
C Rs. 18,000
D Rs. 10,000 (2 marks)

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13.10 Adesh invests Rs. 50,000 in a building society account earning compound
interest of 8% pa.
Required
Calculate the value of the investment in six years' time (to the nearest R).
A Rs. 81,231
B Rs. 75,695
C Rs. 79,344
D Rs. 65,100 (2 marks)

13.11 Babiya needs Rs. 58,000 at the end of five years from now. He can earn 9%
pa interest.
Required
Calculate how much Babiya should invest now (to the nearest R).
A Rs. 31,239
B Rs. 37,696
C Rs. 39,436
D Rs. 33,192 (2 marks)

13.12 A one-year investment yields a return of 15%. The cash returned from the
investment, including principal and interest, is Rs. 20,700.
Required
Calculate the interest earned on this investment.
A Rs. 1,900
B Rs. 1,750
C Rs. 2,900
D Rs. 2,700 (2 marks)

13.13 A financial adviser leases an office for five years, the rentals being paid
at the beginning of each year. At 10% the present value of the rentals is
Rs. 328,000.
Required
Calculate the annual rental cost (to the nearest R).
A Rs. 78,657
B Rs. 75,695
C Rs. 79,344
D Rs. 85,100 (2 marks)

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13.14 R LLC is considering a project. The present value of the initial investment of
the project is Rs. 320,000, the present value of the project's variable costs is
Rs. 270,000, the present value of its cash inflows is Rs. 1,300,000 and the
present value of its net cash flows is Rs. 710,000. The cost of capital is 10%.
The project's IRR is 17%.
Required
Calculate the change required in the cost of capital to make R LLC
indifferent between accepting and rejecting the project.
A 7%
B 28%
C 50%
D 70% (2 marks)

13.15 A government organisation has a fixed interest ten-year loan. The interest
rate on the loan is 8% per annum. The loan is being repaid in equal annual
instalments at the end of each year. The amount borrowed was
Rs. 2,500,000. The loan has just over four years to run.
Ignore taxation.
Required
Calculate the present value of the amount outstanding on the loan
A Rs. 1,581,231
B Rs. 1,756,295
C Rs. 1,606,556
D Rs. 1,465,100 (2 marks)

13.16 Fill in the missing names of capital appraisal methods:

The ………. method may give better rankings to a project with high early
cash flows and the ………. method may give a better ranking to a project
with later cash flows
(2 marks)

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13.17 M LLC is evaluating some possible investment projects and uses a 10%
discount rate to determine their net present values.
Investment A
Rs'000
Initial Investment 400
Incremental cash flows: Year 1 100
Year 2 120
Year 3 140
Year 4 120
Year 5* 100
Net present value 39
*includes Rs. 20,000 residual value for each investment project.

Calculate the payback period of investment A. (2 marks)

13.18 P LLC is evaluating some possible investment projects and uses a 10%
discount rate to determine their net present values.
Investment B
Rs'000
Initial Investment 450
Incremental cash flows: Year 1 130
Year 2 130
Year 3 130
Year 4 130
Year 5* 150
Net present value 55
*includes Rs. 20,000 residual value for each investment project.

Calculate the discounted payback period of investment B. (2 marks)

13.19 R LLC is evaluating some possible investment projects and uses a 10%
discount rate to determine their net present values.

Investment C generates the following cash flows.

Rs'000
Initial investment 350
Incremental cash flows: Year 1 50
Year 2 110
Year 3 130
Year 4 150
Year 5* 100
* Includes residual value of investment
Calculate the net present value of investment C using a 10% cost of capital
(to the nearest Rs'000) (2 marks)

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13.20 D LLC is evaluating some possible investment projects and uses a 10%
discount rate to determine their net present values.

Investment C generates the following cash flows.

Rs'000
Initial investment 350
Incremental cash flows: Year 1 50
Year 2 110
Year 3 130
Year 4 150
Year 5* 100
* Includes residual value of investment
Calculate the Internal Rate of Return (IRR) of investment C. (2 marks)

13.21 Harston LLC is to spend Rs. 600,000 on a machine which will have an
economic life of 10 years and no residual value. Depreciation is to be
charged using the straight-line method. Estimated operating cash flows are:

Year Rs
1 – 20,000
2 +130,000
3 +200,000
4–6 +250,000 p.a.
7–10 +300,000 p.a.
What is the payback period (PB) and the average annual return on initial
investment (ARR)?
PB ARR
A 5.47 years 37.67%
B 5.47 years 27.67%
C 4.16 years 37.67%
D 4.16 years 27.67% (2 marks)

13.22 Lasai is considering the following two investments that are mutually
exclusive:
Project 1: Initial outlay = Rs. 1,000,000
Scrap proceeds at end of project = Rs. 50,000
Profit receivable = Rs. 150,000 p.a. for 8 years
Project 2: Initial outlay = Rs. 500,000
Scrap proceeds at end of project = Rs. 50,000
Cash flows receivable = Rs. 150,000 p.a. for 5 years
If Lasai has a target Accounting Rate of Return of 20% based on average
investment, determine which project(s) he would find acceptable.
(2 marks)

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13.23 Pavith proposes to purchase a machine costing Rs. 135,000. The machine
will save labour costs of Rs. 70,000 per annum for 2 years and will then be
sold for Rs. 50,000.
What is the IRR of the project? Ignore tax.
A 18.6%
B 23.3%
C 38.7%
D Impossible to determine without a cost of capital (2 marks)

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PART D QUESTIONS: RISK & UNCERTAINTY

Questions 14.1 to 14.41 cover Risk & Uncertainty the subject of Chapter 14 of the
Study Text.

14 Risk and Uncertainty

14.1 Sample 1: 2, 5, 5, 12
Sample 2: 1, 3, 5, 8, 8
Which of the following statistics has the same value in both samples?
A Arithmetic mean
B Standard deviation
C Median
D Mode

14.2 In a supermarket, the number of employees and the annual earnings per
employee are shown as follows.
Annual Number
earnings employed
$
6,000 3
7,000 5
10,000 3
11,000 1
12,000 2
15,000 1
The median value of annual earnings is:

14.3 A factory employs 100 people and is divided into three departments. The
mean (arithmetic) output per employee per month for all employees is 139
units.
What is the mean output per employee per month for department 2?

Department No of employees Mean output per

in department employee per month
Units
1 54 130
2 ? ?
3 24 140

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14.4 The weights of three items – A, B and C – vary independently and have the
following means and standard deviations.
Mean Variance
weight kg
A 120 400
B 100 400
C 80 100
The three items are sold together in a single packet. The variance of this
packet is 900kg.
What is the mean weight of a packet of one unit each of A, B and C, and the
standard deviation of the weights of packets?
Mean Standard
weight kg deviation kg
A 100 30
B 100 900
C 300 30
D 300 900

14.5 The following has been calculated for a frequency distribution.

S(f) = 50
S(fx) = 1,610
S(fx2) = 61,250
The value of the standard deviation (to 1 decimal place) is .

14.6 Which of the following statements about decision making under conditions
of uncertainty is true?
A A risk neutral decision maker will avoid the worse possible outcome.
B. A risk averse decision maker will avoid all risks in decision making.
C Expected values are used to support a risk adverse attitude to
decision making.
D. A risk taker will choose the highest possible outcome even where there
is possibility of the worse outcome.

14.7 Which investment will a decision maker who is a risk taker choose?
Worse case Best case
A Rs100,000 Rs300,000
B (Rs100,000) Rs400,000
C (Rs300,000) Rs600,000
D Rs200,000 Rs200,000

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14.8 R LLC is deciding whether to launch a new product. The initial outlay for
the product is Rs. 200,000. The forecast possible annual cash inflows and
their associated probabilities are shown below.
Probability Year 1 Year 2 Year 3
Rs Rs Rs
Optimistic 0.20 100,000 120,000 90,000
Most likely 0.50 70,000 80,000 76,000
Pessimistic 0.30 64,000 72,000 62,000
The company's cost of capital is 10% per annum.
Assume the cash inflows are received at the end of the year and that the cash
inflows for each year are independent.
Required
Calculate the expected net present value for the product.
A Rs. 5,821
B Rs. (5,821)
C Rs. (7,934)
D Rs. 6,510 (2 marks)

14.9 A survey of heights of lampposts is carried out in a single country to find

out if there is any variation across the country.
What sort of data is being collected in such a survey?
A Quantitative Discrete
B Qualitative Discrete
C Quantitative Continuous
D Qualitative Continuous (2 marks)

14.10 A normal distribution has a mean of 55 and a variance of 14.44. The

probability of a score of 59 or more is approximately
A 0.15
B 0.35
C 0.50
D 0.85 (2 marks)

14.11 The weights of elephants are normally distributed. The mean weight is
5,200kg and the standard deviation is 430kg. What is the probability of an
elephant weighing more than 6,000kg?
A 0.0314
B 0.2343
C 0.4686
D 0.9686 (2 marks)

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14.12 Invoices produced within a firm are known to contain errors: 3% contain a
very serious error, 6% a serious error and 12% a minor error.
The probability that a randomly-chosen invoice will have a serious error or
a minor error is
A 0.21
B 0.18
C 0.09
D 0.06 (2 marks)

14.13 A normal distribution has a mean of 150 and a variance of 6,944.

Calculate the percentage of the population that is less than 210? (Give your
answer to two decimal places.)
A 0.89
B 0.85
C 0.75
D 0.72 (2 marks)

14.14 Production of aluminium tubes is normally distributed with a mean length

of 50 cm and a standard deviation of 5 cm.
Calculate the percentage of tubes at least 57 cm long.
A 8.08
B 9.08
C 8.80
D 8.60 (2 marks)

14.15 From past records it is known that 15% of items from a production line are
defective.
Calculate the probability that if two items are selected randomly that only
one will be defective.
A 0.28
B 0.22
C 0.26
D 0.30 (2 marks)

14.16 A company is bidding for three contracts which are awarded independently
of each other. The board estimates its chances of winning contract X as
50%, of winning contract Y as 1 in 3, and of winning contract Z as 1 in 5.
The profits from X, Y and Z are estimated to be Rs. 50,000, Rs. 90,000 and
Rs. 100,000 respectively.

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Calculate the expected value to the company of the profits from all three
contracts.
A 70,000
B 75,000
C 65,000
D 72,000 (2 marks)

14.17 Three sales representatives – J, K and L – rate their (independent) chances

of achieving certain levels of sales as follows.
Possible sales Rs. 10,000 Rs. 20,000 Rs. 30,000
J Probability 0.3 0.5 0.2
K Probability 0.3 0.4 0.3
L Probability 0.2 0.6 0.2
(For example, J rates her chances of selling Rs. 20,000 worth of business as
'fifty-fifty' and K has a 30% chance of selling Rs. 30,000 worth.)
Assess which of the sales representatives has the highest expected sales.
A J
B J&L
C K&L
D J, K, & L (2 marks)

14.18 Which of the following is NOT a limitation of using expected values?

A It ignores risk.
B It is heavily dependent on probability estimates.
C It is inappropriate for repeated decisions.
D The EV is unlikely to correspond to one of the outcomes.
(2 marks)

14.19 XY Co is trying to decide which of four potential projects to invest in, but is
concerned about risk. The following information has been obtained about
the four potential projects.
Project A B C D
Expected contribution 9,000 9,000 8,000 8,000
Standard deviation 400 500 400 500
Which of the projects has the highest relative dispersion and therefore
risk?
Project A
Project B
Project C
Project D (2 marks)

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The following data relates to Questions 14.20 to & 14.21

A company expects to sell 1,000 units per month of a new product but there is
uncertainty as to both the unit selling price and the unit variable cost of the
product. The following estimates of selling price, variable costs and their related
probabilities have been made.
Unit variable cost
Selling price probability Probability
Rs per unit % Rs per unit %
200 25 80 20
250 40 100 50
300 35 120 30
There are specific fixed costs of Rs. 50,000 per month expected for the new
product.
14.20 The expected value of monthly contribution is:
A Rs. 5,890
B Rs. 10,300
C Rs. 10,890
D Rs. 15,300 (2 marks)

14.21 The probability of monthly contribution from this new product exceeding
Rs. 135,000 is:
A 24.5%
B 30.5%
C 63.0%
D 92.5% (2 marks)

14.22 A manager is considering the price to charge for a new product.

The contribution depending on the level of demand and the selling price is
shown in the payoff table below:
Selling price
Demand Rs. 60 Rs. 70 Rs. 80 Rs. 90
High Rs. 100,000 Rs. 120,000 Rs. 110,000 Rs. 105,000
Medium Rs. 50,000 Rs. 60,000 Rs. 100,000 Rs. 80,000
Low Rs. 40,000 Rs. 30,000 Rs. 80,000 Rs. 70,000
If the manager applies the maximin criterion to make decisions the selling
price chosen will be:
A Rs. 60
B Rs. 70
C Rs. 80
D Rs. 90 (2 marks)

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14.23 Camp LLC is trying to predict sales of its new tent, but it will be dependent
on the weather. The Sales Manager predicts that 10,000 tents will be sold if
the weather is dry, but only 6,000 if the summer if wet. The probability of a
dry summer is 0.3. Each tent will retail for Rs. 3,000.
What is the expected value of the sales revenue for the forthcoming
year?
Rs.
(2 marks)

14.24 A company has produced a payoff table showing the profit earned
depending upon the number of units produced and the number of units
demanded of a new product.
Payoff table
Production
Demand 300 325 350
300 Rs. 300,000 Rs. 270,000 Rs. 250,000
325 Rs. 300,000 Rs. 325,000 Rs. 290,000
350 Rs. 300,000 Rs. 325,000 Rs. 350,000

It has started to produce a minimax regret matrix table but there are
some entries outstanding.
Complete the minimax regret matrix by selecting the appropriate
figures from the list below.
Production
Demand 300 325 350
300 Rs. 0
325 Rs. 25,000 Rs0
350 Rs. 50,000
Picklist:
Rs. 50,000
Rs. 35,000
Rs. 25,000
Rs. 30,000
Rs. 0
(2 marks)

The following data relates to Questions 14.25 to & 14.26

A company wishes to decide on a selling price for a new product.
Weekly sales of each product will depend on the price charged and also on
customers' response to the new product. The following pay-off table has been
prepared.

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Probability Price P1 Price P2 Price P3 Price P4

Rs Rs Rs Rs
Price 5.00 5.50 6.00 6.50
Unit contribution 3.00 3.50 4.00 4.50
Weekly demand Units Units Units Units
Best possible 0.3 10,000 9,000 8,000 7,000
Most likely 0.5 8,000 7,500 7,000 6,000
Worst possible 0.2 6,000 5,000 4,000 3,000
14.25 If the choice of selling price is based on a maximax decision rule, which
price would be selected?
A P1
B P2
C P3
D P4 (2 marks)

14.26 If the choice of selling price is based on a maximin decision rule, which
price would be selected?
A P1
B P2
C P3
D P4 (2 marks)

14.27 A manager is trying to decide which of three mutually exclusive projects to

undertake. Each of the projects could lead to varying net costs which the
manager calls outcomes I, II and III. The following payoff table or matrix
has been constructed.
Outcomes (Net profit)
Project I (Worst) II (Most likely) III (Best)
A 60 70 120
B 85 75 140
C 100 120 135
Using the minimax regret decision rule, decide which project should be
undertaken.
A Project A
B Project B
C Project C
D None of the above (2 marks)

14.28 The following statements have been made about decision making under
conditions of uncertainty.
1. The expected value of a project is the value expected to occur if an
investment project with several possible outcomes is undertaken
once.

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2. A risk-averse decision maker avoids all risks in decision making.

3. Expected values are used to support a risk-averse attitude to
decision making.
4. Expected values are more valuable as a guide to decision making
where they refer to outcomes which will occur many times over.
Which of the above statements is / are true?
A All of them
B 1, 3 and 4 only
C 1 and 2 only
D 4 only (2 marks)

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14.29 AB can choose from four mutually exclusive projects. The projects will each
last for one year only and their net cash inflows will be determined by the
prevailing market conditions. The forecast net cash inflows and their
associated probabilities are shown below.

Market conditions Poor Good Excellent

Probability 0.20 0.40 0.40
Project outcomes Rs'000 Rs'000 Rs'000
Project L 550 480 580
Project M 450 500 570
Project N 420 450 480
Project P 590 580 430
Based on the expected value of the net cash inflows, which project should
be undertaken?
A Project L
B Project M
C Project N
D Project P (2 marks)

14.30 Which of the following are true in respect of using expected values cost vs.
benefit calculations?
1. Expected value is appropriate for one-off events
2. Expected value ignores best- and worst-case possibilities
3. The expected value probably will not actually occur
4. Expected value eliminates uncertainty
A 1, 2 and 3 only
B 3 and 4 only
C 2 and 3 only
D 1, 2 and 4 (2 marks)

14.31 An analysis of 480 working days in a factory shows that on 360 days there
were no machine breakdowns. Assuming that this pattern will continue,
what is the probability that there will be a machine breakdown on a
particular day?
A 0%
B 25%
C 35%
D 75% (2 marks)

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14.32 A production director is responsible for overseeing the operations of three

factories – North, South and West. He visits one factory per week. He visits
the West factory as often as he visits the North factory, but he visits the
South factory twice as often as he visits the West factory.
What is the probability that in any one week he will visit the North factory?
A 0.17
B 0.20
C 0.25
D 0.33 (2 marks)

14.33 If one card is drawn from a normal pack of 52 playing cards, what is the
probability of getting an ace or a heart spade?
A 17/52
B 4/13
C 4/52
D 19/52 (2 marks)

14.34 A company's security system is made up of three separate electronic

alarms, which operate independently.
The security system operates provided that at least one of the three alarms
is working. The probability of an alarm failing at any time is 1 in 100. The
probability of the security system failing is
A 1 in 100
B 3 in 100
C 1 in 10,000
D 1 in 1,000,000 (2 marks)

14.35 The mail-order sales (units) of Brand X in a certain country are shown
below. In this country, the populations of all twenty sub-groups are equal.
Each customer buys one unit. Ages are given in years.
Mail-order sales of Brand X (units) by region and age in 20X6
Region/Age 21–29 30–39 40–49 50–59 60 + Total
North 100 80 50 40 30 300
South 55 50 45 30 20 200
East 65 60 65 60 50 300
West 20 30 40 50 60 200
240 220 1,000
A customer is to be randomly selected for a holiday prize. The probability
that this customer is from the East and over 39 years of age is to
3 decimal places.
(2 marks)

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14.36 The mail-order sales (units) of Brand X in a certain country are shown
below. In this country, the populations of all twenty sub-groups are equal.
Each customer buys one unit. Ages are given in years.
Mail-order sales of Brand X (units) by region and age in 20X6
Region/Age 21–29 30–39 40–49 50–59 60 + Total
North 100 80 50 40 30 300
South 55 50 45 30 20 200
East 65 60 65 60 50 300
West 20 30 40 50 60 200
240 220 1,000

For the North and South the rank correlation coefficient between sales and
age is (to the nearest whole number).
(2 marks)

14.37 An item is made in two stages. At the first stage it is processed by one of
four machines (Machine A, B, C, or D), each machine having equal
probability. At the second stage it is processed by one of two machines
(Machine E or F) and is twice as likely to go through Machine F as this
machine works twice as quickly.
The probability that an item is processed on Machine A or Machine E is?
A 1/12
B 2/7
C 1/2
D 7/12 (2 marks)

14.38 D provides a motorist rescue service to its members. It has been proposed
to change the monthly membership fee to Rs. 1,200 for the next year. The
impact of this on the number of members is uncertain but the following
estimates have been made:
Number of members Probability
20,000 0.1
30,000 0.6
40,000 0.3
The following estimates for variable costs have also been made:
Variable cost per member per month Probability
Rs. 700 0.3
Rs. 600 0.5
Rs. 400 0.2
D expects to incur annual fixed costs of Rs. 1,100,000.
Calculate the probability and monthly profit that would be shown in a two
way data table from 40,000 members with a variable cost per member per

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month of Rs. 400. (2

marks)

The following scenario relates to questions 14.39 to 14.41

Alpha is a manufacturer of sports equipment and is planning to launch a new style
of tennis racket
If the price is set at Rs. 4,250 then demand is expected to be 1,000 tennis rackets;
at Rs. 5,000, demand is expected to be 730 tennis rackets and at Rs. 6,000 it is
predicted to be 420 tennis rackets. Variable costs are estimated at Rs. 170, Rs. 210
or Rs. 260. The following payoff table of contributions has been produced
showing the possible contributions outcomes. A decision on price must be made.
Price Rs. 4,250 Rs. 5,000 Rs. 6,000
Variable cost Rs. 1,700 2,550,000 2,409,000 1,806,000
Rs. 2,100 2,150,000 2,117,000 1,638,000
Rs. 2,600 1,650,000 1,752000 1,428,000
14.39 What price would be set if Alpha were to use a maximin decision criterion?

Rs. (2 marks)

14.40 What price would be set if Alpha were to use a minimax regret decision
criterion?

Rs. (2 marks)

14.41 If the probabilities of the variable costs are Rs. 1,700: 0.4; Rs. 2,100: 0.25;
and Rs. 2,600: 0.35, which price would the risk-neutral decision maker
choose?

Rs. (2 marks)

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PART E QUESTIONS: WORKING CAPITAL MANAGEMENT

Questions 15.1 to 15.28 cover Working Capital Management the subject of
Chapter 15 of the Study Text.

15 Inventory Control
15.1 In times of rising prices, the FIFO method of inventory valuation, when
compared to the average cost method of inventory valuation, will usually
result in which of the following?
A A higher profit and a lower closing inventory value
B A higher profit and a higher closing inventory value
C A lower profit and a lower closing inventory value
D A lower profit and a higher closing inventory value (2 marks)

15.2 During May 20X7, Bhavya's purchases were Rs. 126,500k, and her sales were
Rs. 150,000k. Bhavya's gross profit is 20% of sales. The value of her
inventory at 1 May 20X7 was Rs. 12,500k.
What is the value of Bhavya's inventory at 31 May 20X7?
A Rs. 6,000k
B Rs. 11,000k
C Rs. 14,000k
D Rs. 19,000k (2 marks)

15.3 Your organisation uses the continuous weighted average cost method of
valuing inventories. During August 20X9, the following inventory details
were recorded:
Opening balance 30 units valued at Rs. 200 each
5 August Purchase of 50 units at Rs. 240 each
10 August Issue of 40 units
18 August Purchase of 60 units at Rs. 250 each
23 August Issue of 25 units
Required
Calculate the value of the inventory balance at 31 August 20X9.
A Rs. 18,000
B Rs. 19,000
C Rs. 14,000
D Rs. 19,500 (2 marks)

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15.4 The following information is available from the inventory department

concerning Material A. The company uses the AVCO method.
January 1 Balance 300kg Rs. 25 per unit
January 2 Issue 250kg
January 12 Receipt 400kg Rs. 25.75 per unit
January 21 Issue 200kg
January 29 Issue 75kg
Required
Calculate the cost of materials issues and the value of closing inventory at
each of the dates above. (2 marks)

SK
SK sells bathroom fittings throughout the country in which it operates.
Shower units
In order to obtain the best price, it has decided to purchase all its annual demand
of 10,000 shower hinges from a single supplier. RR has offered to provide the
required number of shower hinges each year under an exclusive long-term
contract.
Demand for shower hinges is at a constant rate all year. The cost to SK of holding
one shower hinge in inventory for one year is Rs. 4 plus 3% of the purchase price.
RR is located only a few miles from the SK main showroom. It supplies each
shower hinge at Rs. 400 with a transport charge of Rs. 200 per delivery. It
provides such a regular and prompt delivery service that SK believes it will not be
necessary to hold any safety inventory (that is buffer inventory) if it uses RR as its
supplier.
Note.
The EOQ (economic order quantity) formula is:

2C0D
EOQ =
CH

Where:
CO = the cost of making an order with a supplier
CH = the cost of holding one unit of the stores item in store for one year
D = the demand for the stores item (in units) each year
Required
Using the economic order quantity model (EOQ model),

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15.5 Calculate the optimal order size for shower hinges, assuming that RR is the
sole supplier of shower hinges for SK.
A EOQ = 575
B EOQ = 500
C EOQ = 550
D EOQ = 525 (2 marks)

JW
JW sells kitchen fittings throughout the country in which it operates.
Soap dispensers
Demand for JW's liquid dispensers is 95,000 units per annum. Demand is evenly
distributed throughout the year. The cost of placing an order is Rs. 15 and the cost
of holding a unit of inventory for a year is Rs. 3.
15.6 Calculate how many orders of liquid dispensers JW should make in a year.
A EOQ = 900
B EOQ = 925
C EOQ = 975
D EOQ = 950 (2 marks)

OG
OG sells door stoppers throughout the country in which it operates.
Hooks
Demand for door stoppers is 2,500 packs per year, each pack contains four door
stoppers. The door stoppers are purchased from a single supplier, and it costs
Rs. 25 to place an order. The cost of holding a single door stopper in inventory for
a year is 50c.
15.7 Calculate how many door stoppers should be ordered each time to minimise
inventory costs (answer to the nearest 10).
A EOQ = 1,000
B EOQ = 1,050
C EOQ = 1,075
D EOQ = 1,025 (2 marks)

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FLG
FLG LLC wishes to minimise its inventory costs. Annual demand for a raw material
costing Rs. 12 per unit is 60,000 units per year. Inventory management costs for
this raw material are as follows:
Ordering cost: Rs. 6 per order
Holding cost: Rs. 0.5 per unit per year
The supplier of this raw material has offered a bulk purchase discount of 1% for
orders of 10,000 units or more. If bulk purchase orders are made regularly, it is
expected that annual holding cost for this raw material will increase to Rs. 2 per
unit per year.
Required
15.8 Calculate the total cost of inventory for the raw material when using the
economic order quantity.
A Rs. 720,600
B Rs. 720,000
C Rs. 750,000
D Rs. 729,500 (2 marks)

EGS
EGS LLC wishes to minimise its inventory costs. Annual demand for a raw material
costing Rs. 120 per unit is 6,000 units per year. Inventory management costs for
this raw material are as follows:
Ordering cost: Rs. 6 per order
Holding cost: Rs. 0.5 per unit per year
The supplier of this raw material has offered a bulk purchase discount of 1% for
orders of 1,000 units or more. If bulk purchase orders are made regularly, it is
expected that annual holding cost for this raw material will increase to Rs. 2 per
unit per year.
15.9 Assess whether accepting the discount offered by the supplier will minimise
the total cost of inventory for the raw material.
A Rs. 715,956
B Rs. 716,500
C Rs. 713,836
D Rs. 718,335 (2 marks)

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15.10 Which of the following functions are fulfilled by a goods received note
(GRN)?
(i) Provides information to update the stock records on receipt of goods
(ii) Provides information to check the quantity on the supplier's invoice
(iii) Provides information to check the price on the supplier's invoice
A (i) and (ii) only
B (i) and (iii) only
C (ii) and (iii) only
D All of them (2 marks)

The following information relates to questions 15.11:

Date Units Unit price Value
Rs Rs
1 Jan Balance b/f 1,000 5.00 5,000
3 Mar Issue 400
4 Jun Receipt 500 5.50 2,750
6 Jun Receipt 500 6.00 3,000
9 Sept Issue 700
15.11 If the first-in, first-out method of pricing had been used, the value of the
issue on 9 September would have been:
A Rs. 3,500
B Rs. 3,550
C Rs. 3,950
D Rs. 4,200 (2 marks)

The following information relates to questions 15.12:

Date Units Unit price Value
Rs'000 Rs'000
1 Jan Balance b/f 100 5 500
3 Mar Issue 40
4 Jun Receipt 50 5.5 275
6 Jun Receipt 50 6 300
9 Sept Issue 70
15.12 If the last-in, first-out method of pricing had been used, the value of the
issue on 9 September would have been:
A Rs. 350,000
B Rs. 395,000
C Rs. 410,000
D Rs. 420,000 (2 marks)

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15.13 There are 27,500 units of Part Number X35 on order with the suppliers and
16,250 units outstanding on existing customers' orders.
If the free stock is 13,000 units, what is the physical stock?
A 1,750
B 3,250
C 24,250
D 29,250 (2 marks)

The following information relates to questions 15.14:

A domestic appliance retailer with multiple outlets stocks a popular toaster
known as the
Autocrisp 2000, for which the following information is available:
Average sales 75 per day
Maximum sales 95 per day
Minimum sales 50 per day
Lead time 12–18 days
Reorder quantity 1,750
15.14 Based on the data above, at what level of stocks would a replenishment
order be issued?
A 600 units
B 1,125 units
C 1,710 units
D 1,750 units (2 marks)

The following information relates to questions 15.15:

A garden tools retailer with multiple outlets stocks a popular Garden Spade
known as the DigDeep100, for which the following information is available:
Average sales 75 per day
Maximum sales 95 per day
Minimum sales 50 per day
Lead time 12-18 days
Reorder quantity 1,750
15.15 Based on the data above, what is the maximum stock level?
A 1,750 units
B 2,275 units
C 2,860 units
D 2,900 units (2 marks)

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15.16 The annual demand for a stock item is 2,500 units. The cost of placing an
order is Rs. 80 and the cost of holding an item in stock for one year is
Rs. 15. What is the economic order quantity, to the nearest unit?
A 31 units
B 115 units
C 163 units
D 26,667 units (2 marks)

The following information relates to questions 15.17:

Stock item 2362 X
Receipts Issues
Price Price
Date Units per unit Value Units per unit Value
Rs Rs Rs Rs
1 June Opening stock 100 5.00 500
3 June Receipts 300 4.80 1,440
5 June Issues 220
12 June Receipts 170 5.20 884
24 June Issues 300
15.17 Using the weighted average price method of stock valuation, the cost of the
materials issued on 5 June was
A Rs. 1,056
B Rs. 1,067
C Rs. 1,078
D Rs. 1,100 (2 marks)

The following information relates to questions 15.18:

Stock item 1319B
Receipts Issues
Price Price
Date Units per unit Value Units per unit Value
Rs. Rs. 000's Rs. Rs. 000's
1 June Opening stock 100 500 50
3 June Receipts 300 480 144
5 June Issues 220
12 June Receipts 170 520 88.4
24 June Issues 300
15.18 Using the weighted average price method of stock valuation, the value of
closing stock on 30 June was
A Rs. 24,800
B Rs. 25,000
C Rs. 25,100
D Rs. 26,000 (2 marks)

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15.19 Which of the following documents would be completed for materials being
returned to stores from production?
A Material requisition note
B Purchase requisition note
C Goods received note
D Goods returned note (2 marks)

15.20 Which of the following would be the form completed by the stores
department detailing inventory requirements?
A Material requisition note
B Purchase requisition note
C Goods received note
D Goods returned note (2 marks)

15.21 Which of the following would be completed for materials being returned to
the supplier?
A Material requisition note
B Purchase requisition note
C Goods received note
D Goods returned note (2 marks)

15.22 Which of the following would be the form completed by stores on receipt of
goods?
A Material requisition note
B Purchase requisition note
C Goods received note
D Goods returned note (2 marks)

15.23 Which of the following would be the form completed by production

detailing inventory requirements?
A Material requisition note
B Purchase requisition note
C Goods received note
D Goods returned note (2 marks)

15.24 Delete the irrelevant words:

Perpetual / Periodic inventory counting is usually carried out once a year
with all inventory being counted on a particular day.
Perpetual / Periodic inventory counting occurs on a year-round basis.
(2 marks)

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15.25 Which of the following would be completed by stores to record all

movements on individual items of inventory?
A Material requisition note
B Stock Card
C Purchase Order
D Goods returned note (2 marks)

15.26 What type of cost is damage and pilferage?

A Ordering cost
B Purchase cost
C Holding cost
D Stock-out cost (2 marks)

15.27 What type of cost is a transport cost?

A Ordering cost
B Purchase cost
C Holding cost
D Stock-out cost (2 marks)

15.28 What type of cost are extra costs caused by the need for emergency orders?
A Ordering cost
B Purchase cost
C Holding cost
D Stock-out cost (2 marks)

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Answers

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PART A: COST ACCOUNTING

1 Introduction to Management Accounting

1.1 C Complete accuracy is not necessarily an essential quality of good
information. It needs to be sufficiently accurate for its purpose, and
often there is no need to go into unnecessary detail for pointless
accuracy.
Relevance (option A) is an essential quality of good information. Busy
managers should not be forced to waste their time reading pages of
unnecessary information.
Communication of the information to the right person (option B) is
essential. Individuals who are given the authority to do certain tasks
must be given the information they need to do them.
The correct timing of information (option D) is essential. Information
which is not available until after a decision is made will be useful only
for comparisons and longer-term control, and may serve no purpose
even then. Information prepared too frequently can also be a waste of
time and resources.
1.2 D Management accounts often incorporate non-monetary measures.
Therefore statement (i) is incorrect.
There is no legal requirement to prepare management accounts.
Therefore statement (ii) is incorrect.
Management accounts do serve as a future planning tool, but they are
also useful as an historical record of performance. Therefore statement
(iii) is incorrect.
1.3 C
1.4 D Statements (i), (ii) and (iii) are all correct.
1.5 C
1.6 A
1.7 D
1.8 B
1.9 B
1.10 (a) Data
(b) Information

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1.11 B Operational tasks are short term in timescale is true. Strategic tasks are
unstructured. Tactical information is mostly internal. Operational plans
are implemented by low level management
1.12 B Seb: Operational information, Jai: Strategic information

2 Cost Classification
2.1 B The stores assistant's wages cannot be charged directly to a product,
therefore the stores assistant is part of the indirect labour force.

2.2 A By definition

2.3 A The depicted cost has a basic fixed element which is payable even at
zero activity. A variable element is then added at a constant rate as
activity increases.

2.4 A The cost described will increase in steps, remaining fixed at each step
until another supervisor is required. Graph 1 depicts a step cost
therefore the correct answer is A.

2.5 True

2.6 B The royalty cost can be traced in full to the product, ie it has been
incurred as a direct consequence of making the product. It is therefore
a direct expense. Options A, C and D are all overheads or indirect costs
which cannot be traced directly and in full to the product.

2.7 B The wages paid to the stores assistant cannot be traced in full to a
product or service, therefore this is an indirect labour cost.
The assembly workers' wages can be traced in full to the televisions
manufactured (option A), therefore this is a direct labour cost.
The wages paid to plasterers in a construction company can be traced
in full to the contract or building they are working on (option C). This is
also a direct labour cost.
The audit clerk's time can be traced to specific clients or jobs (option
D) and would therefore be classified as a direct labour cost.

2.8 D Indirect costs are those which cannot be easily identified with a
specific cost unit. Although the staples could probably be identified
with a specific chair, the cost is likely to be relatively insignificant. The
expense of tracing such costs does not usually justify the possible
benefits from calculating more accurate direct costs. The cost of the
staples would therefore be treated as an indirect cost, to be included as
a part of the overhead absorption rate.

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Options A, B and C all represent significant costs which can be traced to

a specific cost unit. Therefore, they are classified as direct costs.

2.9 B Prime cost is the total of direct material, direct labour and direct
expenses. Therefore, the correct answer is B.
Option A describes total production cost, including absorbed
production overhead. Option C is only a part of prime cost. Option D is
an overhead or indirect cost.

2.10 C The supervisors are engaged in the production activity, therefore

option D can be eliminated. They supervise the production of all
products, therefore their salaries are indirect costs because they
cannot be specifically identified with a cost unit. This eliminates
options A and B. The salaries are indirect production overhead costs,
therefore option C is correct.

2.11 D It would be appropriate to use the cost per customer account and the
cost per cheque received and processed for control purposes.
Therefore items (ii) and (iii) are suitable cost units.
Stationery costs, item (i), is an expense of the department, therefore it
is not a suitable cost unit.

2.12 A A period cost is charged against the sales for the period. It is not
carried forward in stock to a future period.
Many period costs can be easily allocated to a period (option B) and are
incurred regularly (option D). However the major distinguishing
feature of a period cost in the context of cost accounting is that it is not
included in the stock valuation for the period. Hence option A is the
better description.
Option C describes a product cost, which is carried forward in the stock
valuation until the relevant cost unit is sold.

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2.13 C The supervisors are engaged in the production activity, therefore

option D can be eliminated. They supervise the production of all
products, therefore their salaries are indirect costs because they
cannot be specifically identified with a cost unit. This eliminates
options A and B. The salaries are indirect production overhead costs,
therefore option C is correct.

2.14 B Within the relevant range, fixed costs are not affected by the level of
activity, therefore option B is correct.
Option A describes a linear variable cost. Options C and D could apply
to any type of cost, not just to fixed costs, so they are not the correct
options.
Rs. 835,850 – Rs. 739,500 Rs. 96,350
2.15 B Variable overhead = =
15,100 – 12,750 2,350
= Rs. 41 per square metre
Fixed overhead = Rs. 739,500 – (Rs. 41 ´ 12,750)
= Rs. 739,500 – Rs. 522,750 = Rs. 216,750
Overheads on 16,200 square metres = Rs. 216,750 + (Rs. 41 ´ 16,200)
= Rs. 216,750 + Rs. 664,200
= Rs. 880,950
If you selected option A you calculated the correct amount of variable
cost but you forgot to add on the fixed cost. If you selected options C or
D you calculated a total unit rate from one of the two activity levels
given. However, this makes no allowance for the constant amount of
fixed costs that is included in each of the total cost figures provided.

2.16 B Graph 2 shows that costs increase in line with activity levels

2.17 A Graph 1 shows that fixed costs remain the same whatever the level of
activity

2.18 A Graph 1 shows that cost per unit remains the same at different levels of
activity

2.19 C Graph 4 shows that semi-variable costs have a fixed element and a
variable element

2.20 A Graph 3 shows that the step fixed costs go up in 'steps' as the level of
activity increases

2.21 C
Units Rs 000s
High output 1,100 18,300
Low output 700 13,500
Variable cost of 400 4,800

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Variable cost per unit Rs. 4,800,000/400 units = Rs. 12,000 per unit
Fixed costs = Rs. 18,300,000 – (Rs. 12,000 × 1,100) = Rs. 5,100,000
Therefore, the correct answer is C.
Option A is the total cost for an activity of 700 units
Option B is the total variable cost for 1,100 units (1,100 × Rs. 12,000)
Option D is the difference between the costs incurred at the two
activity levels recorded

2.22 D The salary is part fixed (Rs. 6500 per month) and part variable (Rs. 50
per unit). Therefore, it is a semi-variable cost and answer D is correct.
If you chose option A or B you were considering only part of the cost.
Option C, a step cost, involves a cost which remains constant up to a
certain level and then increases to a new, higher, constant fixed cost.

2.23 D The cost described will increase in steps, remaining fixed at each step
until another supervisor is required. Such a cost is known as a step
cost.

2.24 B Using the high-low method:

Units Cost
Rs
4,000 400,000
2,000 200,000
2,000 200,000
Rs. 200,000
Variable cost per unit =
2000 units
= Rs. 100

2.25 C

2.26 B

2.27 C

2.28 A

2.29 (i) A Per item manufactured

(ii) C Per passenger mile
(iii) C Per chargeable hour

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2.30 A

2.31 Extrapolation involves using a line of best fit to predict a value outside the
two extreme points of the observed range.

2.32 A When cold drinks sell well, so will suntan cream. Neither sales level
causes the other; both are caused by the weather.

2.33 Statement (a) is true. The coefficient of determination is r2.

Statement (b) is false. r can reach 1 or –1, so r2 can reach 1.
Statement (c) is false. Correlation does not prove a causal link.

2.34 regression analysis, years (or days or months)

2.35 WORKINGS
X Y XY X2
20 82 1,640 400
16 70 1,120 256
24 90 2,160 576
22 85 1,870 484
18 73 1,314 324
SX = 100 SY = 400 SXY = 8,104 SX2 = 2,040
n = 5 (there are five pairs of data for x and y values)
b = (nSXY – SXSY)/(nSX2 – (SX)2) = ((5 ´ 8,104) – (100 ´ 400))/ ((5 ´
2,040) – 1002)
= (40,520 – 40,000)/(10,200 – 10,000) = 520/200 = 2.6
a = Y - bX = (400/5) – (2.6 ´ (100/5)) = 28

Y = 28 + 2.6X

Where Y = total cost, in thousands of pounds and X = output, in thousands

of units.

2.36 D If the output is 22,000 units, we would expect costs to be 28 + 2.6 ´ 22

= 85.2 = Rs. 85,200.

2.37 & 2.38

WORKINGS

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Year X Y XY X2
1 1 22 22 1
2 2 25 50 4
3 3 24 72 9
4 4 26 104 16
5 5 29 145 25
6 6 28 168 36
7 7 30 210 49
SX = 28 SY = 184 SXY = 771 SX2 = 140
n = 7
Where Y = a + bX
b = ((7 ´ 771) – (28 ´ 184))/((7 ´ 140) – (28 ´ 28)) = 245/196 = 1.25
a = (184/7) – ((1.25 ´ 28)/7) = 21.2857, say 21.3
Y = 21.3 + 1.25X where X = 1 in year 1, X = 2 in year 2 and so on

2.37 = A
Using this trend line, predicted sales in year 8 (X = 8) would be 21.3 +
1.25 ´ 8 = 31.3 = 31,300 units.

2.38 = C
Similarly, for year 9 (X = 9) predicted sales would be 21.3 + 1.25 ´ 9 =
32.55 = 32,550 units.

6Sd2
2.39 D R = 1–
n(n2 –1)
6×50
R = 1– = 0.70
10×99
If you selected option A, you omitted the '1' from the equation above.
If you selected option B, you didn't state your answer to two decimal
places.
If you selected option C, you forgot to deduct your answer from 1. Make
sure you perform the entire calculation using the complete formula
(which is provided in your exam) next time.

2.40 The rank correlation coefficient is +0.30.

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Technical Degree of
ability accuracy
(ranking) (ranking) d d2
Employee 1 2 4 2 4
Employee 2 3 3 0 0
Employee 3 4 5 1 1
Employee 4 5 2 3 9
Employee 5 1 1 0 0
14

6Sd2
R =1–
n(n2 – 1)

(6 ×14)
=1–
5×(25 – 1)

= 1 – 0.7
= +0.30 (to 2 decimal places)
2.41 B A rank correlation coefficient of 0.95 indicates that there is strong
positive correlation between taste and looks of new drink products. So
if the drink tastes good and ranks highly, then it is likely that’s its looks
will also be ranked highly by consumers. This means the company must
focus on new drinks which taste good and also look good against
competitor drinks.

2.42 Positive correlation

2.43 The correct answer is B. The correlation coefficient, r, must always fall
within the range –1 to +1, where -1 is perfect negative correlation, 0 is
no correlation and +1 is perfect correlation.

n å xy - å x å y
2.44 0.76 r=
[nΣx - (å x)2 ][n å y2 - ( å y)2 ]
2

(4 ´ 485) - (30 ´ 62)

=
[(4 ´ 238) - 302 ]´[(4 ´ 1,014) - 622 ]

1,940 - 1,860
=
52 ´ 212

80
=
104.995
= 0.76

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nå XY - å X å Y
2.45 r =
(nå X 2
- ( å X)
2
) (nå Y - ( å Y) )
2 2

=
(11 ´ 13,467) - ( 440 ´ 330)
( )
(11 ´ 17,986) - ( 440)2 ((11 ´ 10,366) - (3302 ))
2,937
= = 0.63
( 4,246 ´ 5,126)

3 Accounting for Labour Costs

3.1 B The others are direct labour

3.2 A 3,300 hours represent 75% of the total time for the job. Therefore, the
total time must be 3,300 ¸ 0.75 = 4,400 hours.
36,300,000
Labour cost per hour = = 8,250
4,400
3.3 A Hours
Active hours required for production = 200 ´ 6 hours = 1,200
Allowance for idle time (20% of total time = 25% of active time) 300
Total hours to be paid for 1,500
´ Rs. 70 per hour
Direct labour cost budget Rs. 105,000

3.4 The basic pay of machine operators is a direct cost to the unit, job or
process.
3.5 The basic pay of supervisors is an indirect cost, unless a customer asks
for an order to be carried out which involves the dedicated use of
indirect workers' time, when the cost of this time would be a direct
labour cost of the order.

3.6 Overtime premium paid to both direct and indirect workers is usually
an indirect cost because it is 'unfair' to charge the items produced in
overtime hours with the premium. Why should an item made in
overtime be more costly just because, by chance, it was made after the
employee normally clocks off for the day?

3.7 The correct answer is:

A 1 and 2 only
Statement 1: holding on to heavily depreciated assets gives a low
figure for 'capital employed' which, in turn, gives a higher figure for
ROI which could lead to bonuses for divisional managers. However,

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there are likely to be higher running costs for an old machine, making
the organisation less profitable than it might be. Low depreciation
charges may also hide this, but cash flow would be affected.
Statement 2: when a manufacturing division uses absorption costing,
building high inventory levels will result in a large proportion of
production overheads being carried from one period to the next in
inventory. This increases the return figure benefiting the divisional
managers if these are linked to bonuses but would only benefit the
company if those units of inventory can be sold in the following period.
Statement 3: this is useful for the organisation as whole - by setting a
relative target on market share when the market increases, then more
sales are expected in absolute terms. This adds controllability to the
organisation, since the sales manager could not be held responsible for
a rise (or a fall) in the overall market. Since this target is outside of the
control of the divisional managers, it is more likely to benefit the
organisation rather than the divisional managers.
3.8 B Hours
Standard time for 180 units (× 4/60) 12
Actual time taken 7
Time saved 5

Rs
Basic pay 7 hours × Rs. 50 350
Bonus: 60% × 5 hours saved × Rs. 50 per hour 150
500
Option A is the basic daily pay, without consideration of any bonus. If
you selected option C, you simply added 60 per cent to the basic daily
pay, so you have misunderstood how to calculate the bonus.
Option D is based on the standard time allowance for 180 units,
without considering the basic pay for the seven-hour day.
3.9 A Number of units qualifying for payment = 210 – 17
= 193
Piecework payment to be made:
Rs
First 100 units @ Rs. 2 200
Last 93 units @ Rs. 3 279
479
Option B is not correct because it includes payment for the 17 rejected
units. If you selected option C you calculated the correct number of
units qualifying for payment, but you evaluated all of them at the

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higher rate of Rs. 3 per unit. Option D is incorrect because it includes

the 17 rejected units and evaluates them all at the higher rate of Rs. 3
per unit.

3.10 C The overtime premium paid at the specific request of a customer would
be treated as a direct cost because it can be traced to a specific cost unit.
The four hours of machine breakdown is idle time. It cannot be traced
to a specific cost unit therefore it is an indirect cost.
The direct wages cost is as follows.
Rs
Basic pay for active hours (38 hours ´ Rs. 36) 1,368
Overtime premium re: customer request (2 hours ´ Rs. 18) 36
1,404
Option A is incorrect because it is the employee's total wages for the
week, both direct and indirect.
Option B is the basic pay for a 36-hour week, making no allowance for
the overtime worked at the customer's request.
If you selected option D you calculated the basic pay for all the hours
worked, but you made no allowance for either the idle time or the
overtime premium.

3.11 C Group bonus schemes are useful to reward performance when

production is integrated so that all members of the group must work
harder to increase output, for example in production line manufacture.
Statement (i) is therefore true.
Group bonus schemes are not effective in linking the reward to a
particular individual's performance. Even if one individual makes a
supreme effort, this can be negated by poor performance from other
members of the group. Therefore statement (ii) is not true.
Non-production employees can be included in a group incentive
scheme, for example when all employees in a management accounting
department must work harder to produce prompt budgetary control
reports. Statement (iii) is therefore true, and the correct option is C.

3.12 B Reduction in number of employees = 30 – 20 = 10

Number of employees leaving = 15
\ Number of employees replaced = 15 – 10 = 5
replacements
Labour turnover rate = ´ 100
average no. of employees in period

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= 5
× 100
(30 + 20) ÷ 2
= 20%
If you selected options A or C you calculated the correct number of
replacements as five, but you expressed this as a percentage of 30 and
20 respectively, instead of as a percentage of the average number of
employees.
If you selected option D, you used 15 employees leaving as the
numerator in your calculation. However, the labour turnover rate is
calculated based on the number of employees replaced.
3.13 A Hours
Standard time for 80 units (× 9/60) 12
Actual time taken 8
Time saved 4
Group bonus: 70% × 4 hours saved × Rs. 60 per hour = Rs. 168
Akila's share of bonus= 50% × (Rs. 168 × 60%)
= Rs. 50.40
If you selected option B you took all of the time saved as the bonus
hours, instead of only 70 per cent. Option C is the bonus payable to
Akila and her team-mate combined. If you selected option D, you have
calculated the group bonus correctly but have not taken the final step
to calculate Jane's share of the bonus.
3.14 A manufacturing firm is very busy, and overtime is being worked. The
amount of overtime premium contained in direct wages would
normally be classed as factory overheads.
Overtime premium is always classed as factory overheads unless it is:
· Worked at the specific request of a customer to get his order
completed.
· Worked regularly by a production department in the normal course
of operations, in which case it is usually incorporated into the direct
labour hourly rate.
3.15 D Hours
Active hours required 380
Add idle time (5/95) 20
Total hours to be paid 400 @ Rs. 60 per hour
Total labour cost Rs. 24,000
If you selected option A you reduced the active hours by five per cent.
However, the hours to be paid must be greater than the active hours,
therefore the idle hours must be added. If you selected option B you
made no allowance for the idle hours, which must also be paid for. If

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you selected option C you added five per cent to the active hours but
note that the idle time is quoted as a percentage of the total time to
be paid for.

100
3.16 D Standard labour cost per unit = 9 hours ´ ´ Rs. 90 = Rs. 900
90
You should have been able to eliminate option A because it is less than
the basic labour cost of Rs. 810 for 9 hours of work. Similar reasoning
also eliminates option B. If you selected option C you simply added
10% to the 9 active hours to determine a standard time allowance of
9.9 hours per unit. However, the idle time allowance is given as 10% of
the total labour time.

3.17 B Overtime premium is always classed as factory overheads unless it is:

· Worked at the specific request of a customer to get his order
completed.
· Worked regularly by a production department in the normal course
of operations, in which case it is usually incorporated into the direct
labour hourly rate.
3.18 A
Monday 12 units ´ Rs. 550 = Rs. 6600
Tuesday 14 units ´ Rs. 550 = Rs. 7700
Wednesday 9 units ´ Rs. 550 = Rs. 4950 – therefore paid Rs. 6000
Thursday 14 units ´ Rs. 550 = Rs. 7700
Friday 8 units ´ Rs. 550 = Rs. 4400 – therefore paid Rs. 6000
Total = 6600 + 7700 + 6000 + 7700 + 6000 = Rs. 34000

4 Accounting for Overhead Costs

4.1 OAR for last year = Budgeted overheads/Budgeted machine hours
= Rs. 660,000/44,000 hours
= Rs. 15 per hour
OAR per unit = Rs. 15 per hour ´ 0.2 hours/unit = Rs. 3
Overheads absorbed = 200,000 ´ Rs. 3
= Rs. 600,000
Actual overheads = Rs. 590,000
\ overheads were over absorbed by Rs. 590,000 – Rs. 600,000
= Rs. 10,000 over absorption

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Fixed production overheads for that year were Rs. 10,000 over absorbed.
4.2 A Overhead absorption rates are determined in advance for each period,
usually based on budgeted data. Therefore statement (i) is correct and
statement (iii) is incorrect. Overhead absorption rates are used in the
final stage of overhead analysis, to absorb overheads into product
costs. Therefore statement (ii) is correct. Statement (iv) is not correct
because overheads are controlled using budgets and other
management information. Therefore, the correct answer is A.
4.3 C Rs
Actual overhead incurred 235,920
Overhead under absorbed (9,370)
Overhead absorbed during period 226,550
Overhead absorption rate per direct labour hour = 226,550/4,925
= Rs. 46
Number of direct labour hours budgeted = 257,600/Rs. 46
= 5,600
4.4 C
Rs
Actual overhead incurred 1,074,150
Overhead under recovered (51,150)
Total overhead recovered by 68,200 calls made 1,023,000
Overhead absorption rate per call made = Rs. 1,023,000/68,200
= Rs. 15
4.5 D Number of employees in packing department = 2 direct + 1 indirect = 3
Number of employees in all production departments = 15 direct + 6
indirect = 21
Packing department overhead
Canteen cost apportioned to packing department = Rs. 8,400 ´ 3
21
= Rs. 12,000

Original overhead allocated and apportioned = Rs. 89,600

Total overhead after apportionment of canteen costs = Rs. 101,600

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4.6
Production Production
centre K centre L Stores Maintenance
Rs Rs Rs Rs
Overhead costs 140,000 70,000
First stores 63,000 63,000 (140,000) 14,000
apportionment
0 84,000
First maintenance 42,000 37,800 4,200 (84,000)
apportionment
4,200 0
Second stores 1,890 1,890 (4,200) 420
apportionment
0 420
Second maintenance 210 189 21 (420)
apportionment
21 0
Third stores 10 11 (21) 0
apportionment
(approx)
107,110 102,890
To the nearest 107,100 102,900
hundred
D Rs. 107,110
4.7
Production Production
centre P centre Q X Y
Rs Rs Rs Rs
Overhead costs 950,000 820,000 460,000 300,000
First X apportionment 184,000 184,000 (460,000) 92,000
0 392,000
First Y apportionment 117,600 235,200 39,200 (392,000)
39,200 0
Second X apportionment 15,680 15,680 (39,200) 7,840
0 7,840
Second Y apportionment 2,350 4,710 780 (7,840)
780 0
Third X apportionment 310 310 (780) 160
0 160
Third Y apportionment 60 100 0 (160)
(approx)
1,270,000 1,260,000 0 0
A Rs. 1,270,000

4.8 Budgeted number of occupied beds per night = 300 beds ´ 365 ´ 95%

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= 104,025 occupied bed nights

Overhead absorption rate for cleaning = Rs. 1,250,000/104,025 =
Rs. 12.02
C Rs. 12.02

4.9 D Department 1 appears to undertake primarily machine-based work,

therefore a machine-hour rate would be most appropriate.
Rs. 27,000,000
= Rs. 600 per machine hour
45,000
Therefore the correct answer is D.
4.10 B Production overhead absorption rate = Rs. 165,000/60,000
= Rs. 2.75 per machine hour
Production overhead absorbed = Rs. 2.75 ´ 55,000 hours
= Rs. 151,250
Production overhead incurred = Rs. 165,000
Production overhead under absorbed = Rs. 13,750
4.11 C Rs
Actual overhead incurred 23,592
Overhead under absorbed (937)
Overhead absorbed during period 22,655
Overhead absorption rate per direct labour hour = 22,655/4,925
= Rs. 4.60
Number of direct labour hours budgeted = 5,760/Rs. 4.60
= 5,600

4.12 Actual overheads incurred that are higher than the absorbed
overheads and will always result in under absorption.
4.13
Rs
Production overhead absorbed (11,970 hours ´ Rs. 260) 3,112,200
Production overhead under absorbed 567,000
Production overhead incurred 3,679,200

D Rs. 3,679,200
4.14 A Description B could lead to under-absorbed overheads if actual
overheads far exceeded both budgeted overheads and the overhead
absorbed. Description C could lead to under-absorbed overheads if
overhead absorbed does not increase in line with actual overhead
incurred.

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4.15 C All of the methods are acceptable bases for absorbing production
overheads. However, the percentage of prime cost has serious
limitations and the rate per unit can only be used if all cost units are
identical.

4.16 The total overhead cost of the machinery department, to the nearest
Rs, after reappointment is Rs. 1,160,000.
Overhead allocation using the elimination method is a two-step process,
as follows:
Step 1: Allocate Canteen costs to Machinery, Finishing and Maintenance
service centres
Machinery Finishing Canteen Maintenance
Number of employees 8 6 4 2
Overhead costs Rs'000 1,000 800 160 120

Canteen apportionment (8:6:2) 80 60 (160) 20

1,080 860 - 140

Step 2: Allocate Maintenance costs to Machinery, Finishing centres only.

Ignore the canteen service centre in this step.
Machinery Finishing Canteen Maintenance
Overhead costs Rs '000 1,080 860 - 140

Maintenance apportionment (8:6) 80 60 - (140)

1,160 920 - -

5 Pricing
5.1 B Minimum pricing is based on relevant costs.
5.2 The correct answer is: A 200%
Breakeven point = Rs. 20,000 = 500 ´ (selling price – Rs. 2,000)
Rs. 2,000,000/500 = Rs. 4,000
Rs. 4,000 = selling price – Rs. 2,000
Rs. 6,000 = selling price
Profit mark up on marginal cost = (Rs. 6,000 – Rs. 2,000) / Rs. 2,000 ´
100% = 200%
Note. Fixed overheads (Rs. 4,000) are omitted, as only marginal costs
are included in the calculation of the profit or 'contribution' to the
recovery in the fixed costs of Rs. 2,000,000.
5.3 D Total contribution for sales of 4,000 units

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= Rs. 40,000 + Rs. 20,000 = Rs.

60,000
Contribution per unit = Rs. 60,000 ¸ 4,000 = Rs. 15
\ Product PL selling price = Rs. 25 + Rs. 15 = Rs. 40
Rs. 15
Profit mark-up as percentage of variable cost = ´ 100% = 60%
Rs. 25
If you selected options A or B you calculated the profit per unit based
on the full cost as a percentage of the selling price and the cost
respectively. If you selected option C you calculated the profit margin,
based on variable cost, as a percentage of the selling price. This is in
fact the contribution to sales ratio for product PL.
5.4 D The full cost-plus approach to pricing relies on establishing a budgeted
activity level as a basis for calculating predetermined overhead
absorption rates. If the activity level is not achieved there is a danger of
under absorption and not all costs will be covered by the full cost-plus
prices. Therefore statement (i) is incorrect.
The full cost-plus approach fails to recognise that there will be a profit-
maximising combination of price and demand (statement (ii)).
The mark up can be adjusted to reflect demand conditions and profit
expectations, therefore statement (iii) is correct.
5.5 B Rs
Selling price of job 16,900
Less profit margin (30/130) 3,900
Total cost of job 13,000
Less overhead 6,940
Prime cost 6,060
If you selected option A you deducted 30 per cent from the selling price
to derive the total cost of the job. Option C is the result of deducting the
overhead from the selling price, but omitting to deduct the profit
margin. Option D is the total cost of the job; you needed to deduct the
overhead to derive the prime cost.

6 Integrated Accounting
6.1 B The entries for the return of direct material to stores are the reverse of
those made when the material is first issued to production. The work in
progress account is credited to 'remove' the cost of the material from
the production costs. The stores account is debited to increase the
value of stock. Therefore, the correct answer is B.
If you selected option A you identified the correct accounts, but your
entries were reversed.

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Option C represents the entries for the return of indirect materials to

stores. Option D represents the entries for the issue of indirect
materials from stores.
6.2 B The overtime was not worked for any specific job and is therefore an
indirect wages cost to be 'collected' in the overhead control account.
Similarly, the holiday pay is an indirect cost, therefore the total debit to
the overhead control account is Rs. 2,500. The direct wages of Rs.
70,800 is debited to the work in progress account and the total wages
cost is credited to the wages control account.
If you selected option C you identified the correct accounts, but your
entries were reversed.
If you selected option A you treated the overtime premium as a direct
cost, and if you selected option D you made the same mistake and your
entries were reversed.
6.3 C Statement (i) is correct. The cost of indirect material issued is
'collected' in the overhead control account pending absorption into
work in progress.
Statement (ii) is incorrect. The overhead cost incurred was Rs.
2,100,000. The overhead absorbed into work in progress during the
period was Rs. 4,048,000.
Statement (iii) is incorrect. The Rs. 84,000 is debited to profit and loss,
indicating an extra charge to compensate for the overhead under
absorbed.
Statement (iv) is correct. The indirect wage cost is 'collected' in the
overhead control account pending absorption into work in progress.
Therefore, the correct answer is C.
6.4 B
6.5
PROD’N OVERHEAD CONTROL ACCOUNT – Kitchen Dept
Rs Rs
Bank (Overheads incur) 50,000 Production 56,000
Statement of P/L 6,000
(Over absorbed)
56,000 56,000

6.6

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PROD’N OVERHEAD CONTROL ACCOUNT – Canning Dept

Rs Rs
Bank (O’heads incur) 35,000 Production 32,000
Statement of P/L 3,000
(Under absorbed)
35,000 35,000

6.7 A The entries for the under absorption of overheads would be to debit
the Statement of P/L account to 'add' the cost of extra overheads and
thereby reducing the gross profit. The production overheads control
account is credited to balance the control account.

6.8 A The entries for the issue of indirect material to production would be to
debit the work in progress account to 'add' the cost of the indirect
material to the production costs. The stores account is credited to
decrease the value of stock.
6.9 D

6.10 C The entries for the transfer of finished goods from production to
inventory would be to debit the inventory account to 'add' the cost of
the finished goods to the total inventory. The work in progress account
credited as it is now finished.

7 Job, Batch, Contract & Service Costing

7.1 A Job costing is a costing method applied where work is undertaken to
customers' special requirements. Option B describes process
costing, C describes service costing and D describes absorption costing.
7.2 B In service costing it is difficult to identify many attributable direct
costs. Many costs must be shared over several cost units, therefore
characteristic (i) does apply. Composite cost units such as tonne-mile
or room-night are often used, therefore characteristic (ii) does apply.
Equivalent units are more often used in costing for tangible products,
therefore characteristic (iii) does not apply, and the correct answer is
B.

7.3 The most appropriate cost unit is the tonne-mile. Therefore the cost
Rs. 562,800,000
per unit = = Rs. 1,500
375,200
7.4 D Process costing is a costing method used where it is not possible to
identify separate units of production, or jobs, usually because of the
continuous nature of the production process. The manufacture of paint
is a continuous production process.

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7.5 D Rs
Direct materials (5 ´ Rs. 200) 1,000
Direct labour (14 ´ Rs. 80) 1,120
Variable overhead (14 ´ Rs. 30) 420
Fixed overhead (14 ´ Rs. 50*) 700
Other overhead 800
Total cost of job 173 4040
Profit margin (´ 20/80) 1010
Selling price 5050
Rs. 2,000,000
*Fixed production overhead absorption rate =
40,000
= Rs. 50 per direct labour
hour
Option A is the total cost, but a profit margin should be added to this to
determine the selling price. If you selected option B you added only Rs.
50 for fixed production overhead: but this is the hourly rate, which
must be multiplied by the number of direct labour hours. If you
selected option C you calculated 20 per cent of cost to determine the
profit: but the data states that profit is calculated as 20 per cent of the
sales value.

7.6 C The most logical basis for absorbing the overhead job costs is to use a
percentage of direct labour cost.
Rs. 24,600
Overhead = ´ Rs. 126,000
Rs. (14,500 + 3,500 + 24,600)
Rs. 24,600
= ´ Rs. 126,000
Rs. 42,600
= Rs. 72,761
If you selected option A you used the materials cost as the basis for
overhead absorption. This would not be equitable because job number
BB15 incurred no material cost and would therefore absorb no
overhead. Option B is based on the prime cost of each job (material
plus labour) and therefore suffers from the same disadvantage as
option A. Option D is the total overhead for the period, but some of this
cost should be charged to the other two jobs.
7.7 C Job WID02
Rs
Opening WIP 42,790
Labour for period 3,500
Rs. 3,500
Overheads ( ´ Rs. 126,000) 10,352
Rs. 42,600
Total costs 56,642
Profit (331/3% on sales) 28,321
Rs. 84,963

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If you selected option A you forgot to add on overhead cost. If you

selected option B you calculated the profit as 331/3 % on cost, instead
of 331/3% on sales. If you selected option D you charged all of the
overhead to job WID02, but some of the overhead should be charged to
the other two jobs.
7.8 C Job number WIP
Rs
14,500
AA10 (26,800 + 17,275 + 14,500) + ( ´ 126,000) 101,462
42,600
CC20 (18,500 + 24,600 + 72,761) 115,861
217,323
Option A is the direct cost of job YN12, with no addition for overhead.
Option B is the direct cost of both jobs in progress, but with no addition
for overhead. Option D is the result of charging all of the overhead to
the jobs in progress, but some of the overhead must be absorbed by the
completed job YN15.

7.9 C The actual material and labour costs for a batch ((i) and (iv)) can be
determined from the material and labour recording system. Actual
manufacturing overheads cannot be determined for a specific batch
because of the need for allocation and apportionment of each item of
overhead expenditure, and the subsequent calculation of a
predetermined overhead absorption rate. Therefore item (ii) is
incorrect and item (iii) is correct.

7.10 B Cost per cake would be very small and therefore not an appropriate
cost unit. The most appropriate cost unit would be cost per batch.

7.11 C The following items may be used in costing batches.

(i) Actual material cost
(iii) Absorbed manufacturing overheads
(iv) Actual labour cost
Often, actual manufacturing costs are unknown until much later, and
it is difficult to allocate these to different product batches. Therefore,
overheads are generally absorbed into cost batches based on an
overhead absorption rate.

7.12 B Number of occupied room-nights = 40 rooms ´ 30 nights ´ 65% = 780

Room servicing cost per occupied room-night = Rs. 39,000 = Rs. 50

780

Option A is the cost per available room-night. This makes no allowance

for the 65% occupancy achieved. If you selected option C you simply
divided Rs. 39,000 by 40 rooms. This does not account for the number
of nights in the period, nor the percentage occupancy achieved. If you

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selected option D you calculated the cost per occupied room, rather
than the cost per occupied room-night.

7.13 A For most services it is difficult to identify many attributable direct

costs. A high level of indirect costs must be shared over several cost
units, therefore option A is not a characteristic of service costing.

Many services are intangible, for example an accountancy practice

offers an intangible service, therefore option B is a characteristic of
service costing.

Composite cost units such as tonne-kilometre or room-night are often

used, therefore characteristic C does apply. Service costing can also be
used to establish a cost for an internal service such as a maintenance
department which does work for other departments. Therefore, option
D is a characteristic of service costing.

7.14 B A college and a hotel are likely to use service costing. A plumber works
on separately identifiable jobs and is therefore more likely to use job
costing.

7.15 Since wages are paid on a piecework basis they are a variable cost
which will increase in line with the number of binders. The machine
set-up cost and design costs are fixed costs for each batch which will
not be affected by the number of binders in the batch.

For a batch of 300 binders:

Rs’000
Direct materials (30 × 30) 900
Direct wages (10 × 30) 300
Machine set up 30
Design and artwork 150
Production overhead (300 × 20%) 60
Total production cost 1,440
Selling, distribution and administration overhead (+ 5%) 72
Total cost 1,512
Profit (25% margin = 33% of cost) 504
Selling price for a batch of 300 2,016

B Rs. 2,016,000

7.16 A The price to be quoted for job B124 is Rs. 1,245

Production overhead absorption rate = Rs. 2,400,000/30,000 = Rs. 80
per labour hour
Other overhead absorption rate = (Rs. 1,500,000/Rs. 7,500,000) ´ 100%
= 20% of total production cost

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Job B124 Rs
Direct materials (3 kgs ´ Rs. 50) 150
Direct labour (4 hours ´ Rs. 90) 360
Production overhead (4 hours ´ Rs. 80) 320
Total production cost 830
Other overhead (20% ´ Rs. 830) 166
Total cost 996
Profit margin: 20% of sales (´ 20/80) 249
Price to be quoted 1,245

7.17 A
Rs
Materials 750,000
Labour 60,000
Overheads 1,000 hours ´ Rs. 150 150,000
Total cost 960,000
Cost per unit = = Rs. 24

7.18 C The first step is to calculate the overhead absorption rate for the
production departments.
Welding = = Rs. 400 per labour hour
=
Assembly = = Rs. 1000 per labour hour
Total cost – Batch 46
Rs Rs
Direct material 120,000
Direct expense 5,000
Direct labour 100 ´ Rs. 60 = 6,000
200 ´ Rs. 70 = 14,000
20,000
Prime cost 145,000
Overheads 100 ´ Rs. 400 = 80,000
200 ´ Rs. 1000 = 400,000
480,000
Factory cost 625,000
Selling and administrative cost (10% of factory cost) 62,500
Total cost 687,500
Rs. 687,500
Cost per unit = 250
= Rs. 2,750

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8 Process Costing

8.1 C The value of the abnormal loss for the period is Rs. 460
kg
Input 20,000
Normal loss (5% ´ 20,000 kg) (1,000)
Abnormal loss ( 200)
Output 18,800
Input costs - scarp value of normal loss
Cost per kg =
Expected output
Rs. 26,000+ 12,000 +19,000 - nil
=
20,000 - 1,000
Rs. 43,700
= = Rs. 2.3
19,000
Value of abnormal loss = 200 ´ Rs. 2.3 = Rs. 460

8.2 The value of the closing work in progress for the period was Rs. 9,396
Step 1 Determine output
STATEMENT OF EQUIVALENT UNITS
Total Materials Labour and overhead
units Equivalent units Equivalent units
Completed output 16,000 (100%) 16,000 (100%) 16,000
Normal loss 2,000 (0%) – (0%) –
Abnormal loss 200 (100%) 200 (100%) 200
Closing WIP 1,800 (100%) 1,800 (75%) 1,350
20,000 18,000 17,550
Step 2 Calculate the cost per equivalent unit
STATEMENT OF COST PER EQUIVALENT UNIT
Materials Labour and overhead
Total costs *Rs. 810,000 Rs. 168,480
Equivalent units 18,000 17,550
Cost per equivalent unit Rs. 45 Rs. 9.60
* Rs. 816,000 less scrap value of normal loss (Rs. 2,000 × Rs. 3 =
Rs. 6,000) = Rs. 810,000
Value of work in progress:
Rs
Materials 1,800 equivalent units ´ Rs. 45 81,000
Labour and overhead 1,350 equivalent units ´ Rs. 9.60 12,960
93,960

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8.3 D Rs. 326

Actual output 5,600
Normal loss (10% × 6,000) 600
Abnormal gain (200)
Input 6,000
Cost of input less scrap value of normal loss
Cost per unit =
Expected units

1,800,000 + 140,000 - (6,000 ´ Rs. 30)

= 6,000 ´ 90%

= 1,760,000/5,400
= Rs. 326 per unit

8.4 C Total production inventory

Rs
Opening inventory 100,000
Direct materials added 1,000,000
Conversion costs 1,200,000
2,300,000
Less closing inventory 300,000
Total production cost 2,000,000

Production Sales Apportioned

value cost
Units Rs’000 Rs’000
P 4,000 (´ Rs. 500) 2,000 (Rs. 2,000,000 ´ 500
20/80)
R 6,000 (´ Rs. 1,000) 6,000 (Rs. 2,000,000 ´ 1,500
60/80)
8,000 2,000

Product R cost per unit = Rs. 1,500,000/6,000 = Rs. 250 per unit.
8.5 D Process costing is a costing method used where it is not possible to
identify separate units of production, or jobs, usually because of the
continuous nature of the production process. The manufacture of
liquid soap is a continuous production process.
8.6 A Good production = input – normal loss – abnormal loss
= (2,500 – (2,500 × 10%) – 75)kg
= 2,500 – 250 – 75
= 2,175 kg

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8.7 C Work in progress = 300 litres input – 250 litres to finished goods
= 50 litres
Equivalent litres for each cost element are as follows.
Material Conversion costs
% Equiv. litres % Equiv. litres
50 litres in progress 100 50 50 25

8.8 MNP
Product Value at end of Litres (ii) Value per litre from
process (i) process ((i)/(ii))
Rs Rs
M 141,875 25,000 5.675
N 85,125 15,000 5.675
P 255,375 45,000 5.675
482,375 85,000
As Rs. 482,375/85,000 = Rs. 5.675, the method used to apportion
common costs between the joint products is litres produced.
This method is only suitable when products remain in the same state,
that is they don't separate into liquid and gas products. It also doesn't
take into account the relative income earning potential of each product.
However, it does allow values to be put on the products for inventory
financial reporting purposes.
It is necessary to apportion the common costs between each product to
put a value on inventory for financial reporting and so sales can be
matched with the cost of sales.
8.9 Viability of the common process
Selling price after common
Product process Litres Total revenue
Rs/litre Rs
M 6.25 25,000 156,250
N 5.20 15,000 78,000
P 6.80 45,000 306,000
540,250
Less costs at end of common process (per (c) above) (482,375)
Net revenue at the end of the common process 57,875

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8.10 C Rs. 57,875

Therefore, the common process is viable as net revenue is positive.
Optimal processing plan for each product
Product Further revenues Further costs Net revenue
Rs Rs Rs
M Rs. 2.15 ´ 25,000 = Rs. 1.75 ´ 25,000 = 10,000
3,750 43,750
N Rs. 1.25 ´ 15,000 = Rs. 0.95 ´ 15,000 = 4,500
18,750 14,250
P Rs. 0.65 ´ 45,000 = Rs. 0.85 ´ 45,000 = (9,000)
29,250 38,250
Therefore, products M and N make additional profit and so should be
processed further.

8.11 Z LLC
Product Output value at end Output Value per litre from
of process (i) Litres process ((i)/(ii))
(ii)
Rs Rs
M 141,875 25,000 5.675
N 85,125 15,000 5.675
P 255,375 45,000 5.675
482,375 85,000 5.675

D Total output value for product M, N, P / Total output (litres) from the
process will provide the value per litre i.e. Rs. 482,375/85,000 = Rs. 5.675.
This method can then be used to apportion common costs between the
joint products. Therefore, the value per litre from the process for Product
M is Rs5.675, which is the same as Product N and Product P.
This method is only suitable when products remain in the same state
that is don't separate into liquid and gas products. It also doesn't take
into account the relative income earning potential of each product.
It is necessary to apportion the common costs between each product to
put a value on stock for financial reporting and so sales can be matched
with the cost the of sales.

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8.12 A Total production cost to be apportioned (Rs’000)

= 100 + 1,000 + 1,200 – 300 = 2,000

Production Apportioned cost
Units Rs
P 4,000 (Rs. 2,000,000 ´ 4/10) 800,000
R 6,000 (Rs. 2,000,000 ´ 6/10) 1,200,000
10,000 2,000,000
If you selected option B you made no adjustment for stocks when
calculating the total costs.
If you selected option C you apportioned the production costs on the
basis of the units sold. Option D is the total cost of product R.

8.13 D Statement (i) is incorrect because the value of the product described
could be relatively high even though the output volume is relatively
low. This product would then be classified as a joint product.
Statement (ii) is incorrect. Since a by-product is not important as a
saleable item, it is not separately costed and does not absorb any
process costs.
Statement (iii) is correct. These common or joint costs are allocated or
apportioned to the joint products.

8.14 B Net process costs

Rs
Raw material input 216,000
Conversion costs 72,000
Less by-product revenue (4,000)
Net process cost 284,000

Production Apportioned
Units Sales value cost
Rs Rs
E 21,000 (´ Rs. 15) 315,000 (Rs. 284,000 ´ 180,727
315/495)
Q 18,000 (´ Rs. 10) 180,000 (Rs. 284,000 ´ 103,273
180/495)
495,000 284,000
If you selected option A you apportioned some of the net process costs
to the by-product. Option C makes no allowance for the credit of the
by-product revenue to the process account, and option D is the
production cost of product E.

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8.15 C No costs are apportioned to the by-product. The by-product revenue is

credited to the sales account, and so does not affect the process costs.
Sales Apportioned
Units value cost
Rs Rs
L 3,000 (´ Rs. 32) 96,000 (Rs. 230,000 ´ 66,506
96/332)
M 2,000 (´ Rs. 42) 84,000 (Rs. 230,000 ´ 58,193
84/332)
N 4,000 (´ Rs. 38) 152,000 (Rs. 230,000 ´ 105,301
152/332)
332,000 230,000
If you selected option A you credited the by-product sales revenue to
the process account, but the question states that by-product revenue is
credited to the sales account.
If you selected option B you apportioned some of the process costs to
the by-product. Option D is the production cost for product L.

9 Marginal & Absorption Costing

9.1 B Closing inventory valuation under absorption costing will always be
higher than under marginal costing because of the absorption of fixed
overheads into closing inventory values.
The profit under absorption costing will be greater because the fixed
overhead being carried forward in closing inventory is greater than the
fixed overhead being written off in opening inventory.

9.2 A Using marginal costing, the profit in March was:

Rs Rs
Sales revenue 820,000
Less: variable production costs
[Rs. 300,000 – 150 ´ Rs. 300,000] (255,000)
1,000
565,000
Less: fixed production costs 180,000
variable selling costs 105,000
Fixed selling costs 110,000
(395,000)
170,000

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9.3 A If marginal costing is used to value inventory instead of absorption

costing, the difference in profits will be equal to the change in
inventory volume multiplied by the fixed production overhead
absorption rate = 80 units ´ Rs. 34 = Rs. 2,720
Since closing inventory are higher than opening inventories, the
marginal costing profit will be lower that the absorption costing profit
(so option B is incorrect). This is because the marginal costing profit
does not 'benefit' from the increase in the amount of fixed production
overhead taken to inventory (rather than to the income statement).
If you selected options C or D, you based the difference on 100 units of
opening inventory.
9.4 D We know that the profit using marginal costing would be higher than
the absorption costing profit, because stocks are decreasing. However,
we cannot calculate the value of the difference without the fixed
overhead absorption rate per unit.
fixed overhead
Difference in profit 2,000 units stock
´ absorption rate per
= reduction
unit

9.5 B Difference in profit = change in stock level ´ fixed overhead per unit
= (2,400 – 2,700) ´ (Rs. 4 ´ 3)
= Rs. 3,600
The absorption profit will be higher because stocks have increased, and
fixed overheads have been carried forward in stock.
If you selected option A or C you used Rs. 4 per unit as the fixed
overhead absorption rate, but this is the absorption rate per machine
hour. If you selected option D you calculated the correct monetary
value of the profit difference but you misinterpreted its 'direction'.

9.6 A Difference in profit = change in stock level ´ fixed overhead per unit
= (15,000 – 20,000) ´ Rs. 8
= Rs. 40,000
The stock level increased during the period therefore the absorption
costing profit is higher than the marginal costing profit.
Marginal costing profit = Rs. 130,000 – Rs. 40,000 = Rs. 90,000
If you selected option B you decided there would be no difference in
the reported profits. If stock levels change there will always be a
difference between the marginal and absorption costing profits.
If you selected option C you calculated the correct monetary value of
the profit difference but you misinterpreted its 'direction'.

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9.7 A Contribution per unit = Rs. 30 – Rs. (6.00 + 7.50 + 2.50)

= Rs. 14
Contribution for month = Rs. 14 × 5,200 units
= Rs. 72,800
Less fixed costs incurred = Rs. 27,400
Marginal costing profit = Rs. 45,400
If you selected option B you calculated the profit on the actual sales at
Rs. 9 per unit. This utilises a unit rate for fixed overhead which is not
valid under marginal costing.
If you selected option C you used the correct method but you based
your calculations on the units produced rather than the units sold.
If you selected option D you calculated the correct contribution but you
forgot to deduct the fixed overhead.

9.8 D
Rs Rs
Sales (5,200 at Rs. 30) 156,000
Materials (5,200 at Rs. 6) 31,200
Labour (5,200 at Rs. 7.50) 39,000
Variable overhead (5,200 at Rs. 2.50) 13,000
Total variable cost (83,200)
Fixed overhead (Rs. 5 ´ 5,200) (26,000)
Over-absorbed overhead (W) 1,600
Absorption costing profit 48,400

Working Rs.
Overhead absorbed (5,800 ´ Rs. 5) 29,000
Overhead incurred 27,400
Over-absorbed overhead 1,600
If you selected option A you calculated all the figures correctly but you
subtracted the over-absorbed overhead instead of adding it to profit.
Option B is the marginal costing profit.
If you selected option C you calculated the profit on the actual sales at
Rs. 9 per unit, and forgot to adjust for the over-absorbed overhead.

9.9 B Stock levels increased by 3,000 units and absorption costing profit is
Rs. 105,000 higher (Rs. 955,500 – Rs. 850,500).
\ Fixed production cost included in stock increase:

= £105,000 = Rs. 35 per unit of stock

3,000
Budgeted fixed costs £1,837,500
= = 52,500 units
Fixed cost per unit £35

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Option A is an average of the opening and closing stocks.

Option C is the total of the opening and closing stocks. If you selected
option D you simply calculated the difference between the two stated
profit figures.

9.10 D Decrease in stock levels = 48,500 – 45,500 = 3,000 units

Difference in profits = Rs. 315,250 – Rs. 288,250 = Rs. 27,000

Fixed overhead per unit = £27,000 = Rs. 9 per unit

3,000
If you selected one of the other options you attempted various
divisions of all the data available in the question!

9.11 D Absorption costing is concerned with including in the total cost of a

product an appropriate share of overhead, or indirect cost. Overheads
can be fixed or variable costs, therefore option D is correct.
Option A and option B are incorrect because they relate to direct
costs. Option C is incorrect because it does not take account of variable
overheads.

9.12 B Fixed costs per unit = Rs. 16 ¸ 4 = Rs. 4

Units in closing stock = 17,500 – 15,000 = 2,500 units
Profit difference = stock increase in units × fixed overhead
per unit
= 2,500 × Rs. 4 = Rs. 10,000
Stocks increased, therefore fixed overhead would have been carried
forward in stock using absorption costing and the profit would be
higher than with marginal costing.
If you selected option A you calculated the correct profit difference, but
misinterpreted the 'direction' of the difference.
If you selected option C or D you evaluated the stock difference at
variable cost and full cost respectively.

9.13 B
£48,000
Fixed production overhead absorption rate =
12,000 units
= Rs. 4 per unit
Increase in stock levels = (12,000 – 11,720) units
= 280 units
\ Difference in profit = 280 units × Rs. 4 per unit
= Rs. 1,120

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Marginal costing profits are lower than absorption costing profits

when stock levels increase in a period, therefore marginal costing
profit will be Rs. 1,120 lower than absorption costing profits for the
same period.

9.14 B The fixed overhead absorbed into the stock valuation is the difference
in the marginal costing profit.
Stock = 14,000 – 12,000 = 2,000 units
Value of fixed production costs absorbed into stock
= 2,000 ´ 63,000/14,000
= Rs. 9,000
Marginal costing profit = 36,000 – 9,000 = Rs. 27,000

9.15 The correct answer is C.

Inventory levels have fallen so marginal costing reports the higher
profit.
$
Absorption costing profit 1,219,712
+ fixed overhead included in inventory level change
((1,680 – 1,120) ´ $128) 71,680
Marginal costing profit 1,291,392
If you chose option A, you deducted the fixed overhead included in the
inventory level change. If inventory levels decrease, absorption costing
will report the lower profit because, as well as the fixed overhead
absorbed during the period, fixed overhead which had been carried
forward in opening inventory is released and included in cost of sales.
Option B is the absorption costing profit. The marginal costing profit
must be different, however, because there has been a change in
inventory levels.

9.16 $853,750
Net profit = sales revenue – cost of sales – selling and distribution costs
Sales revenue = 130,000 units × $24 = $3,120,000
Manufacturing cost per unit = $15.00 + ($225,000/150,000 units) =
$16.50
\ Cost of sales = 130,000 units × $16.50 = $2,145,000

Selling and distribution costs = (130,000 units × $0.50) + $56,250 =

$121,250
\ Net profit = $3,120,000 – $2,145,000 – $121,250 = $853,750

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9.17 Using the high two method to determine the period fixed costs:
Production (units) Production costs
Rs
1,210 3,394
990 3,086
220 308
Variable cost per unit = Rs. 308/220 = Rs. 1.40
Fixed cost = Rs. 3,394 – (1,210 ´ Rs. 1.40) = Rs. 1,700
Overhead absorption rate = Rs. 1,700/1,000 units
= Rs. 1.70 per unit
Difference in reported profit = change in inventory units ´ Rs. 1.70
= (1,200 – 1,040) ´ Rs. 1.70
= Rs. 272
The absorption costing profit will be lower than the marginal costing
profit because the number of units in inventory reduced during the
period.
Absorption costing profit = Rs. 8,160 – Rs. 272 = Rs. 7,888
A Rs. 7,888

9.18
Net profit = sales revenue – cost of sales – selling and distribution costs
Sales revenue = 130,000 units × Rs. 240 = Rs. 31,200,000
Manufacturing cost per unit = Rs. 150 + (Rs. 2,250,000/150,000 units)
= Rs. 165
\ Cost of sales = 130,000 units × Rs. 165 = Rs. 21,450,000

Selling and distribution costs = (130,000 units × Rs. 5) + Rs. 562,000 =

Rs. 1,212,000
\ Net profit = Rs. 31,200,000 – Rs. 21,450,000 – Rs. 1,212,000 =
Rs. 8,538,000
B Rs. 8,538,000

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9.19 B Difference in profit = change in inventory level ´ fixed overhead per

unit
= (2,400 – 2,700) ´ (MWK400 ´ 3)
= MWK360,000
The absorption profit will be higher because inventories have
increased, and fixed overheads have been carried forward in
inventories.

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PART B: PLANNING & CONTROLLING

10 Standard Costing & Variance Analysis

10.1 D The direct materials usage variance compares the standard material
usage for the actual production with the actual material used. This
means that the budgeted output volume is not relevant because it is not
included in the calculation of the variance.

10.2 D The direct labour rate variance for April is calculated as:
The actual direct labour rate paid is calculated as:
Direct labour cost Rs. 3,360,000
= = Rs. 140 per hour
Direct labour hours 24,000 hours
The direct labour rate variance is calculated as:
Actual hours worked ´ [standard rate per hour – actual rate per hour]
= 24,000 hours ´ [Rs. 150 – Rs. 140] = Rs. 240,000 favourable.
The correct answer is D

10.3 C A basic standard is one which is kept unaltered over a long period of
time and may be out of date. They are used to show changes in
efficiency or performance over a long period of time.

10.4 B Sales price variance

Rs
15,759 should have sold for (´Rs. 600) 9,455,400
But did sell for (× Rs. 600 × 1.1) 10,400,940
945,540 (F)

10.5 A Budgeted sales volume = 15,750/1.05 = 15,000 bars

\ the difference between budgeted and actual sales volume was
15,750 – 15,000 = 750 bars.
Sales volume contribution variance = 750 bars × standard contribution
per unit
= 750 bars × RS. 2
= RS. 1,500 (F)

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10.6 C Actual hours = 26,000 × 2.8 = 72,800

Rs
72,800 hours should have cost (× Rs. 100) 7,280,000
But did cost 7,571,200
291,200 (A)

10.7 C
26,000 units should have taken (× 3 hours) 78,000 hours
But did take 72,800 hours
Variance in hours 5,200 (F)
× standard cost per hour ×Rs. 100
Rs. 520,000 (F)

10.8 C
The sales volume variance in a marginal costing system is valued at
standard contribution per unit, rather than standard profit per unit.
Contribution per unit of E = Rs. 150 - Rs. 80 = Rs. 70
Rs. 90000(A)
Sales volume variance in terms of contribution = ´ Rs. 70
Rs50
= Rs. 126,000(A)

10.9 D
Total material cost variance

890 units should have cost (890 ´ Rs. 200 ´ 890,000

5kg)
But did cost (Rs. 216 ´ 4,375kg) 945,000
55,000(A)

10.10 A
Contribution
Tables
Rs
Sales price 2,200
Materials (1,000)
Labour (400)
Variable o/head (40)
Contribution 760
Sales quantity contribution variance
Actual Standard
sales sales Difference ´ Std Variance
Std mix Std mix in units contribution Rs'000
Tables 9,200 8,000 1,200 (F) ´ Rs. 760 Rs. 912 (F)

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10.11 B An attainable standard assumes efficient levels of operation, but

includes allowances for normal loss, waste and machine downtime.
Option A describes an ideal standard.
Option C describes a current standard.
Option D describes a basic standard.

10.12 C It is generally accepted that the use of attainable standards has the
optimum motivational impact on employees. Some allowance is made
for unavoidable wastage and inefficiencies, but the attainable level can
be reached if production is carried out efficiently.
Option A and option D are not correct because employees may feel that
the goals are unattainable and will not work so hard.
Option B is not correct because standards set at a minimal level will not
provide employees with any incentive to work harder.

10.13 B The volume of output would influence the total number of labour hours
required, but it would not be directly relevant to the standard labour
time per unit.
The type of performance standard (option A) would be relevant. For
example, if an ideal standard is used there would be no extra time
allowed for inefficiencies. Options C and D would be relevant because
they would provide information about the tasks to be performed and
the time that those tasks should take.

100
10.14 D Required liquid input = 1 litre ´ = 1.25 litres
80
If you selected option A you deducted 20 per cent from the required
output, instead of adding extra to allow for losses, whereas option B
makes no allowance for losses.
Option C simply adds an extra 20 per cent to the completed output, but
the wastage is 20 per cent of the liquid input, not 20 per cent of output.

10.15 C When management by exception is operated within a standard

costing system, only the variances which exceed acceptable tolerance
limits need to be investigated by management with a view to control
action. Adverse and favourable variances alike may be subject to
investigation, therefore option A is incorrect.
Any efficient information system would ensure that only managers
who are able to act on the information receive management reports,
even if they are not prepared on the basis of management by exception.
Therefore option B is incorrect.

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10.16 A Standard costing provides targets for achievement, and yardsticks

against which actual performance can be monitored (item (i)). It also
provides the unit cost information for evaluating the volume figures
contained in a budget (item (ii)). Stock control systems are simplified
with standard costing. Once the variances have been eliminated, all
stock units are valued at standard price (item (iii)).
Item (iv) is incorrect because standard costs are an estimate of what
will happen in the future, and a unit cost target that the organisation is
aiming to achieve.
100
10.17 D Standard labour cost per unit = 9 hours ´ ´ Rs. 90 = Rs. 900
90
You should have been able to eliminate option A because it is less than
the basic labour cost of Rs. 810 for 9 hours of work. Similar reasoning
also eliminates option B. If you selected option C you simply added
10% to the 9 active hours to determine a standard time allowance of
9.9 hours per unit. However the idle time allowance is given as 10% of
the total labour time.

10.18 D None of the criticisms apply in all circumstances.

Criticism (i) has some validity but even where output is not
standardised it may be possible to identify a number of standard
components and activities whose costs may be controlled effectively by
the use of standard costs.
Criticism (ii) also has some validity but the use of information
technology means that standards can be updated rapidly and more
frequently, so that they may be useful for the purposes of control by
comparison.
Criticism (iii) can also be addressed in some circumstances. The use of
ideal standards and more demanding performance levels can combine
the benefits of continuous improvement and standard costing control.

10.19 C Since stocks are valued at standard cost, the material price variance is
based on the materials purchased.
Rs
12,000 kg material purchased should cost (´Rs. 30) 360,000
but did cost 336,000
Material price variance 24,000 (F)

800 units manufactured should use (´ 14 kg) 11,200 kg

but did use 11,500 kg
Usage variance in kg 300 kg (A)
´ standard price per kg ´ Rs. 30
Usage variance in £ Rs. 9,000 (A)

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If you selected option A or B you based your calculation of the

material price variance on the material actually used, and if you
selected option B you forgot to evaluate the usage variance in kg at
the standard price per kg. If you selected option D you evaluated the
usage variance at the actual price per kg, rather than the standard
price per kg.

10.20 C
Rs
2,300 hours should have cost (´ Rs. 70) 161,000
but did cost 186,000
Rate variance 25,000 (A)
Option A is the total direct labour cost variance. If you selected option
B you calculated the correct money value of the variance but you
misinterpreted its direction. If you selected option D you based your
calculation on the 2,200 hours worked, but 2,300 hours were paid for
and these hours should be the basis for the calculation of the rate
variance.

10.21 D
260 units should have taken (´ 10 hrs) 2,600 hrs
but took (active hours) 2,200 hrs
Efficiency variance in hours 400 hrs (F)
´ standard rate per hour ´ Rs. 70
Efficiency variance in £ Rs. 28,000 (F)
Option A is the total direct labour cost variance. If you selected option
B you based your calculations on the 2,300 hours paid for; but
efficiency measures should be based on the active hours only, ie 2,200
hours.
If you selected option C you calculated the correct money value of the
variance but you misinterpreted its direction.

10.22 B Idle time hours (2,300 – 2,200) × standard rate per hour = 100 hrs ×
Rs. 70 = Rs. 7,000 (A)
If you selected option A you calculated the correct money value of the
variance but you misinterpreted its direction. The idle time variance is
always adverse.
If you selected option C or D you evaluated the idle time at the actual
hourly rate instead of the standard hourly rate.

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10.23 C Standard variable production overhead cost per hour

= Rs. 115,500 ¸ 5,775 = Rs. 20
Rs
8,280 hours of variable production overhead should cost 165,600
(´ Rs. 20)
but did cost 149,040
Variable production overhead expenditure variance 16,560 (F)
Standard time allowed for one unit = 5,775 hours ¸ 1,925 units = 3
hours
2,070 units should take (´ 3 hours) 6,210 hours
but did take 8,280 hours
Efficiency variance in hours 2,070 hours
(A)
´ standard variable production overhead cost per hour ´ Rs. 20
Variable production overhead efficiency variance Rs. 41,400 (A)
If you selected option A you calculated the correct efficiency variance
in hours but you omitted to evaluate it at the standard variable
overhead cost per hour. If you selected option B you evaluated the
efficiency variance at the actual variable overhead rate per hour,
instead of at the standard rate per hour. If you selected option D you
calculated the expenditure variance as the difference between the
budget and actual expenditure. However this does not compare like
with like. The actual expenditure should be compared with the
expected expenditure for the number of hours actually worked.

10.24 B Statement (i) is consistent with a favourable material price variance. If

the standard is high then actual prices are likely to be below the
standard.
Statement (ii) is consistent with a favourable material price variance.
Bulk purchase discounts would not have been allowed at the same
level in the standard, because purchases were greater than expected.
Statement (iii) is not consistent with a favourable material price
variance. Higher quality material is likely to cost more than standard,
resulting in an adverse material price variance.
10.25 C Statement (i) is not consistent with a favourable labour efficiency
variance. Employees of a lower skill level are likely to work less
efficiently, resulting in an adverse efficiency variance.
Statement (ii) is consistent with a favourable labour efficiency
variance. Time would be saved in processing if the material was easier
to process.

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Statement (iii) is consistent with a favourable labour efficiency

variance. Time would be saved in processing if working methods were
improved.
Therefore the correct answer is C.

10.26 D Direct material cost variance = material price variance + material usage
variance
The adverse material usage variance could be larger than the
favourable material price variance. The total of the two variances
would therefore represent a net result of an adverse total direct
material cost variance.
The situation in option A would sometimes arise, but not always,
because of the possibility of the situation described in option D.
Option B could sometimes be correct, depending on the magnitude of
each of the variances. However it will not always be correct as stated in
the wording.
Option C is incorrect because the sum of the two favourable variances
would always be a larger favourable variance.

10.27 D Raising prices in response to higher demand would result in a

favourable selling price variance.
Market penetration pricing (option A) is a policy of low prices. This
would result in an adverse selling price variance, if the original planned
policy had been one of market skimming pricing, which involves
charging high prices.
Early payment discounts (option B) are financial accounting items
which do not affect the recorded selling price.
Reducing selling prices (option C) is more likely to result in an adverse
selling price variance.
10.28 A Rs
Total actual direct material cost 24,000
Add back variances: direct material price (8,000)
direct material usage 4,000
Standard direct material cost of production 20,000
Standard material cost per unit Rs. 100
Number of units produced (20,000 ¸ Rs. 100) 200
Option B is the actual sales revenue divided by the standard selling
price. This does not lead to a production figure, and it does not allow
for any selling price variance which may have arisen.
If you selected option C you divided the actual material cost by £10
without adjusting first for the material cost variances.

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If you selected option D you had the right idea about adjusting the
variances, but you got the additions and subtractions the wrong way
round. An adverse variance must be deducted from the actual cost to
derive the standard cost, and vice versa with a favourable variance.
10.29 A Since there was no change in stocks, the usage variance can be used to
calculate the material usage.
Rs4,000 (F)
Saving in material used compared with standard = = 200
Rs20 per kg
kg
Standard material usage for actual production 1,000 kg
(200 units ´ 5kg)
Usage variance in kg 200 kg (F)
Actual usage of material 800 kg
Option B is the standard usage for the output of 200 units
If you selected option C you added the 200 kg usage variance instead of
subtracting it.
10.30 D Rs
200 units should sell for (´ Rs. 700) 140,000
but did sell for 152,000
Selling price variance 12,000(F)
Option A is 1/10 of the correct value – did you miss off a zero?
Option B is the sales volume variance.
If you selected option C you calculated the correct value for the
variance, but misinterpreted it as adverse.

Budgeted material cost of sales

10.31 C Budgeted sales volume per month =
Standard material cost per unit
Rs23,000
= = 230 units
Rs100
Budgeted monthly profit margin
Budgeted profit margin per unit =
Budgeted monthly sales volume

Rs69,000
= = Rs. 300 per unit
230
Budgeted sales volume 230 units
Actual sales volume 200 units
Sales volume variance in units 30 units (A)
Standard profit per unit × Rs. 300
Sales volume variance in Rs Rs. 9,000 (A)
If you selected option A you calculated the correct value for the
variance, but misinterpreted it as favourable.

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Option B is the selling price variance.

If you selected option D you evaluated the sales volume variance in
units at the standard selling price per unit, instead of using the
standard profit per unit. Remember that the volume variance
highlights the margin lost or gained as a result of achieving a lower or
higher sales volume than budgeted.
10.32 C Let x = the number of hours 12,250 units should have taken
12,250 units should have taken x hrs
but did take 41,000
hrs
Labour efficiency variance (in hrs) x – 41,000
hrs
Labour efficiency variance (in Rs) = Rs. 112,500 (F)
Rs. 112,500
\ Labour efficiency variance (in hrs) =
Rs60
= 1,875 (F)
\ 1,875 hrs = (x – 41,000) hrs
\ standard hours for 12,250 units = 41,000 + 1,875
= 42,875 hrs
42,875 hrs
\ Standard hours per unit =
12,250 units
= 3.50 hrs
If you selected option A you treated the efficiency variance as adverse.
Option B is the actual hours taken per unit and option D is the figure for
the standard wage rate per hour.
10.33 D Total standard cost of material purchased – actual cost of material
purchased = Price variance
Total standard cost = Rs. 219,200 + Rs. 13,700
= Rs. 232,900
Rs. 232,290
Standard price per kg =
6,850
= Rs. 34
Option A is the favourable price variance per kg. This should have been
added to the actual price to determine the standard price per kg. If you
selected option B you subtracted the price variance from the actual
cost. If the price variance is favourable then the standard price per kg
must be higher than the actual price paid. Option C is the actual price
paid per kg.

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10.34 B
Actual sales 2,550 units
Budgeted sales 2,400 units
Variance in units 150 units (F)
´ standard contribution per unit (Rs. (270 – 120)) ´ Rs. 150
Sales volume variance in Rs Rs. 22,500 (F)
Rs
Revenue from 2,550 units should have been (´ Rs. 270) 688,500
but was 673,200
Selling price variance 15,300 (A)
If you selected option A you evaluated the sales volume variance at the
standard profit per unit. This would be the sales volume variance as
calculated in an absorption costing system.
If you selected option C or D you calculated the variances correctly but
you misinterpreted the direction of the volume variance and price
variance respectively.
10.35 A
Standard costing provides targets for achievement, and yardsticks
against which actual performance can be monitored (item (i)). It also
provides the unit cost information for evaluating the volume figures
contained in a budget (item (ii)). Stock control systems are simplified
with standard costing. Once the variances have been eliminated, all
stock units are valued at standard price (item (iii)).
Item (iv) is incorrect because standard costs are an estimate of what
will happen in the future, and a unit cost target that the organisation is
aiming to achieve.

10.36 The correct answer is: D Current standard.

Budgeted capacity is associated with current standards. Budgeted
capacity is not associated with basic standards. Practical capacity is
associated with attainable standards.
Full capacity is associated with ideal standards.
10.37 A Rs. 55,000 A
Sales price variance
Rs'000
Sales revenue from 110,000 units should have
been (´ Rs. 10) 1,100
But was 1,045
55 (A)

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10.38 B
Difference in profit = (18,500 – 16,750) ´ Rs. 30 = Rs. 52,500
Absorption costing profit = Rs. 162,100 – Rs. 52,500 = Rs. 109,600

10.39 D Any difference between marginal and absorption costing profit is due
to changes in inventory.
Rs'000
Absorption costing profit 1,000
Marginal costing loss (1,500)
Difference 2,500
Change in inventory = Difference in profit/fixed product cost per
unit

10.40 The sales volume contribution variance is calculated as follows.

Budgeted sales volume 8,000 units
Actual sales volume 7,700 units
Sales volume variance in units 300 units (A)
´ standard contribution per unit (Rs. (1,200–700)) ´ Rs. 500
Sales volume variance Rs. 150,000 (A)
The variance calculated above is adverse because actual sales were less than
budgeted (planned).

10.41 D
Sales variances
Rs
Sales revenue for 620 units should have been
(´ Rs. 3,000) 1,860,000
but was (´ Rs. 2,900) 1,798,000
Selling price variance 62,000 (A)

10.42 C
Budgeted sales volume 600 units
Actual sales volume 620 units
Sales volume variance in units 20 units (F)

´ standard contribution per unit (Rs. (3,000 – 2,800)) × Rs. 200

Sales volume contribution variance Rs. 4,000 (F)

10.43 B Standard marginal costing reconciliation Rs
Original budgeted contribution 290,000
Sales volume variance (36,250)

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Standard contribution from actual sales 253,750

Selling price variance 21,875
Total direct material variance (6,335)
Total direct labour variance 11,323
Total variable overhead variance (21,665)
Actual contribution 258,948
10.44 B The variable overhead variance is calculated by comparing the
budgeted variable overheads per labour hour worked with the actual
variable overheads incurred during the month. Is we know the
variance, then the standard variable overhead rate per labour hour can
be derived.

(8,000 hours ´ Standard variable overhead rate per labour hour −

Rs1,320,000) = (Rs120,000) Adverse. Therefore, the standard variable
overhead rate per labour hour is
(Rs1,320,000 - Rs120,000 +)/8,000 hours = RS150 variable overhead
per labour hour

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11 Budgeting, Preparation & Control

11.1 B
Rs
40% of May sales for c ash (40% ´ Rs. 55,000) 22,000
70% of April credit sales less 2% discount
(70% ´ 60% ´ Rs. 70,000 ´ 98%) 28,812
27% of March credit sales (27% ´ 60% ´ Rs. 60,000) 9,720
60,532

11.2 D Expected sales = ((27 ´ 12) – 24) ´ 1.35 = 405 units

11.3 B Orders are estimated as follows, using the given formula which
combines regression analysis and a time series model.
Number of orders = (100,000 + 240 ´ 30) ´ Index value
= (100,000 + 240 ´ 30) ´ 1.08
= 115,776
The overhead cost was represented by
y = Rs. 10,000 + Rs. 0.25 X where X = number of orders = 115,776
= Rs. 10,000 + (Rs. 0.25 ´ 115,776) = Rs. 39,000 to the nearest
Rs. 1,000.

11.4 B I Forecasts are made on the assumption that everything continues

as in the past.
II If the model being used is inappropriate, for example if an
additive model is used when the trend is changing sharply,
forecasts will not be very reliable.
III Provided a multiplicative model is used, the fact that the trend is
increasing need not have any adverse effect on the reliability of
forecasts.
IV Provided the seasonal variation remains the same in the future as
in the past, it will not make forecasts unreliable.
I and II are therefore necessary and hence the correct answer is B.

11.5 B Seasonally adjusting the values in a time series removes the seasonal
element from the data, thereby giving an instant estimate of the trend.

11.6 A
Rs
Cash sales in December (Rs. 402,000 ´ 10%) 40,200
Receipts from November credit sales (Rs. 390,000 ´ 90%
´ 30% ´ 99%) 104,247
Receipts from October credit sales (Rs. 224,000 ´ 90% ´
70%) 141,120
Total sales receipts in December 285,567

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11.7 C y = 7.112 + 3.949x

If x = 19, trend in sales for month 19 = 7.112 + (3.949 ´ 19) = 82.143
Seasonally-adjusted trend value = 82.143 ´ 1.12 = 92

11.8 D Recognises different cost behaviour patterns and is designed to change

as the volume of activity changes.
A flexible budget is designed to change as the volume of activity
changes.

11.9 D (II) only.

11.10 B, C The correct answers are:

• Managers may introduce budgetary slack.
• Managers may set easy budgets to ensure they are achievable.

11.11 C The principal budget factor is the factor that limits the activities of an
organisation.
Although cash and profit are affected by the level of sales (options A
and B), sales is not the only factor that determines the level of cash and
profit.

11.12 C There is likely to be a demotivating effect where an ideal standard of

performance is set, because adverse efficiency variances will always be
reported. It is important that adverse variances are not used to lay
blame if targets have been set with the aim of motivation.
A low standard of efficiency is also demotivating, because there is no
sense of achievement in attaining the required standards. Managers
and employees will often outperform the standard or target when in
fact they could have performed even better if they had been sufficiently
motivated.

11.13 B An example of feedforward control is using the information from a

forecast, rather than a historical result, to decide on appropriate
control measures.

11.14 C If targets are not communicated, they cannot provide an incentive, but
they cannot be a disincentive either.
If targets are set at high levels that cannot realistically be achieved, this
can be demotivating. Demotivation can also occur if targets are
imposed by senior management; or if control reports are provided late
so that the manager responsible is unable to take prompt action to deal
with problems that may arise.

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11.15 B Tactical planning is used by middle management to decide how the

resources of the business should be employed to achieve specific
objectives in the most efficient and effective way.
Strategic planning (option A) is planning for the achievement of long-
term objectives, and corporate planning (option D) is another name for
this.
Operational planning (option C) is concerned with the very short term,
day to day planning that is carried out by 'front line' managers such as
supervisors and head clerks.

X LLC

11.16 B Production budget in units = 7,700 Units

Q1 Q2 Q3 Q4 Total
Budgeted sales 2,250 2,050 1,650 2,050 8,000
Closing
inventories
(30% of next
quarter's sales) 615 495 615 375 375
Opening
inventory (675) (615) (495) (615) (675)
(Decrease)/
increase
in inventory (60) (120) 120 (240) (300)
Production 2,190 1,930 1,770 1,810 7,700

11.17 A 155,085
Q1 Q2 Q3 Q4 Total
Production units 2,190 1,930 1,770 1,810
kg kg kg kg
Materials
Opening
inventory
(3 kg × 45% ×
current quarter's
production) (2,957) (2,606) (2,390) (2,444) (2,012)
Usage (3 kg per
unit
of current
production) 6,570 5,790 5,310 5,430 23,100
Closing inventory
(45% × next
quarter's usage) 2,606 2,390 2,444 2,012 2,957
6,219 5,574 5,364 4,998 22,155
Cost in Rs. 435,330 390,180 375,480 349,860 1,550,850

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11.18 Material A which may be in short supply during the year is referred to
as the principal budget factor, key or limiting budget factor. It is the
factor that limits the activities of the organisation. The scarcity of
material A will mean that there is a limit to how many units can be
produced.
The company could try to obtain alternative supplies or substitute
products. If this is not possible, the impact this will have is that
production will be limited by the supply of material A and therefore,
once this has been identified, the production budget has to be prepared
before all others. In addition, to make use of limited resources the
company will have to concentrate production on the product that
maximises contribution per limiting factor.

11.19 B The budgeted cash flow, budgeted statement of profit or loss and
budgeted statement of financial position.

11.20 To calculate material purchase requirements, it is first of all necessary

to calculate the budgeted production volumes and material usage
requirements.
Product W Product S
Units Units Units Units
Sales 8,000 6,000
Provision for losses 50 100
Closing inventory 600 600
Opening inventory 1,500 300
(Decrease)/increase in inventory (900) 300
Production budget 7,150 6,400

Material R Material T
Litres Litres kg kg
Usage requirements
To produce 7,150 units of W 21,450 28,600
To produce 6,400 units of S 32,000 12,800
Usage budget 53,450 41,400
Provision for losses 500 200
53,950 41,600
Closing inventory 5,000 3,500
Opening inventory 6,000 2,800
(Decrease)/increase in inventory (1,000) 700
Material purchases budget 52,950 42,300

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Cost per unit Rs. 3,000 per Rs. 7,000 per

litre kg

Rs. ‘000 Rs. ‘000

Cost of material purchases 158,850 296,100
Total purchases cost 454,950

11.21 B
Sales budget
Product X Product Y Product Z Total
Sales quantity 2,000 4,000 3,000
Sales price Rs. 100 Rs. 130 Rs. 150
Sales value Rs. 200,000 Rs. 520,000 Rs. 450,000 Rs. 1,170,000

11.22 Production budget

Product X Product Y Product Z
Units Units Units
Sales quantity 2,000 4,000 3,000
Closing inventories 600 1,000 800
2,600 5,000 3,800
Less opening inventories 500 800 700
Budgeted production 2,100 4,200 3,100

11.23 Material usage

budget
Production RM11 RM22 RM33
Units Units Units Units
Product X 2,100 10,500 4,200 –
Product Y 4,200 12,600 8,400 8,400
Product Z 3,100 6,200 3,100 9,300
Budgeted material
usage 29,300 15,700 17,700

11.24 Material purchases budget

RM11 RM22 RM33
Units Units Units
Budgeted material usage 29,300 15,700 17,700
Closing inventories 18,000 9,000 12,000
47,300 24,700 29,700
Less opening inventories 21,000 10,000 16,000
Budgeted material purchases 26,300 14,700 13,700

Standard cost per unit Rs. 5 Rs. 3 Rs. 4

Budgeted material purchases Rs. 131,500 Rs. 44,100 Rs. 54,800

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11.25 C Labour budget

Hours
required Total Rate per
Product Production per unit hours hour Cost
Units K K
X 2,100 4 8,400 9 75,600
Y 4,200 6 25,200 9 226,800
Z 3,100 8 24,800 9 223,200
Budgeted total
wages 525,600

11.26 B

11.27 C Budget manuals contain instructions and objectives rather than the
budgets themselves.

11.28 C The principal budget factor is the factor that limits the activities of an
organisation. Although cash and profit are affected by the level of sales
(options A and B), sales is not the only factor that determines the level
of cash and profit.

11.29 B

11.30 B Strategic planning and information often relates to long-term

objectives and performance, and to matters that are external to the
organisation.

11.31 A Operational information is information provided to management,

supervisors and other employees at a day-to-day operational level. It
is usually detailed information and much of it is non-financial in nature.
It is needed to help individuals to do their day-to-day work.
Examples of operational information include detailed information
about throughput times, machine failures and downtime, bottlenecks,
complaints, quantities of rejected items and so on.

11.32 D

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11.33 B The correct answer is: Rs. 11,400,000.

Original Per Flexed
budget unit amount
Sales units 600 550
Rs’000 Rs’000 Rs’000
Sales revenue 54,000 90 49,500
Direct material 16,200 27 14,850
Direct labour 6,000 10 5,500
Variable 3,000 5 2,750
overhead
Fixed 15,000 N/A 15,000
overhead
Profit 13,800 11,400
Alternatively, you could calculate the contribution per unit: 90 – 27 –
10 – 5 = Rs. 48.
Total flexed contribution:
Rs. 48 ´ 550 = Rs. 26,400
Less fixed costs (15,000)
Flexed profit 11,400

11.34 The correct answer is: Rs. 578,000

Rs
July Rs. 500,000 ´ 0.05 25,000
August Rs. 600,000 ´ 0.7 420,000
September Rs. 560,000 ´ 0.25 ´ 0.95 133,000
Total 578,000

11.35 The correct answer is B, arrange an overdraft. Implement better credit

control procedures.
Replace non-current assets is incorrect as replacing non-current assets
cost money. Pay suppliers early is incorrect because paying suppliers
early would make the situation worse. Increasing inventory would not
provide any extra cash.

11.36 The correct answer is D.

June sales Rs. 100,000 ´ 15% = Rs. 15,000
July sales Rs. 150,000 ´ 20% = Rs. 30,000
August sales Rs. 130,000 ´ 60% = Rs. 78,000 less 2% discount
Rs. 1,560 = Rs. 76,440
Total cash received in September = Rs. 15,000 + Rs. 30,000 +
Rs. 76,440 = Rs. 121,440

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11.37 The correct answer is C, arrange a long term loan with the bank to
match the forecast long term deficit. If budgeted, it is likely the cash
deficit will occur, and only by arranging a long term loan will be
company avoid running out of cash.
A is not as good an answer as B, as a bank overdraft is likely to be more
expensive, the company may not be able to arrange a bank overdraft
for such a large value and the bank could remove the overdraft facility
at short notice. B is unlikely to realise sufficient savings to remove the
long term deficit and D is unlikely to happen otherwise the increased
sale volumes would already be in the budget.
11.38 The correct answer is D. The sales price variance is the difference
between the flexed budget and the actual results.
The sales price variance = Rs. 74,275 – Rs. 73,600 = Rs. 675 Adverse

11.39 The correct answer is B. The direct cost volume variance is the increase
in cost resulting from a change in the volume of activity, ie the
difference between the original budget and the flexed budget.
The direct cost volume variance = Rs. 61,100 – Rs. 64,155 = Rs. 3,055
Adverse

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PART C: DECISION MAKING

12 Short-term Decision Making

12.1 C Aye Bee Cee Total
C/S ratio 0.4 0.5 *0.54
Market share ´ 1/3 ´ 1/3 ´ 1/3
0.133 0.167 0.18 0.48
*balancing figure
With revised proportions:
Aye Bee Cee Total
C/S ratio 0.40 0.500 0.540
Market share 0.40 0.250 0.350
0.16 0.125 0.189 0.474
If you chose option A, you have selected the C/S ratio of the Aye.
If you chose option B, you have selected the C/S ratio of the Cee.
If you chose option D, you incorrectly calculated Cee's C/S ratio as 0.1
(possibly because you thought the sum of the C/S ratios should be 1.0).
12.2 B
Contribution per unit
O Rs. (12 – 7.90) = Rs. 4.10
H Rs. (17 – 11.20) = Rs. 5.80
Contribution per mix
(Rs. 4.10 ´ 4) + (Rs. 5.80 ´ 3) = Rs. 33.80
Breakeven point in terms of mixes
Fixed costs/contribution per mix = Rs. 131,820/Rs. 33.80 = 3,900 mixes
Breakeven point in units
O 3,900 ´ 4 = 15,600
H 3,900 ´ 3 = 11,700
Breakeven point in revenue
Rs
O 15,600 ´ Rs. 12 = 187,200
H 11,700 ´ Rs. 17 = 198,900
386,100

Margin of safety
Budgeted sales – breakeven sales = Rs. (398,500 – 386,100) = Rs. 12,400

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12.3 C
Contribution per unit
A Rs. 22
B Rs. 19
C Rs. 17
Contribution per mix
(Rs. 22 ´ 1) + (Rs. 19 ´ 1) + (Rs. 17 ´ 4) = Rs. 109
Required number of mixes
(Fixed costs + required profit)/contribution per mix
= Rs. (55,100 + 43,000)/Rs. 109
= 900 mixes
Required sales of A
900 ´ 1 = 900 units
900 ´ Rs. 47 = Rs. 42,300 revenue

12.4 C
W X Y Z
Rs per unit Rs per unit Rs per unit Rs per unit
Selling price 56 67 89 96
Variable 49 66 74 85
costs
Contribution 7 1 15 11
C/S ratios 7/
56 = 0.125 1/
67 = 0.015 15/
89 = 0.169 11/
96 =
0.115
Ranking 2 4 1 3

12.5 D Contribution per mix

= (2 ´ Rs. 7) + (3 ´ Rs. 1) + (3 ´ Rs. 15) + (4 ´ Rs. 11) = Rs. 106
\ Breakeven point in number of mixes = Rs. 15,000/Rs. 106 = 141.5
\ Number of A sold at breakeven point = 2 ´ 141.5 = 283 units

(3 ´ 27%)+(2 ´ 56%)+(5 ´ 38%)

12.6 C Average C/S ratio = = 38.3%
(3+ 2+5)
At breakeven point, contribution = fixed costs
$648,000
\ = 0.383
Breakeven sales revenue
\Breakeven sales revenue = Rs. 1,691,906

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12.7 A
Service J Service H Service N
Contribution per unit Rs. 45 Rs. 63 Rs. 78
Labour hours required per unit 1/2 2/3 5/6
Contribution per labour hour Rs. 90 Rs. 94.50 Rs. 93.60
Ranking 3 1 2

12.8 C Modification = Rs. 7,200, hire costs avoided = Rs. (19,800) and disposal
costs = Rs. 4,000 and so the relevant cost is a saving of Rs. 8,600.
12.9 A Their net realisable value will, of course, depend on the manner in
which they are to be disposed. It might be scrap value less any disposal
costs or, if they are sold for an alternative use once work has been
carried out on them, the net realisable value will be selling price less
the costs of the further work.
Option B is incorrect because replacement cost is not an appropriate
relevant cost, as the units are no longer required.
Option C is incorrect because variable cost is only relevant in certain
circumstances (if net realisable value is the same as variable cost).
Option D is incorrect because full cost includes absorbed fixed
overheads, which are not relevant.

12.10 False. The hire of a programmer is the incremental cost that would be
incurred if the programmer works on the L job. It is therefore Rs.
220,000.

12.11 D I is incorrect because this term is used to describe a cost that will differ
under some or all of the decision options.
II is incorrect because relevant costs can be expressed as opportunity
costs.
Notional cost (III) is a hypothetical accounting cost used to reflect the
benefit from the use of something for which no actual cash expense is
incurred.
Sunk cost (IV) is a term used to describe a cost that has already been
incurred or committed and which is therefore not relevant to
subsequent decisions.

12.12 B The cost of special material which will be purchased is a relevant cost
in a short-term decision-making context.
12.13 D Weeks during year = 52 – 4 = 48
Hours worked per year = 48 ´ 35 hours
= 1,680 hours
Hours chargeable to clients = 1,680 ´ 90% = 1,512

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Rs. 30,000 + Rs. 180,000 Rs. 210,000

Hourly charge rate = =
1,512 1,512
Price for 3-hour 'colour and cut' = Rs. 139 per hour
= Rs. 139 ´ 3 = Rs. 417
If you selected option A you calculated the correct hourly charge rate
but you forgot to multiply by three to determine the correct total
charge.
If you selected option B you did not add on the £3,000 required to
cover the materials costs. Option C makes no allowance for the ten per
cent of time which is not chargeable to clients.

12.14 D
The contribution per unit is K(8,000 – 5,000) = Rs. 3,000
Contribution required to break even = fixed costs = Rs. 21
million
Breakeven point (BEP) = 21,000,000 ÷ 3,000
= 7,000 units

12.15 B In revenue, BEP=(7,000 ´ K8,000) = Rs. 56 million

12.16 A
Total fixed costs
Breakeven point = = = 7,000 units
Contribution per unit

12.17 B Margin of safety = 8,000 – 7,000 units = 1,000 units

12.18 B Required contribution = fixed costs + profit = Rs. 68 million + Rs. 16

million = Rs. 84 million
Required sales can be calculated in one of two ways.
Required contribution Rs.
= 84,000,000 = 14,000 units
Contribution per unit Rs. (30,000

12.19 C Sales price per unit

Required contribution = fixed costs plus profit
= Rs. 47,000 + Rs. 23,000
= Rs. 70,000
Required sales = 14,000 units
Rs
Required contribution per unit sold (Rs. 70,000/14,000) 5
Variable cost per unit 15
Required sales price per unit 20

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12.20 Labelling a breakeven chart

Fixed costs (d)
Margin of safety (a)
Budgeted profit (b)
Budgeted variable costs (c)

12.21 C
A: Profit achieved from Rs. 80,000,000 sales revenue = Rs. 17,000,000
B: Loss at zero sales revenue = fixed costs = –Rs. 15,000,000
C: Breakeven point = Rs. 37,500,000 sales revenue (see below)
C/S ratio = 32,000,000/80,000,000 = 40%
Fixed costs
Breakeven point = = = Rs. 37,500,000 Sales revenue
C / S ratio

12.22 A The term used to describe the distance D on the chart is the margin of
safety. (This is the difference between the sales revenue budgeted or
achieved, and the revenue required to break even.)

12.23 D The profit for the whole year will be Rs. 180,000,000.
WORKINGS
Contribution achieved = sales revenue × C/S ratio
= Rs. 900,000,000 × 0.4
= Rs. 360,000,000
Fixed costs Rs. 180,000,000
∴Profit for whole year Rs. 180,000,000

12.24 D The annual margin of safety for BGG’s product is 50% of budgeted
sales.
WORKINGS
Fixed costs
Annual breakeven point = = = = Rs. 450,000,000
C / S ratio

Margin of safety = Rs. 900,000,000 – Rs. 450,000,000 =

Rs. 450,000,000 sales revenue = 50% of budgeted sales

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12.25 A Confirm that the limiting factor is something other than sales demand.
Trouser Jacket Total
Labour hours per unit 2 hrs 1 hr
Sales demand 3,000 units 5,000 units
Labour hours needed 6,000 hrs 5,000 hrs 11,000 hrs
Labour hours available 8,000 hrs
Shortfall 3,000 hrs

Labour is the limiting factor on production.

12.26 C Identify the contribution earned by each product per unit of scarce
resource, that is, per labour hour worked.
Trouser Jacket
Rs'000 Rs'000
Sales price 14 11
Variable cost 8 7
Unit contribution 6 4
Labour hours per unit 2 hrs 1 hr
Contribution per labour hour (= per unit of
limiting factor) (K'000) 3 4
Although Trousers’ have a higher unit contribution than Jackets, two
Jackets can be made in the time it takes to make one Trouser. Because
labour is in short supply it is more profitable to make Jackets than
Trousers.

12.27 B Determine the budgeted production and sales. Sufficient Jackets will be
made to meet the full sales demand, and the remaining labour hours
available will then be used to make Trousers.

(a) Hours Hours Priority for

Product Demand required available manufacture
Sauce 5,000 5,000 5,000 1st
Mash 3,000 6,000 3,000 (bal) 2nd
11,000 8,000
(b) Hours Contribution
Product Units needed per unit Total
Rs'000 Rs'000
Jackets 5,000 5,000 4 20,000
Trousers
(balance) 1,500 3,000 6 9,000
8,000 29,000
Less fixed 20,000
costs
Profit 9,000

12.28 D SG should manufacture 9,000 units of D

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12.29 A and 7,000 units of E.

D E
Rs per unit Rs per unit
Variable cost of making 10,000 15,000
Variable cost of buying 17,000 25,000
Extra variable cost of buying 7,000 10,000
Raw material saved by buying 3.5 kg 8 kg
Extra variable cost of buying per kg saved Rs. 2,000 Rs. 1,250
Priority for internal manufacture 1 2

Production plan Material used

kg
\ Make D (9,000 ´ 3.5 kg) 31,500
E (7,000 ´ 8 kg) (balance) 56,000
87,500
The remaining 5,000 units of E should be purchased from the
contractor.

12.30 D This is not an assumption in relevant costing.

12.31 A Their net realisable value will, of course, depend on the manner in
which they are to be disposed. It might be scrap value less any disposal
costs or, if they are sold for an alternative use once work has been
carried out on them, the net realisable value will be selling price less
the costs of the further work.
Option B is incorrect because replacement cost is not an appropriate
relevant cost, as the units are no longer required.
Option C is incorrect because variable cost is only relevant in certain
circumstances (if net realisable value is the same as variable cost).
Option D is incorrect because full cost includes absorbed fixed
overheads, which are not relevant.

12.32 B False. The hire of a programmer is the incremental cost that would be
incurred if the programmer works on the L LLC job. It is therefore
Rs. 22,000.

12.33 D I is incorrect because this term is used to describe a cost that will differ
under some or all of the decision options.
II is incorrect because relevant costs can be expressed as opportunity
costs.
Notional cost (III) is a hypothetical accounting cost used to reflect the
benefit from the use of something for which no actual cash expense is
incurred.

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Sunk cost (IV) is a term used to describe a cost that has already been
incurred or committed and which is therefore not relevant to
subsequent decisions.

12.34 C Modification = Rs. 7,200,000, hire costs avoided = Rs. (19,800,000) and
disposal costs = Rs. 4,000,000, and so the relevant cost is a saving of
Rs. 8,600,000.

12.35 A 400 of the units required are already in stock. They have no other use
and if not used for this job, they could be sold. The opportunity cost of
using these 400 units is therefore the sales revenue forgone. The
remaining 300 units would have to be purchased. The relevant cost is
therefore (400 ´ Rs. 20,000) + (300 ´ Rs. 60,000) = Rs. 26,000,000.

13 Long-term Decision Making

13.1 B Net present value is the appraisal method to adopt when appraising
mutually exclusive projects.

13.2 C The NPV approach is superior if discount rates are expected to vary
over the life of the project. Variable discount rates can be incorporated
easily into NPV calculations, but not into IRR calculations.
Option A is false because the methods only give the same accept or
reject decision when the cash flows are conventional. When the cash
flow patterns are non-conventional, there may be several IRRs that
decision makers must be aware of to avoid making the wrong decision.
Option B is false because NPV is technically superior to IRR and easier
to calculate.
Option D is false because NPV is dissimilar to accounting ROCE.
However, IRR can be confused with ROCE since both measures are
expressed in percentage terms.

13.3 D The present value of Rs. 5,000 in perpetuity is calculated as

Rs. 5,000/0.1.
If you selected option A, you might have calculated Rs. 5,000 ´ 10%.
If you selected option B, you might have calculated Rs. 5,000 ´ 110%.
If you selected option C, you might have calculated Rs. 5,000/110%.
13.4 A I is not a disadvantage because the fact that it tends to bias in favour of
short-term projects means that it tends to minimise both financial and
business risk.
II is untrue. It is simple to calculate the simple to understand, which
may be important when management resources are limited.

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III is not a disadvantage because it helps to identify those projects

which generate additional cash for investment quickly.
annuity
13.5 A PV of a perpetuity =
interest rate

= Rs. 8,652
0.07
= Rs. 123,600
13.6 B Annuity rate for years 4 to 6 is 4.355 – 2.487 = 1.868.
Rs. 1,500,000 ´ 1.868 = Rs. 2,802,000

13.7 C The following problems arise when using net present values to
appraise an investment.
· Estimating future cash flows
· Selecting an appropriate discount rate
· Non-accountants often find it difficult to understand the concept of
net present value
Inflation will often be ignored when two alternative investments are
being considered since both will be affected by it. III is therefore not
(generally) a problem with the use of net present values in appraising
projects.

13.8 D The IRR is the discount rate at which the NPV = 0 and hence it is the
percentage return paid by the investment.
There is no special name for the discount rate which should be used in
different circumstances.
If the rate charged on loans was to equal the internal rate of return, the
investment would not make a profit.
There is no special name for the probability of making a profit on an
investment.

13.9 A
Year Annual cash flow inflated Discount factor PV
Rs 8% Rs
0 (500,000) 1.000 (500,000)
1 (4,000 ´ Rs. 50) 200,000 0.926 185,200
2 (4,000 ´ Rs. 50) 200,000 0.857 171,400
3 (4,000 ´ Rs. 50) 200,000 0.794 158,800
15,400
nearest Rs. 500 15,000

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13.10 C 50,000 ´ (1 + 0.08)6 = Rs. 79,343.7. or to the nearest Rs, Rs. 79,344

13.11 B 58,000/(1 + 0.09)5 = Rs. 37,696

13.12 D Rs. 20,700 = 115% of the original investment

\ Original investment = 100 ´ Rs. 20,700

115
= Rs. 18,000
\ Interest = Rs. 20,700 – Rs. 18,000
= Rs. 2,700

13.13 A Rental payments

Now END
1st 2nd 3rd 4th 5th

Year 0 Year 1 Year 2 Year 3 Year 4 Year 5

Let x = annual rental
Present value of the rentals for years 1–4 = x ´ 3.170
Present value of the rentals for years 0–4 = x ´ (1 + 3.170) = 4.170x
We know that the present value of the rentals is Rs. 328,000.
\ Rs. 328,000 = 4.170x
R328,000
x =
4.170
= Rs. 78,657 (to the nearest R)
13.14 D The cost of capital can increase by ((17 – 10)/10) ´ 100% = 70%.

13.15 C

Annuity ´ 6.710* = Rs. 2,500,000

Rs.2,500,000
\ = monthly repayment
6.170
= Rs. 372,578
Payments are made at the end if each year so if there are just over
4 years left to run then there will be five payments outstanding.
Rs. 372,578 + (Rs. 372,578 ´ 3.312**) = Rs. 1,606,556
* Cumulative discount factor for ten years at 8%.
** Cumulative discount factor for four years at 8%

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13.16 The IRR method may give better rankings to a project with high early
cash flows and the NPV method may give a better ranking to a project
with later cash flows.

13.17 The payback method looks at how long it takes for a project's net
cash inflows to equal the initial investment.
For investment A, it is clear that the project pays back sometime during
year 4.
Therefore payback = 3 + ((400 – (100 + 120+140))/120)
= 3+ 40/120
= 3.33 years
13.18 The discounted payback period is the time it takes for a project's
cumulative NPV to become positive.
With a cost of capital of 10% and the cash flows shown below, we can
calculate a discounted payback period.
Discount Present Cumulative
Year Cash flow factor value NPV
Rs'000 10% Rs'000 Rs'000
0 (450) 1.000 (450) (450)
1 130 0.909 118 (332)
2 130 0.826 107 (225)
3 130 0.751 98 (127)
4 130 0.683 89 (38)
5 150 0.621 93 55
The DPP is during year 5.
DPP = 4 + (38/93)
= 4.41 years

13.19 D Calculation of net present value at a discount rate of 10%.

Discount Present
Year Cash flow factor value
Rs'000 10% R'000
0 (350) 1.000 (350.00)
1 50 0.909 45.45
2 110 0.826 90.86
3 130 0.751 97.63
4 150 0.683 102.45
5 100 0.621 62.10
48.49
The NPV is Rs. 49,000 (to the nearest R'000)

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13.20 The IRR defines the DCF rate of return at which a project's NPV is zero.
At 10%, the project has a positive NPV of Rs. 49,000. Therefore use a
higher discount factor to calculate a negative NPV for the project.
Choose a discount rate of say 15%.
Discount Present
Year Cash flow factor value
Rs'000 15% RRs'000
0 (350) 1.000 (350)
1 50 0.870 44
2 110 0.756 83
3 130 0.658 86
4 150 0.572 86
5 100 0.497 50
NPV = (1)
49
So IRR = 10 + éê × (15 - 10) ùú % = 14.9%, say 15%.
ë 49 + 1 û

13.21 D At the end of year 3 Rs. 310,000 repaid

... Rs. 290,000 left to repay
4
... Payback = 4 + years = 4.16 years
25
Average profit
ROI =
Investment
1
10
[ 2,260,000 – 600,000]
=
600,000
= 27.67%
13.22 Project 1:
Note. Profit was already given and so no adjustment was required for
depreciation.
Rs. 150,000
Rs. (1,000,000 + 50,000)
ARR = = 28.6%
2
Project 2:
(500,000 –50,000)
Profit after depreciation = Rs. 150,000 –
5
= Rs. 60,000

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Rs. 60,000
Rs. (500,000 + 50,000)
ARR = = 21.8%
2
Both projects have an ARR > 20% so both are acceptable.
13.23 B

Time Cash DF PV DF PV
Rs 15% Rs 20% Rs
0 (135,000) 1 (135,000) 1 (135,000)
1–2 70,000 1.626 113,820 1.528 106,960
2 50,000 0.756 37,800 0.694 34,700
16,620 6,660
NPVa
IRR = a + (b-a)
NPVa - NPVb

1,662
= 15 + (20 – 15)
1,662 – 666

= 15 + 8.34
= 23.3%

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PART D: RISK & UNCERTAINTY

14 Risk & Uncertainty

14.1 C Sample 1 median = average of second and third items in the array, ie
æ5 + 5ö
ç ÷=5
è 2 ø
Sample 2 median = the middle (third) item in the array, ie 5.
The median has the same value, therefore, in both samples.
14.2 The correct answer is: 7,000
Firstly, we need to calculate the cumulative frequency of earnings.
Annual earnings Frequency Cumulative frequency
$
6,000 3 3
7,000 5 8
10,000 3 11
11,000 1 12
12,000 2 14
15,000 1 15
The median is the (15 + 1)/2 = 8th item which has a value of $7,000.
14.3 The correct answer is: 160
Number of employees in department 2 = 100 – 54 – 24 = 22.
For all employees, mean output per month = 139.
Let x = the mean output per employee per month for department 2.
139 = [(54 ´ 130) + (22 ´ x) + (24 ´ 140)]/100
139 ´ 100 = 7,020 + 22x + 3,360
13,900 = 10,380 + 22x
22x = 13,900 – 10,380
x = 3,520/22
x = 160
14.4 C Mean of A + B + C = (120 + 100 + 80)kg = 300 kg
Standard deviation = √variance = √900 = 30 kg
Packets of one of each of A, B and C have a mean weight of 300 kg and a
standard deviation of 30 kg.

14.5 The correct answer is: 13.7

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2
Sfx 2 Sfx
Standard deviation = -x where x=
Sf Sf
2
61,250 æ 1,610 ö
= –ç ÷
50 è 50 ø

= 1,225 - 32.22
= 188.16
= 13.7

14.6 The correct answer is D as a risk taker will choose the highest possible
outcome even where there is possibility of the worse outcome. A is incorrect,
as a risk neutral decision maker will choose the mostly likely outcome. B is
incorrect as a risk adverse decision maker will seek to minimise risk, not
avoid it completely. C is incorrect as Expected values are used to support a
risk neutral strategy.

14.7 The correct answer is C as a risk taker will choose the investment with the
highest possible outcome of Rs600,000 regardless of the highest possible
loss of Rs300,000.

14.8 B
EV of year 1 cash flow = 0.2 ´ Rs. 100,000 + 0.5 ´ Rs. 70,000 + 0.3 ´
Rs. 64,000 = Rs. 74,200
EV of year 2 cash flow = 0.2 ´ Rs. 120,000 + 0.5 ´ Rs. 80,000 + 0.3 ´
Rs. 72,000 = Rs. 85,600
EV of year 3 cash flow = 0.2 ´ Rs. 90,000 + 0.5 ´ Rs. 76,000 + 0.3 ´
Rs. 62,000 = Rs. 74,600
Cash flow Discount PV
Year factor
Rs 10% Rs
0 (200,000) 1.000 (200,000.00)
1 74,200 0.909 67,448
2 85,600 0.826 70,706
3 74,600 0.751 56,025
(5821)

14.9 C The heights of lampposts is an example of quantitative data as they

can be measured. Since the lampposts can take on any height, the data
is said to be continuous.

14.10 A

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m = 55 59
Standard deviation (s) = variance
= 14.44
= 3.8
We are therefore looking for the probability corresponding to the
shaded area on the graph above.
Using normal distribution tables we can calculate the area between
55 and 59 on the graph above.
-μ
z= x
σ
59 - 55
=
3.8
= 1.05
From tables, z = 1.05 corresponds to an area of 0.3531. This
represents the area between 55 and 59. However, we are interested
in the shaded area, to the right of 59. This is calculated as 0.5 –
0.3531 = 0.1469

14.11 A

5,200 6,000
We are interested in calculating the area of the shaded part of the
graph above.
We can find the area of the graph that lies between 5,200kg and
6,000kg as follows.
x -μ
Using z=
σ
6,000 - 5,200
z=
430
z = 1.86
z = 1.86 corresponds to an area of 0.4686. However, we are interested
in the shaded area = 0.5 – 0.4686 = 0.0314.

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14.12 B Pr(serious error or a minor error) =

Pr(serious error) + Pr(minor error)
= 0.06 + 0.12
= 0.18

14.13 D

m = 150 210
We are interested in the shaded area shown in the graph above. We can
calculate the z score using the following formula.
x -μ
z =
σ
210 - 150
=
6,944
60
= = 0.72
83.33
From normal distribution tables, the probability of a value between
150 and 210 is 0.2642. Therefore the probability of a value less than
210 = 0.5 + 0.2642 = 0.7642 or 76.42%.

14.14 A
m = 50 cm
s = 5 cm
57 cm is 7 cm above the mean = 1.4 standard deviations above the mean.
Using normal distribution tables, the proportion between the mean
and 1.4 standard deviations above the mean = 0.4192
\ The percentage of tubes at least 57 cm long is (0.5 – 0.4192) =
0.0808 = 8.08%

14.15 C
Pr (only one is defective)
= Pr (defective) × Pr (not defective) = 0.15 × 0.85 = 0.13, or
= Pr (not defective) × Pr (defective) = 0.85 × 0.15 = 0.13
0.26

14.16 A
Expected value = probability ´ profit

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Contract Expected value

Rs
X 1/2 ´ Rs. 50,000 25,000
Y 1/3 ´ Rs. 90,000 30,000
Z 1/5 ´ Rs. 100,000 20,000
75,000

14.17 C
The expected sales are given by
J: 10,000 ´ 0.3 + 20,000 ´ 0.5 + 30,000 ´ 0.2 = 19,000
K: 10,000 ´ 0.3 + 20,000 ´ 0.4 + 30,000 ´ 0.3 = 20,000
L: 10,000 ´ 0.2 + 20,000 ´ 0.6 + 30,000 ´ 0.2 = 20,000
K and L have the highest expected sales

14.18 C
The correct answer is: It is inappropriate for repeated decisions.
EVs are most suited for repeated decisions, in fact they are not suitable
for one-off decisions because the calculation produces a long-run
average, which means that the EV calculated is unlikely to be one of the
possible outcomes.
All of the other options are limitations of using EVs. Risk is ignored
because the spread of outcomes from the EV is not considered when
EVs are used in isolation. The technique is very heavily dependent on
the probabilities used, even a small change will affect the calculation.

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14.19 The correct answer is: Project D.

Dispersion is measured via the coefficient of variation calculation.
standarddeviation
Coefficient of variation =
EV
Project A B C D
Expected 9,000 9,000 8,000 8,000
contribution
Standard deviation 400 500 400 500
Coefficient of 0.0444 0.0555 0.05 0.0625
variation

14.20 D

Selling Unit Combined Monthly Expected

Price Probability var Probability probability contribution* vvalue**
cost
Rs/unit RRs R Rs Rs
200 0.25 80 0.20 0.050 120,000 6000
0.25 100 0.50 0.125 100,000 12,500
0.25 120 0.30 0.075 80,000 6000
250 0.40 80 0.20 0.080 170,000 13,600
0.40 100 0.50 0.200 150,000 30,000
0.40 120 0.30 0.120 130,000 15,600
300 0.35 80 0.20 0.070 220,000 15,400
0.35 100 0.50 0.175 200,000 35,000
0.35 120 0.30 0.105 180,000 18,900
1.000 153,000
*(selling price – variable cost) ´ 1,000
**monthly contribution ´ combined probability
The expected value of contribution is Rs. 153,000.
Note contribution excludes fixed costs.

14.21 C The probability of monthly contribution > Rs. 135,000 =

0.08+0.2+0.07+0.175+0.105 = 0.63

14.22 The correct answer is: Rs. 80.

Maximin = maximise the minimum achievable profit. The minimum
achievable profits are when the demand is low. The maximum profit
when demand is low is achieved when the selling price is Rs. 80.

14.23 The correct answer is: Rs. 21,600,000.

WORKINGS
EV units: (10,000 ´ 0.3 ) + (6,000 ´ 0.7) = 7,200 units

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Sales revenue = Sales volume ´ Selling price = 7,200 ´ Rs. 3,000 =

Rs. 21,600,000.

14.24 The correct answer is:

Production
Demand 300 325 350
300 Rs. 0 Rs. 30,000 Rs. 50,000
325 Rs. 25,000 Rs. 0 Rs. 35,000
350 Rs. 50,000 Rs. 25,000 Rs. 0
The values in a minimax regret table represent the opportunity cost
of having chosen the wrong level of production for the actual level of
demand.

14.25 The correct answer is C

Weekly contribution
Price P1 Price P2 Price Price P4
P3
Rs Rs Rs Rs
Best 30,000 31,500 32,000 31,500
possible
The maximax decision rule is to select the price offering the maximum
possible benefit, which is P3. This will provide the biggest weekly
contribution, provided that the best possible sales demand is
achieved.

14.26 The correct answer is A

Weekly contribution
Price Price P2 Price P3 Price P4
P1
Rs Rs Rs Rs
Worst 18,000 17,500 16,000 13,500
possible
The maximin decision rule is to select the price offering the maximum
possible benefit under the worst of circumstances. Price P1 will
provide the biggest weekly contribution under the worst of
circumstances, which is a contribution of Rs. 18,000 if the worst
possible demand occurs.

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14.27 The correct answer is C. A table of regrets can be compiled, as follows,

showing the amount of profit that might be forgone for each project,
depending on whether the outcome is I, II or III.
Outcome Maximum
I II III
Project A 40 (W1) 50 20 50
Project B 15 (W2) 45 0 45
Project C 0 0 5 5
W1: 100–60 W2: 100–85 etc
The maximum regret is 50 with project A, 45 with B and 5 with C. The
lowest of these three maximum regrets is 5 with C, and so Project C
would be selected if the minimax regret rule is used.

14.28 The correct answer is D. Only statement four is correct.

Expected values (EVs) are more valuable as a guide to decision
making where they refer to outcomes which will occur many times
over, because EVs represent a long-run expected average outcome.
Explanation of the incorrect statements.
1. The second part of this statement is not true, it should say ‘is
undertaken many times.
2. A risk averse decision maker may minimise risk but cannot
eliminate it.
3. EVs support a risk-neutral attitude to decision making.

14.29 The correct answer is A, as Project L has the highest expected value
Expected value
$'000
Project L (550 ´ 0.20 + 480 ´ 0.40 + 580 ´ 0.40) 534
Project M (450 ´ 0.20 + 500 ´ 0.40 + 570 ´ 0.40) 518
Project N (420 ´ 0.20 + 450 ´ 0.40 + 480 ´ 0.40) 456
Project P (590 ´ 0.20 + 580 ´ 0.40 + 430 ´ 0.40) 522

14.30 The correct answer is C, as only statements 2 and 3 are correct.

A is false. As an average the expected value probably won't actually
occur in any single event so it does not represent a probable outcome.
It is more appropriate for repeated events (for example expected sales
each year for many years). By the same logic statement 3 is true.
B is true. Expected values fail to show the spread of possible values,
therefore hiding the best/worst outcomes from the decision making
process.
C is true, the expected value is a long-run average and is unlikely to
occur as a single outcome in the short-run.

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D is false. Risk is calculable (known or estimated probabilities and /

or outcomes), uncertainty is not (either probabilities or some
outcomes are unknown). In any event expected values show a long-
run average outcome but they do not eliminate risk (or uncertainty).

14.31 The correct answer is B. The data tells us that there was a machine
breakdown on 120 days (480 – 360) out of a total of 480.
P(machine breakdown) = 120/480 ´ 100%
= 25%
You should have been able to eliminate option A immediately since a
probability of 0% = impossibility.
If you selected option C, you calculated the probability of a machine
breakdown as 120 out of a possible 365 days instead of 480 days.
If you selected option D, you incorrectly calculated the probability that
there was not a machine breakdown on any particular day.

14.32 The correct answer is C.

Factory Ratio of visits
North 1
South 2
West 1
4
P(visiting North factory) = 1/4 = 0.25

14.33 The correct answer is B.

As a card can be both a heart and an ace, we need to use Venn diagrams
when adding the probabilities together, to remove duplication, where
an ace and a heart overlap, as follows
Probably (ace) + Probably (heart) – Probability (ace and a heart) =
4 13 4 13 16 4
Probability (ace or heart) = + - ´ = =
52 52 52 52 52 13

14.34 The correct answer is D.

Since the electronic alarms operate independently, the failure of one
alarm in no way affects the operation of the other two alarms. We need
to use the simple multiplication law.
1 1 1 1
Probability of security system failing = ´ ´ =
100 100 100 1, 000, 000

14.35 The probability that this customer is from the east and over 39 years of
age is 0.175.

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Number of customers from the East and over 39 years of age = 65 + 60

+ 50 =175
Total number of customers = 1,000
175
Required probability = = 0.175
1, 000

14.36 For the North and South, the rank correlation coefficient between sales
and age is +1 (to the nearest whole number).
Region/Age 21-29 30-39 40-49 50-59 60 +
North 100 80 50 40 30
Ranking 1 2 3 4 5
South 55 50 45 30 20
Ranking 1 2 3 4 5
The rankings for North and South are identical and therefore the
coefficient perfect and the rank correlation coefficient is +1.

14.37 The correct answer is C.

P(A) = 1/4
P(B) = 1/4
P(C) = 1/4
P(D) = 1/4
P(E) = 1/3
P(F) = 2/3 (twice as likely to go through F)
As the item can be processed on both Machine A and Machine E, we
need to use Venn diagrams when adding the probabilities together, to
remove duplication, as follows
P(A or E) = P(Machine A) + P(Machine E) – P(Machine A and Machine E)
= 1/4 + 1/3 – (1/4 ´ 1/3)
= 7/12 – 1/12
= 6/12
= 1/2
14.38 The correct answer is a probability of 6% and a profit of Rs21,000,000
P (40,000 members AND variable cost of Rs400) = 0.3 x 0.2 = 0.06 or 6%
Contribution (40,000 members AND variable cost of Rs400) = (Selling price
– variable cost) x volume
= (Rs1,200 – Rs400) x 40,000 members = Rs32,000,000
Profit = Rs32,000,000 – Rs11,000,000 = Rs21,000,000

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14.39 The correct answer is: Rs5,000

The maximin decision rule involves choosing the outcome that offers the
least unattractive worst outcome, in this instance choosing the outcome
which maximises the minimum contribution.
Demand/price Minimum contribution
1,000/Rs4,250 Rs1,650,000
730/Rs5,000 Rs1,752,000
420/Rs6,000 Rs1,428,000
Alpha would therefore set a price of Rs5,000 as represents the highest
(least worst) minimum.
14.40 The correct answer is: Rs4,250
The minimax regret decision rule involves choosing the outcome that
minimises the maximum regret from making the wrong decision, in this
instance choosing the outcome which minimises the opportunity loss
from making the wrong decision.
We can draw up an opportunity loss table.
Variable cost Price
Rs4,250 Rs5,000 Rs6,000
Rs1,700 – Rs141,000 Rs744,000 (W1)
Rs2,100 – Rs33,000 Rs512,000 (W2)
Rs2,600 Rs102,000 – Rs324,000 (W3)
Minimax regret Rs102,000 Rs141,000 Rs744,000
Minimax regret strategy (price of Rs4,250) is that which minimises the
maximum regret (Rs100,200).
Workings
1 At a variable cost of Rs1,700 per day, the best strategy would be a price
of Rs4,250. The opportunity loss from setting a price of Rs6,000 would
be Rs(2,550,000 – 1,806,000) = Rs744,000.
2 At a variable cost of Rs2,100 per day, the best strategy would be a price
of Rs4,250. The opportunity loss from setting a price of Rs6,000 would
be Rs(2,150,000 – 1,638,000) = Rs512,000.
3 At a variable cost of Rs2,600 per day, the best strategy would be a price
of Rs5,000. The opportunity loss from setting a price of Rs,6000 would
be Rs(1,752,000 – 1,428,000) = Rs324,000.
14.41 The correct answer is: Rs4,250
Expected values calculations:
Price Rs4,250: (2,550,000 × 0.4) + (2,150,000 × 0.25) + (1,650,000 × 0.35)
= Rs2,135,000 (highest EV)

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Price Rs5,000: (2,409,000 × 0.4) + (2,117,000 × 0.25) + (1,752,000 × 0.35)

= Rs2,106,050
Price Rs6,000: (1,806,000 × 0.4) + (1,638,000 × 0.25) + (1,428,000 × 0.35)
= Rs1,631,700

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PART E: WORKING CAPITAL MANAGEMENT

15 Inventory Control
15.1 B Lower-valued inventory has been used in production and higher-
valued inventory remains on hand.
15.2 D
Rs'000
Opening inventory 12,500
Purchases 126,500
Sales at cost price (150,000k ´ 80%) (120,000)
Closing inventory 19,000

15.3 A
Units Unit cost Total Average
Rs Rs Rs
Opening inventory 30 200 6000
5 August purchase 50 240 12,000
80 18,000 225
10 August issue (40) 225 (9,000)
40 9,000
18 August purchase 60 250 15,000
100 24,000 240
23 August issue (25) 240 (6,000)
75 18,000

15.4 AVCO
Inventory Record Card
Purchases Requisitions Balance
Total Total Total
Date Quantity Cost Quantity Cost Quantity
cost cost cost
(kg) Rs Rs Rs Rs Rs

1 Jan 300 7,500

2 Jan 250 25.00 6,250 50 1,250

12 Jan 400 25.75 10,300 450 11,550

21 Jan 200 25.67 5,134 250 6,416

29 Jan 75 25.67 1,925 175 4,491

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15.5 B
Optimal order size = 500 units

2×order cost ×demand

EOQ =
holding cost

2×200×10,000
EOQ =
Rs. 4+(3%×$400)

EOQ = 500

15.6 C
2´ 15´ 95,000
= 950,000 = 975
3
No. of orders = 95,000/975 = 98 orders

15.7 A
The EOQ model can be used:

(2CoD)
EOQ =
Ch

where EOQ = the reorder quantity

Co = cost of making one order
Ch = holding cost per unit of inventory per year
D = usage in units per year
In this case:

(2 ´ 25 ´ 10,000)
EOQ =
0.50
= 1,000
15.8 A

2× demand (units) × ordering cost

holding cost
EOQ =
2 ´ 60,000 ´ 6
=
0.5

= 1,440,000
= 1,200 units
Number of orders per year = 60,000/1,200 = 50 orders

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Annual ordering cost = 50 ´ Rs. 6 = Rs. 300

Average inventory held = 1,200/2 = 600 units
Annual holding cost = 600 ´ 0.5 = Rs. 300
Inventory cost = 60,000 ´ Rs. 12 = Rs. 720,000
Total cost of inventory using EOQ = 720,000 + 300 + 300 =
Rs. 720,600
15.9 C
Order size for bulk discounts is 1,000
Number of orders per year = 6,000/1,000 = 6
Annual ordering cost = 6 ´ Rs. 6 = Rs. 36
Average inventory = 1,000/2 = 500 units
Annual holding cost = 500 ´ Rs. 2 = Rs. 1,000
Inventory cost = 6,000 ´ Rs. 120 ´ 99% = Rs. 712,800
Total cost of inventory with discount = 712,800 + 36 + 1,000 =
Rs. 713,836
Using the EOQ approach will result in a slightly lower inventory cost.
15.10 A
Among other things, the GRN is used to update the stock records and to
check that the quantity invoiced by the supplier was actually received.
The GRN does not usually contain price information. Therefore, the
correct answer is A.
15.11 B Using FIFO, the issue on 9 September would consist of the
remaining 600 units from the opening balance (40 units were issued on
3 March) plus 100 units from the batch received on 4 June.
Rs
600 units ´ Rs. 5 3,000
100 units ´ Rs. 5.50 550
3,550
If you selected option A you used the opening stock rate of Rs. 5 for all
the units issued: you did not notice that 400 of these units had already
been issued on 3 March.
If you selected option C you ignored the opening stock and based your
calculations only on the receipts during the year.
Option D is incorrect because it values all the issues at the latest price
paid, Rs. 6 per unit.

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15.12 C Using LIFO, the issue on 9 September would consist of the 50 units
received on 6 June, plus 20 of the units received on 4 June.
Rs
50 units ´ Rs. 6,000 300,000
20 units ´ Rs. 5,500 110,000
410,000
Option A is incorrect because it is based on the opening stock rate of
Rs. 5,000 per unit – this is certainly not the latest batch received!
Option C is a FIFO calculation based on the receipts on 4 and 6 June.
Option D is incorrect because it values all the issues at the latest price
paid, Rs. 6,000 per unit. However, there were only 50 units in this
batch. The price for the remaining 20 units issued is the Rs. 5,500 per
unit paid for the next latest batch received.
15.13 A Free stock balance = units in stock + units on order from suppliers –
units
outstanding on customers' orders
13,000 = units in stock + 27,500 – 16,250
\ Units in stock = 13,000 – 27,500 + 16,250
= 1,750
Option B is simply the difference between the units outstanding on
customers' orders and the free stock balance.
If you selected option C you have interchanged stock on order and the
outstanding orders. If you selected option D you have simply added
the free stock to the units outstanding on existing orders.

15.14 C Reorder level = maximum usage × maximum lead time

= 95 ´ 18
= 1,710 units
If you selected option A you have used the minimum figures for usage
and lead time. Option B uses the average figures and option D is
simply the reorder quantity.
15.15 C Maximum level = reorder level + reorder quantity – (minimum
usage ×minimum lead time)
= 1,710 + 1,750 – (50 × 12) = 2,860 units
If you selected options A, C or D you have used the correct formula, but
used the incorrect reorder level as calculated in the previous question.

2CoD 2 ´ Rs. 80 ´ 2,500

15.16 C EOQ = = = 163
Ch Rs. 15

If you selected option A you have interchanged Co and Ch.

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If you selected option B, you have omitted the 2.

If you selected option D you forgot to take the square root.

15.17 B
Total
Date Received Issued Balance Stock value Unit cost
Rs
1 June 100 500 5.00
3 June 300 1,440 4.80
400 1,940 4.85 *
5 June 220 (1,067) 4.85
180 873 4.85
12 June 170 884 5.20
350 1,757 5.02 *
24 June 300 (1,506) 5.02
Closing
stock 50 251 5.02
* A new weighted average price is calculated every time there are
receipts into stock.
From the above records, it can be seen that the cost of material issued
on 5 June was Rs. 1,067. Therefore, the correct answer is B.
If you selected option A you used a unit rate of Rs. 4.80, ie the price of
the latest goods received, rather than the average price of Rs. 4.85.
If you selected option C you used a simple average price of Rs. 4.90,
rather than a weighted average price.
If you selected option D you used a unit rate of Rs. 5, ie the price of the
oldest items in stock.
15.18 C From the table in the previous solution, the closing stock value is
Rs. 25,100.
If you selected option A you took a periodic weighted average of all
stock at the month end, instead of recalculating the average every time
there are receipts into stock.
If you selected option B you calculated a simple average of all three
available prices.
Option D would be the correct solution if the FIFO method of stock
valuation was used.

15.19 D

15.20 B

15.21 D

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15.22 C
15.23 A

15.24 Periodic inventory counting is usually carried out once a year with all
inventory being counted on a particular day.
Perpetual inventory counting occurs on a year-round basis.

15.25 B

15.26 C

15.27 A

15.28 D

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Mock Exam Questions

202 CA Sri Lanka

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MOCK EXAM QUESTIONS

All fifty questions are compulsory.
Total marks for exam are 100 marks.
Recommended time for the section is 90 minutes.

1 What is an equivalent unit?

A A unit of output which is identical to all others manufactured in the
same process
B Notional whole units used to represent uncompleted work
C A unit of product in relation to which costs are ascertained
D The amount of work achievable, at standard efficiency levels, in an
hour (2 marks)
2 A company produces a single product that passes through two processes.
The details for process 1 are as follows:
Materials input 20,000kg at Rs. 25 per kg
Direct labour Rs. 150,000
Production overheads 150% of direct labour
Normal losses are 15% of input in process 1 and without further processing
any losses can be sold as scrap for Rs. 100 per kg.
The output for the period was 18,500kg from process 1. There was no work-
in-progress at the beginning or end of the period. What value (to the nearest
Rs) will be credited to the process 1 account in respect of the normal loss?
A Nil
B Rs. 30,000
C Rs. 40,700
D Rs. 52,500 (2 marks)
3 A company must decide between two projects – Project Alpha and Project
Beta. The profits that might be generated from each project are as follows.
Project Alpha Project Beta
Probability Profit Probability Profit
0.5 Rs. 500,000 0.6 Rs. 600,000
0.5 Rs. 200,000 0.4 Rs. 100,000
Which project should the company choose?
A Project Alpha
B Project Beta
C Both projects
D Neither project (2 marks)

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4 A company is bidding for three contracts which are awarded independently

of each other. The board estimates its chances of winning Contract A as 50%,
of winning Contract B as 1 in 5 and of winning Contract C as 1 in 3. The
profits from A, B and C are estimated to be Rs. 5,000,000, Rs. 8,000,000 and
Rs. 9,000,000 respectively.
The expected value to the company of the profits from all three contracts will
be closest to:
A Rs. 3,000,000
B Rs. 7,010,000
C Rs. 7,330,000
D Rs. 9,000,000 (2 marks)
5 Budgeted information relating to a department in JP LLC for the next period
is as follows.
Production Direct Direct Direct Machine
Department overhead material cost labour cost labour hours hours
Rs Rs Rs
A 18,000 36,000 100,000 25,000 300
Individual direct labour employees within each department earn differing
rates of pay, according to their skills, grade and experience
What is the most appropriate production overhead absorption rate for
department A?
A 50% of direct material cost
B 18% of direct labour cost
C Rs. 0.72 per direct labour hour
D Rs. 60 per machine hour (2 marks)
6 Which is worth most, at present values, assuming an annual rate of interest
of 8%?
A Rs. 12,000 in exactly one year from now
B Rs. 14,000 in exactly two years from now
C Rs. 16,000 in exactly three years from now
D Rs. 18,000 in exactly four years from now (2 marks)
7 X40 is one of many items produced by the manufacturing division. Its
standard cost is based on estimated production of 10,000 units per month.
The standard cost schedule for one unit of X40 shows that two hours of
direct labour are required at Rs. 150 per labour hour. The variable overhead
rate is Rs. 60 per direct labour hour. During April, 11,000 units were
produced; 24,000 direct labour hours were worked and charged;
Rs. 3,360,000 was spent on direct labour; and Rs. 1,800,000 was spent on
variable overheads.

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The variable overhead efficiency variance for April is:

A Rs. 120,000 Adverse
B Rs. 120,000 Favourable
C Rs. 150,000 Adverse
D Rs. 150,000 Favourable (2 marks)
8 Market research into demand for a product indicates that when the selling
price per unit is Rs. 145, demand in each period will be 5,000 units and if the
price is Rs. 120, demand will be 11,250 units. It is assumed that the demand
function for this product is linear. The variable cost per unit is Rs. 27.
What selling price should be charged in order to maximise the monthly
profit?
A Rs. 83
B Rs. 84
C Rs. 95
D Rs. 96 (2 marks)
9 Using an additive time series model, the underlying trend in sales in Rs'000
of product A is given by y = 250 – 1.57x, where x is the time period. If the
seasonal component in time period 15 is expected to be –28, the forecast
sales of product A for that quarter correct to the nearest Rs'000 is
A Rs. 163,000
B Rs. 3,698,000
C Rs. 226,000
D Rs. 198,000 (2 marks)
10 Which one of the following conditions does not need to be met if time series
forecasts are to be reliable?
A The seasonal pattern should continue as it has done in the past
B The trend should continue as it has done in the past
C Extrapolation should always be avoided
D Residuals should be small (2 marks)
11 A supplier of telephone services charges a fixed line rental per period. The
first 10 hours of telephone calls by the customer are free, after that all calls
are charged at a constant rate per minute up to a maximum, thereafter all
calls in the period are again free.

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Which of the following graphs depicts the total cost to the customer of the
telephone services in a period?

(2 marks)
12 The following production and total cost information relates to a single
product organisation for the last three months:
Month Production Total cost
Units Rs
1 1,200 666,000
2 900 582,000
3 1,400 682,000
The variable cost per unit is constant up to a production level of 2,000 units
per month but a step up of Rs. 60,000 in the monthly total fixed cost occurs
when production reaches 1,100 units per month.
What is the total cost for a month when 1,000 units are produced?
A Rs. 542,000
B Rs. 550,000
C Rs. 590,000
D Rs. 602,000 (2 marks)

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13 A company uses standard absorption costing. The following data relate to

last month:
Budget Actual
Sales and production (units) 1,000 900
Standard Actual
Rs Rs
Selling price per unit 500 520
Total production cost per unit 390 400
What was the adverse sales volume profit variance last month?
A Rs. 10,000
B Rs. 11,000
C Rs. 12,000
D Rs. 13,000 (2 marks)
14 The following statements refer to strategic planning:
(i) It is concerned with quantifiable and qualitative matters.
(ii) It is mainly undertaken by middle management in an organisation.
(iii) It is concerned predominantly with the long term.
Which of the statements are correct?
A (i) and (ii) only
B (i) and (iii) only
C (ii) and (iii) only
D (i), (ii) and (iii) (2 marks)
15 A company operates a job costing system. Job number 506 requires Rs. 640
of direct materials and 7 hours of direct labour. Direct labour is paid Rs. 80
per hour. Production overheads are absorbed at the rate of Rs. 200 per direct
labour hour and non-production overheads at a rate of 60% of prime cost.
What is the total cost of job number 506?
A Rs. 3320
B Rs. 3520
C Rs. 4160
D Rs. 4480 (2 marks)

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16 All of a company’s skilled labour, which is paid Rs. 80 per hour, is fully
employed manufacturing a product to which the following data refer:
Rs per unit Rs per unit
Selling price 600
Less Variable costs:
Skilled labour 200
Others 150
(350)
Contribution 250
The company is evaluating a contract which requires 90 skilled labour hours
to complete. No other supplies of skilled labour are available.
What is the total relevant skilled labour cost of the contract?
A Rs. 7,200
B Rs. 9,000
C Rs. 16,200
D Rs. 21,600 (2 marks)
17 The overhead absorption rate for product T is Rs. 40 per machine hour. Each
unit of T requires three machine hours. Inventories of product T in the last
period were:
Units
Opening inventory 2,400
Closing inventory 2,700
Calculate the difference between the marginal costing profit for the period
and the absorption costing profit for product T.
A Rs. 36,000
B Rs. 39,000
C Rs. 42,200
D Rs. 32,600 (2 marks)
18 The following diagram represents the behaviour of one element of cost:

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Which ONE of the following statements is consistent with the above

diagram?
A Annual factory power cost where the electricity supplier sets a tariff
based on a fixed charge plus a constant unit cost for consumption but
subject to a maximum annual charge.
B Weekly total labour cost when there is a fixed wage for a standard 40
hour week but overtime is paid at a premium rate.
C Total direct material cost for a period if the supplier charges a lower
unit cost on all units once a certain quantity has been purchased in that
period.
D Total direct material cost for a period where the supplier charges a
constant amount per unit for all units supplied up to a maximum
charge for the period. (2 marks)
19 An organisation manufactures a single product. The total cost of making
4,000 units is Rs. 200,000 and the total cost of making 20,000 units is
Rs. 400,000. Within this range of activity, the total fixed costs remain
unchanged.
What is the variable cost per unit of the product?
A Rs. 8
B Rs. 12
C Rs. 12.5
D Rs. 20 (2 marks)
The following information relates to questions 20 and 21:
The standard direct material cost per unit for a product is calculated as follows:
10.5 litres at Rs. 25 per litre
Last month the actual price paid for 12,000 litres of material used was 4% above
standard and the direct material usage variance was Rs. 18,150 favourable. No
stocks of material are held.
20 What was the adverse direct material price variance for last month?
A Rs. 10,000
B Rs. 12,000
C Rs. 12,120
D Rs. 12,600 (2 marks)

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21 What was the actual production last month (in units)?

A 1,074
B 1,119
C 1,212
D 1,258 (2 marks)
22 A company operates a job costing system. Job number 1012 requires Rs. 450
of direct materials and Rs. 300 of direct labour. Direct labour is paid at the
rate of Rs. 75 per hour. Production overheads are absorbed at a rate of
Rs. 125 per direct labour hour and non-production overheads are absorbed
at a rate of 60% of prime cost.
What is the total cost of job number 1012?
A Rs. 170
B Rs. 195
C Rs. 200
D Rs. 240 (2 marks)
23 Last month, when a company had an opening stock of 16,500 units and
closing stock of 18,000 units, the profit using absorption costing was
Rs. 400,000. The fixed production overhead rate was Rs. 100 per unit.
What would the profit for last month have been using marginal costing?
A Rs. 150,000
B Rs. 250,000
C Rs. 550,000
D Rs. 650,000 (2 marks)
24 Which one of the following groups of workers would be classified as indirect
labour?
A Machinists in an organisation manufacturing clothes
B Bricklayers in a house building company
C Maintenance workers in a shoe factory
D Assembly workers in a vehicle manufacturing business (2 marks)

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25 A manufacturing company has four types of cost (identified as T1, T2, T3

and T4).
The total cost for each type at two different production levels is:
Cost Total cost for Total cost for
type 125 units 180 units
Rs Rs
T1 10,000 12,600
T2 17,500 25,200
T3 24,750 28,260
T4 32,250 46,440
Which two cost types would be classified as being semi-variable?
A T1 and T3
B T1 and T4
C T2 and T3
D T2 and T4 (2 marks)
26 A company’s budgeted sales for last month were 10,000 units with a
standard selling price of Rs. 200 per unit and a contribution to sales ratio of
40%. Last month actual sales of 10,500 units with total revenue of
Rs. 2,047,500 were achieved.
What were the sales price and sales volume contribution variances?
Sales price variance (Rs) Sales volume contribution variance (Rs)
A 52,500 adverse 40,000 favourable
B 52,500 adverse 40,000 adverse
C 50,000 adverse 40,000 favourable
D 50,000 adverse 40,000 adverse
(2 marks)
27 Which of the following are characteristics of work-in-progress under a JIT
system of production?
I Zero defects
II Higher inventory to minimise interruptions in production
III Low set-up times
IV Production often made to customer specifications
A I, III and IV
B I, II and III
C III only
D All of the above (2 marks)

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28 What is defined as 'an activity within an organisation which has a lower

capacity than preceding or subsequent activities, thereby limiting
throughput'?
A Constraint
B Limiting factor
C Bottleneck
D Principal budget factor (2 marks)
29 Which THREE of the following statements about JIT are correct?
1 In a JIT environment there is a risk that inventory will become
obsolete.
2 JIT requires strong relationships with suppliers.
3 JIT is difficult to implement if customer demand is uncertain.
4 JIT increases the need for large warehouses.
5 JIT protects an organisation against risks of disruption in the supply
chain.
6 JIT works best when suppliers are located within a narrow
geographical spread.
A 1, 2, & 5
B 1, 4 & 6
C 3, 4 & 5
D 2, 3, & 6 (2 marks)
30 Which of the following could explain an adverse material usage variance?
(i) Purchase of cheaper materials.
(ii) Recruitment of temporary workers.
(iii) Overtime worked by existing workers.
(iv) Purchase of better quality materials.
(i) only
(i) and (ii)
(ii) only
(iii) and (iv) (2 marks)

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31 The following information relates to job 2468, which is being carried out by
AB Co to meet a customer's order.
Department Department
A B
Direct materials consumed Rs. 50,000 Rs. 30,000
Direct labour hours 400 hours 200 hours
Direct labour rate per hour Rs. 40 Rs. 50
Production overhead per direct labour hour Rs. 40 Rs. 40
Administration and other overhead 20% of full production cost
Profit margin 25% of sales price
Required
Calculate the selling price to the customer for job 2468. Round up to the
nearest Rs. 100.
A Rs. 208,000
B Rs. 310,000
C Rs. 295,000
D Rs. 300,000 (2 marks)
32 A process costing system for J Co used an input of 3,500kg of materials at
Rs. 20 per kg and labour hours of 2,750 at Rs. 25 per hour. Normal loss is 20%
and losses can be sold at a scrap value of Rs. 5 per kg. Output was 2,950kg.
Required
Calculate the value of the output.
A Rs. 145,358
B Rs. 147,300
C Rs. 142,485
D Rs. 140, 210 (2 marks)
33 A company must decide between two projects – Project A and Project B. The
profits that might be generated from each project are as follows.
Project A Project B
Probability Profit Probability Profit/(loss)
Rs Rs
0.45 4,000 0.64 8,000
0.55 2,000 0.36 (1,000)
Required
Assess which project should be chosen and the associated expected value of
profit.
A Project A
B Neither Project
C Both Project A and B are equal
D Project B (2 marks)

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34 Shoe sales for a retail outlet for three weeks are as follows:
Sales units
Week 1 Week 2 Week 3
Monday 102 103 107
Tuesday 78 79 80
Wednesday 119 129 130
Thursday 92 95 95
Friday 99 100 107
The manager of the outlet wishes to analyse this time series of sales data.
Required
Calculate the most appropriate moving average trend figure for Wednesday
of week 3.
A 100 units
B 96 units
C 109 units
D 104 units (2 marks)
35 What is an equivalent unit?
A A unit of output which is identical to all others manufactured in the
same process
B Notional whole units used to represent uncompleted work
C A unit of product in relation to which costs are ascertained
D The amount of work achievable, at standard efficiency levels, in an
hour (2 marks)
36 A company produces a single product that passes through two processes.
The details for process 1 are as follows:
Materials input 20,000kg at Rs. 250 per kg
Direct labour Rs. 1,500,000
Production overheads 150% of direct labour
Normal losses are 15% of input in process 1 and without further processing
any losses can be sold as scrap for Rs. 1,000 per kg.
The output for the period was 18,500kg from process 1. There was no work-
in-progress at the beginning or end of the period. What value (to the nearest
Rs) will be credited to the process 1 account in respect of the normal loss?
A Nil
B Rs. 300,000
C Rs. 400,070
D Rs. 500,250 (2 marks)

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37 A company must decide between two projects – Project Alpha and Project
Beta. The profits that might be generated from each project are as follows.
Project Alpha Project Beta
Probability Profit Probability Profit
0.5 Rs. 50,000 0.6 Rs. 60,000
0.5 Rs. 20,000 0.4 Rs. 10,000
Which project should the company choose?
A Project Alpha
B Project Beta
C Both projects
D Neither project (2 marks)
38 Dagny LLC uses a marginal cost-plus pricing system to determine the selling
price for one of its products, Product X.
Product X has the following costs:
Rs
Direct materials 1,200
Direct labour 500
Variable overheads 300
Fixed overheads 4,000
Fixed overheads are Rs. 2,000,000 for the year. Budgeted output and sales
for the year are 500 units and this should be sufficient for Product X to break
even.
What profit mark-up would Dagny LLC need to add to the marginal cost to
allow Dagny LLC to break even?
A 200%
B 300%
C 275%
D 190% (2 marks)
39 A company has fixed costs of Rs. 130 million. Variable costs are 55% of sales
up to a sales level of Rs. 150 million, but at higher volumes of production and
sales, the variable cost for incremental production units falls to 52% of sales.
What is the breakeven point in sales revenue, to the nearest Rs. 1,000?
A Rs. 1,977Million
B Rs. 2,027Million
C Rs. 2,708Million
D Rs. 2,802Million (2 marks)

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40 Which of the following statements is NOT consistent with the theory of

constraints?
A There is no inventory of work in progress or finished goods held
B Raw materials are converted into sales as quickly as possible
C Operations prior to the bottleneck operate at the same level as the
bottleneck
D Conversion costs and investment costs are kept to a minimum
(2 marks)
AGG
Complete the following sentence by deleted the incorrect words:
41 The economists' model differs from the accountants' model as the
economists' model assumes selling/cost price and variable/fixed cost per
unit will vary, but the accountants' model assumes they remain constant.
The total costs incurred at various output levels, for a process operation in a
factory, have been measured as follows:
Output Total cost
(units) Rs
11,500 10,247,600
12,000 10,462,100
12,500 10,676,600
13,000 10,891,100
13,500 11,105,600
14,000 11,320,100

Required
Using the high-low method, analyse the costs of the process operation into
fixed and variable components. (2 marks)
42 Variable:
A Rs. 456 per unit
B Rs. 429 per unit
C Rs. 333 per unit
D Rs. 439 per unit (2 marks)
43 Fixed costs:
A Rs. 5,250,389
B Rs. 5,341,900
C Rs. 5,341,100
D Rs. 5,250,100 (2 marks)

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44 Calculate the breakeven output level of the process operation above, based
upon the fixed and variable costs identified and assuming a selling price of
Rs. 1,060 per unit.
A 8,422 units
B 8,475 units
C 8,395 units
D 8,565 units (2 marks)
45 Calculate the target output level if the company wishes to make a profit of
Rs. 3,000,000.
A 13,075 units
B 13,276 units
C 13,007 units
D 13,176 units (2 marks)
46 Complete the following sentence by deleting the incorrect words that defines
the term 'margin of safety'.
The margin of safety is a measure by which the actual/ budgeted volume of
sales/purchases is compared with the volume of sales required to break
even. It is the difference in units/profit between the budgeted sales volume
and the breakeven sales volume. (2 marks)
47 Calculate the margin of safety as a percentage if budgeted output is 12,500
units.
A 32.62%
B 42.62%
C 36.22%
D 42.22% (2 marks)
48 The sales manager has prepared a manpower plan to ensure that sales
quotas for the forthcoming year are achieved. This is an example of what
type of planning?
A Strategic planning
B Tactical planning
C Operational planning
D Corporate planning (2 marks)

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49 The following data relate to the overhead expenditure of a contract cleaners

at two activity levels.
Square metres cleaned 13,500 15,950
Overheads Rs. 84,865 Rs. 97,850
What is the estimate of the overheads if 18,300 square metres are to be
cleaned?
A Rs. 96,990
B Rs. 110,305
C Rs. 112,267
D Rs. 115,039 (2 marks)
50 Apply the high-low method to the following data to establish a fixed cost per
period and a variable cost per unit.
Activity
Period level Cost
Units Rs
1 35,000 233,200
2 48,000 274,800
3 32,000 225,200
4 45,000 277,200
5 42,000 256,300
Estimated costs are:
A Rs. 97,200 fixed costs + Rs. 4.00 per unit variable cost
B Rs. 117,700 fixed costs + Rs. 3.30 per unit variable cost
C Rs. 121,200 fixed costs + Rs. 3.20 per unit variable cost
D Rs. 126,000 fixed costs + Rs. 3.10 per unit variable cost (2 marks)

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Answers
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MOCK EXAM ANSWERS

1 B An equivalent unit calculation is used in process costing to value any
incomplete units within work in progress and losses.
2 A There is an abnormal gain, so there will be no entries in respect of an
abnormal loss
kg
Input 20,000
Normal loss (15% ´ 20,000kg) (3,000)
Abnormal gain 1,500
Output 18,500
3 B Expected value of Project Alpha
(0.5 ´ Rs. 500,000) + (0.5 ´ Rs. 200,000)
= Rs. 250,000 + Rs. 100,000 = Rs. 350,000
Expected value of Project Beta
(0.6 ´ Rs. 600,000) + (0.4 ´ Rs. 100,000)
= Rs. 360,000 + Rs. 40,000 = Rs. 400,000
Project Beta should therefore be chosen since it generates the highest
expected profits of Rs. 400,000.
4 B Expected value = probability ´ profit
Contract Probability Estimated profits Expected value
Rs Rs
A 1/2 5,000,000 2,500,000
B 1/5 8,000,000 1,600,000
C 1/3 9,000,000 3,000,000
22,000,000 7,100,000
5 C Department A appears to be labour-intensive therefore a direct labour-
hour rate would be most appropriate.
Rs. 18,000 = Rs. 0.72 per direct labour hour
25,000
6 D
Rs
PV of Rs. 12,000 in one year = Rs. 12,000 ´ 0.926 = 11,112
PV of Rs. 14,000 in two years = Rs. 14,000 ´ 0.857 = 1,1998
PV of Rs. 16,000 in three years = Rs. 16,000 ´ 0.794 = 12,704
PV of Rs. 18,000 in four years = Rs. 18,000 ´ 0.735 = 13,230

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7 A The variable overhead efficiency variance for April is:

[Standard labour hours for production achieved – Actual labour hours]
´ standard variable overhead rate = [(11,000 units ´ 2 hours per unit)
– 24,000 hours] ´ Rs. 60 = Rs. 120,000 adverse.
8 D Rs. 96
An increase in price of Rs. 25 will result in a fall in demand quantity by
6,250 units. Each Rs. 1 change in price therefore results in a change in
demand by
6,250/25 = 250 units.
Demand Q will be 0 when the price P is Rs. 145 + Rs. (5,000/250)
Rs. 165
Demand function = 165 – Q/250 = 165 – 0.004Q
Marginal revenue = 165 – 0.008Q
Profit is maximised when marginal revenue equals marginal cost:
When 27 = 165 – 0.008Q, so Q = 138/0.008 = 17,250
Price = 165 – (17,250/250) = Rs. 96
9 D Trend, y = 250 – 1.57x
In time period 15, t = 15
Therefore trend, y = 250 – (1.57 ´ 15)
y = 250 – 23.55
y = 226.45
Forecast sales = trend + seasonal
= 226.45 + (–28)
= 198.45
= Rs. 198,000 (to the nearest Rs'000)
If you selected option C, you forgot to subtract the seasonal component.
10 C Options A, B and D are conditions which need to be met if time series
forecasts are to be reliable.
11 A

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12 C
Units Rs
1,400 682,000
900 582,000
500 100,000
(60,000) step up in fixed costs
40,000
Variable cost per unit = Rs. 40,000/500 = Rs. 80
Variable cost of 900 units = 900 ´ Rs. 80 = Rs. 72,000
Fixed cost = Rs. 582,000 – Rs. 72,000 = Rs. 510,000
Total cost of 1,000 units = Rs. 510,000 + (1,000 ´ Rs. 80) = Rs. 590,000
13 B Sales volume profit variance
= (actual units sold – budgeted quantity) ´ standard profit per unit
= (900 × 1,000) ´ (Rs. 500 – Rs. 390) = 100 ´ Rs. 110 = Rs. 11,000
14 B Strategic planning is undertaken by senior management in an
organisation.
15 A
Rs
Direct materials 640
Direct labour (7 @ Rs. 80) 560
Production overheads (7 @ Rs. 200) 1400
Non-production overheads (0.6 ´ (640 + 560)) 720
Total cost 332
16 C Labour hours per unit of product = 20/8 = 2.5
Contribution per labour hour = Rs. 250/2.5 = Rs. 100
This contribution will be lost if the contract goes ahead so is a relevant
opportunity cost.
Relevant skilled labour cost = 90 ´ (Rs. 80 + Rs. 100) = Rs. 16,200
17 A Difference in profit = Change in inventory level ´ fixed overhead per unit
= (2,400 – 2,700) ´ (Rs. 40 ´ 3) = Rs. 36,000
Absorption profit is higher because the inventories have increased.
18 A The diagram shown depicts annual factory power cost where the
electricity supplier sets a tariff based on a fixed charge plus a constant
unit cost for consumption but subject to maximising arrival charge.

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19 C Using the high-low method:

Units Cost
Rs
20,000 400,000
4,000 200,000
16,000 200,000
Rs. 200,000
Variable cost per unit =
16,000 units
= Rs. 12.5
20 B Direct material price variance
Rs
12,000 litres should have cost (´ Rs. 25) 300,000
But did cost (12,000 ´ Rs. 25 ´ 1.04) 312,000
Direct material price variance 12,000 (A)
21 C Standard cost per unit = 10.5 litres ´ Rs. 25 per litre
= Rs. 262.5 per unit
Standard cost of actual production = standard cost + variance
= Rs. (12,000 litres ´ Rs. 25) + 18,150
= Rs. (300,000 + 18,150)
= Rs. 318,150
\ Actual production = standard cost of actual production/standard
cost per unit
= 318,150/Rs. 262.5
= 1,212 units
22 A Total cost – job number 1012
Rs
Direct materials 450
Direct labour 300
Prime cost 750
Production overheads (30/7.5 ´ Rs. 125) 500
Total production cost 1,250
Non-production overheads (0.6 ´ Rs. 750) 450
Total cost – job number 1012 1,700
23 B Increase in stock = (18,000 – 16,500) units
= 1,500 units
\ Difference in profit = 1,500 units ´ Rs. 100
= Rs. 150,000
Profits under marginal costing will be Rs. 150,000 less than profits
under absorption costing ie Rs. 400,000 – Rs. 150,000 = Rs. 250,000.

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24 C Maintenance workers in a shoe factory would be classified as indirect

labour.
25 A
Cost Total cost for Cost per unit Total cost for Cost per unit
type 125 units @ 125 units 180 units @ 180 units
Rs Rs Rs Rs
T1 10,000 80 12,600 70
T2 17,500 140 25,200 140
T3 24,750 198 28,260 137.5
T4 32,250 258 46,440 258
Cost types T1 and T3 have different costs per unit at different activity
levels and are therefore most likely to be classified as semi-variable
costs.
Cost types T2 and T4 have the same cost per unit at different levels of
activity and are therefore wholly variable costs.
26 A
Rs
Sales revenue from 10,500 units should have
been ´ £20) 2,100,000
but was 2,047,500
Sales price variance 52,500 (A)
contribution per unit
= 0.4
Rs. 200
\ contribution per unit = 0.4 ´ Rs. 200
= Rs. 80
Budgeted sales 10,000 units
Actual sales 10,500 units
Sales volume variance 500 units (F)
´ standard contribution per unit ´ Rs. 80
Sales volume contribution variance Rs. 40,000 (F)
27 A
28 C Bottleneck.
When a throughput accounting approach is used the organisation will
aim to elevate the bottleneck in order to increase throughput.

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29 D
· JIT requires strong relationships with suppliers.
· JIT is difficult to implement if customer demand is uncertain.
· JIT works best when suppliers are located within a narrow
geographical spread.
Inventory should not become obsolete because it is purchased as
needed for production, similarly less warehouse space will be needed
because of the reduction in inventory levels. An organisation is not
however protected from the risks of disruption in the supply chain
because it does not have any buffer inventory if supply cannot be
maintained.
When demand is hard to predict it becomes more difficult to operate a
demand driven operation. JIT requires flexibility which is achieved
through strong supplier relationships and a smaller geographical
spread.
30 The correct answer is: (i) and (ii).
Cheaper materials may be lower quality, which could mean that more
is used and that more labour time is required because items have to be
reworked due to poorer quality inputs.
Recruitment of temporary workers may also increase the amount of
materials used because they are unfamiliar with the production
process so use more materials.
Better quality materials are more likely to result in a favourable
material usage variance and the use of overtime is not likely to affect
material usage.
31 A
Dept A Dept B Total
Rs Rs Rs
Direct materials 50,000 30,000 80,000
Direct labour 16,000 10,000 26,000
Production overhead 16,000 8,000 24,000
Absorption production cost 130,000
Other overheads (20%) 26,000
Cost of the job 156,000
Profit (25% of sales = 33% of cost
– round up to nearest 100) 52,000
Sales price 208,000

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32 C Rs. 142,485
Actual output 2,950
Normal loss (20% ´ 3,500) 700
Abnormal gain (3,500 ´ 80% – 2,950 (150)
Input 3,500

Cost per unit = Cost of unit less scrap value of normal loss
Expected units

(3,500 ´ Rs. 20)+(2,750 ´ Rs. 25)–(700 ´ Rs. 5)

=
3,500 ´ 80%

= Rs. 135,250/2,800
= Rs. 48.30 per unit
Rs. 48.30 ´ 2,950 = Rs. 142,485
33 D = Project B
The expected value for each project is as follows.
Project A (0.45 ´ Rs. 4,000) + (0.55 ´ Rs. 2,000) = Rs. 1,800 + Rs. 1,100
= Rs. 2,900
Project B (0.64 ´ Rs. 8,000) + (0.36 ´ (Rs. 1,000)) = Rs. 5,120 – Rs. 360
= Rs. 4,760
Project B has a higher expected value of profit which means that it could
offer a better return than A, so Project B should be chosen (with an
expected profit of Rs. 4,760).

34 D 104

Sales vary according to the day of the week. Fore example, Tuesday is a
day of very low sales and Wednesday is a day of very high sales.
Therefore the most suitable moving average is one which covers one
full weekly cycle, ie a five day moving average. A five day moving total
centred on Thursday of week 2 must be calculated:
Sales units
Week 2 Monday 107
Tuesday 80
Wednesday 130 centre point
Thursday 95
Week 3 Friday 107
Five day moving total 519
Moving average = 519 ¸ 5 = 103.8 units = 104 units.

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This moving average of 104 units constitutes a trend figure. The fact
that it is lower than the actual figure for Wednesday of week 3 (130
units) reflects the fact that Wednesday is a day of high sales.
35 B An equivalent unit calculation is used in process costing to value any
incomplete units within work in progress and losses.
36 A There is an abnormal gain, so there will be no entries in respect of an
abnormal loss
kg
Input 20,000
Normal loss (15% ´ 20,000kg) (3,000)
Abnormal gain 1,500
Output 18,500
37 B Expected value of Project Alpha
(0.5 ´ Rs. 50,000) + (0.5 ´ Rs. 20,000)
= Rs. 25,000 + Rs. 10,000 = Rs. 35,000
Expected value of Project Beta
(0.6 ´ Rs. 60,000) + (0.4 ´ Rs. 10,000)
= Rs. 36,000 + Rs. 4,000 = Rs. 40,000
Project Beta should therefore be chosen since it generates the highest
expected profits of Rs. 40,000.
38 The correct answer is: A 200%
Breakeven point = Rs. 20,000 = 500 ´ (selling price – Rs. 2,000)
Rs. 2,000,000/500 = Rs. 4,000
Rs. 4,000 = selling price – Rs. 2,000
Rs. 6,000 = selling price
Profit mark up on marginal cost = (Rs. 6,000 – Rs. 2,000) / Rs. 2,000 ´ 100%
= 200%
Note. Fixed overheads (Rs. 4,000) are omitted, as only marginal costs are
included in the calculation of the profit or 'contribution' to the recovery in
the fixed costs of Rs. 2,000,000.
39 The correct answer is: D Rs. 2,802 Million
When sales revenue is Rs. 150 million, total contribution is 45% ´ Rs. 150
million = Rs. 67,500,000.
This leaves a further Rs. 62,500,000 of fixed costs to cover. To achieve
breakeven, sales in excess of Rs. 150 million need to be Rs. 62,500,000/0.48
= Rs. 130.2 million.
Total sales to achieve breakeven = Rs. 150 million + Rs. 130.2 million = Rs.
280.2 million.

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 Mock Exam A nswer s

40 The correct answer is: A There is no inventory of work in progress or

finished goods held
Holding no inventory of work in progress or finished goods is not consistent
with the theory of constraints as the theory of constraints specifies that a
small amount of buffer inventory should be maintained prior to the
bottleneck activity so that the bottleneck never has to be slowed down or
delayed. The other three statements are all consistent with the theory of
constraints.
AGG
41 The economists' model assumes selling/cost price and variable/fixed cost
per unit will vary, but the accountants' model assumes they remain constant.
42 B
Costs at high output – costs at low output
Variable costs =
High output – low output
11,320,100 – 10,247,600
=
14,000 – 11,500
= Rs. 429 per unit
\Substituting at high output
43 C
Fixed costs = 11,320,100 – (14,000 ´ 429)

= Rs. 5,314,100
44 A
Total fixed costs
Breakeven output =
Contribution per unit

Rs. 5,314,110
=
1,060 - 429
= 8,422 units
The problem with this level of activity is that it is outside the range of
the figures given in the question. The pattern of costs which the
high-low method approximates to may not apply outside the range of
output given.
In practice, however, management is likely to be aware of major
influences on cost behaviour (for example steps in fixed costs) and can
make appropriate adjustments. Hence the calculation is likely to fulfil
the requirement of being broadly right.

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Mock Exam Answers

45 D
Total contribution at output level = Fixed costs + Desired profit
= Rs. 5,314,100 + Rs. 3,000,000

= Rs. 8,314,100
Total contribution
Output level =
Contribution per unit
Rs. 8,314,100
=
Rs. 1,060 – Rs. 429

= 13,176 units
46 The margin of safety is a measure by which the actual/ budgeted volume of
sales/purchases is compared with the volume of sales required to break
even. It is the difference in units/profit between the budgeted sales volume
and the breakeven sales volume.
47 A
(v) In the example given:
(12,500 – 8,422)
Margin of safety = ´ 100%
12,500

= 32.62%
48 B Tactical planning is used by middle management to decide how the
resources of the business should be employed to achieve specific
objectives in the most efficient and effective way.
49 B
97,850 – 84,865 12,985
Variable overhead = =
15,950 – 13,500 2,450
= Rs. 5.30 per square metre
Fixed overhead = Rs. 84, 865 – (Rs. 5.30 ´ 13,500)
= Rs. 84,865 – Rs. 71,550 = Rs. 13,315
Overheads on 18,300 square metres =
Rs. 13,315 + (Rs. 5.30 ´ 18,300) = Rs. 13,315 + Rs. 96,990= Rs. 110, 305

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50 D The high-low method takes the highest and lowest available

activity/output levels.
Rs
Total cost of 48,000 units 274,800
Total cost of 32,000 units 225,200
Variable cost of 16,000 units 49,600
Variable cost per unit = Rs. 49,600/16,000 = Rs. 3.1
Rs
Total cost of 48,000 units 274,800
Variable cost of 48,000 units (´ Rs. 3.1) 148,800
Fixed costs 126,000

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232 CA Sri Lanka

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