INTER

MANAGEMENT
ACCOUNTING
QUESTION BANK
WITH MCQ
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JUNE-23, DEC-23, JUNE-24, DEC-24
PAST PAPER WITH SOLUTON
JUNE-23, DEC-23, JUNE-24, DEC-24
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 INTERMEDIATE EXAMINATION SET 1
MODEL QUESTION PAPER
PAPER - 12
MANAGEMENT ACCOUNTING
Time Allowed: 3 Hours Full Marks: 100
The figures in the margin on the right side indicate full marks.
Where considered necessary, suitable assumptions may be made and
clearly indicated in the answer.
Answer Question No. 1 and any five from Question No. 2, 3, 4, 5, 6, 7 and 8.

SECTION - A
(Compulsory)

1. (a) Choose the correct alternative [1 × 12 = 12]

(i) ____________ is the study of managerial aspects of financial accounting.

a. Cost accounting
b. Financial accounting
c. Management accounting
d. Business accounting
(ii) Just-in-time inventory management and Activity based costing were
developed during the __________.
a. 1st stage
b. 2nd stage
c. 3rd stage
d. 4th stage
(iii) In an ABC system, the allocation bases that are used for applying costs to
services or procedures are called:
a. Cost Pool
b. Cost Drivers
c. Cost Absorption
d. Cost Object
(iv) Which of the following would not be deducted from sales in a management
report prepared using ABC?
a. Direct materials
b. Direct labour
c. Variable selling and administration costs
d. Shipping costs

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(v) ____________ an item for which cost measurement is required e.g. product,
job or a customer.
a. Cost Pool
b. Cost Driver
c. Cost Absorption
d. Cost Object
(vi) Which of the following criterion is not used for decision-making under
uncertainty?
a. Maximin
b. Maximax
c. Minimax
d. Maximise expected value
(vii) Circumstances that influence the profitability of a decision are referred to as
____________.
a. Strategies
b. A payoff matrix
c. States of nature
d. the marginal utility of money
(viii) In a responsibility accounting system, managers are accountable for:
a. Incremental costs.
b. Product costs but not for period costs.
c. Costs over which they have control.
d. Variable costs but not for fixed costs.
(ix) A company has two divisions. The divisions are identical in terms of the
number and type of machines they have and the operations they carry out.
However, one division was set up four years ago and the other was set up one
year ago. Head office appraises the division using both return on the
investment (ROI) and residual income (RI). Which of the following
statements is correct in relation to the outcome of the appraisal for each
division?
a. Both ROI and RI will favour the older division
b. ROI will favour the older division, but RI will treat each fairly
c. RI will favour the newer division and ROI will favour the older division
d. Both RI and ROI will favour the newer division

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 INTERMEDIATE EXAMINATION SET 1
MODEL QUESTION PAPER
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MANAGEMENT ACCOUNTING
(x) Which of the following would be an argument for the use of net book value
in the computation of operating assets in return on investment calculations?
a. It allows the manager to replace old, worn- out equipment with a
minimum adverse impact on ROI.
b. It allows ROI to decrease over time as assets get older.
c. It is consistent with how plant and equipment items are reported on the
balance sheet.
d. It eliminates both age of equipment and method of depreciation as
factors in ROI computations.
(xi) Production at 60% activity is ` 600 units, if flexible budget needs to be
calculated at 80% activity what will be units produced?
a. ` 800
b. ` 600
c. `1200
d. ` 1000
(xii) In which of the following circumstances is there a strong argument that profit
centre accounting is a waste of time?
a. When the transferred item is also sold on an external market.
b. When the supplying division is based in a different country to head
office.
c. If the transferred item is a major product of the supplying division.
d. If there is no similar product sold on an external market and the
transferred item is a major product of the supplying division.

(b) State True or False: [1 × 7 = 7]

(i) Globalization and the rapid growth of international trade has made inter-
company pricing an everyday necessity for the vast majority of businesses.
(ii) Divisional Autonomy is the degree of freedom a division manager can
exercise in decisions making.
(iii) The Budget manual is a schedule, document or booklet, which shows in a
written form, the budgeting organization and procedure.
(iv) If the occurrence or non-occurrence of one event does not change the
probability of the occurrence of the other event, the two events are said to be
independent.
(v) Benchmarking is a process of measuring the performance of a company’s
products, services, or processes against those of another business considered
to be the best in the industry.

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(vi) ABC recognizes the increased complexity of modern businesses with its
multiple cost drivers, many of which are transaction based rather than volume
based.
(vii) A revenue centre is strictly defined as an organizational unit that is
responsible for the generation of revenues and has full control over setting
selling prices or budgeting costs.

(c) Fill in the blanks: [1 × 6 = 6]

(i) Transfer prices based on full cost are appropriate if top management treats
the divisions like______________.
(ii) If the selling division has, _______a transfer price based on _________would
be an appropriate transfer price, although it would hurt the performance of
the selling division.
(iii) lean manufacturing systems that seek to reduce waste by implementing
_________ production systems and focussing on __________.
(iv) There has been a paradigm shift in the role of the management accountant in
the era of globalisation. The focus shifted to _____________.
(v) If a decision maker can estimate the _____________ of the future events,
these should be incorporated into the decision model.
(vi) Under marginal costing, the stock is valued at ________ .

SECTION - B
(answer any five questions)

2. (a) Discuss the role of a management accountant in contemporary business eco system.
[7]

(b) ABC Company manufactures three products: A, B, and C. Data for the period just
ended is as follows:
A B C
Production (units) 20000 25000 2000
Sales price (per unit) ` 20 ` 20 ` 20
Material cost (per unit) `5 ` 10 ` 10
Labour hours (per unit) 2 hours 1 hour 1 hour

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Overheads for the period were as follows:
`
Set-up costs 90,000
Receiving 30,000
Despatch 15,000
Machining 55,000
1,90,000

Cost driver data A B C

Machine hours per unit 2 2 2
Number of set-up 10 13 2
Number of deliveries received 10 10 2
Number of orders dispatched 20 20 20
As a cost accountant you are required to
(i) Calculate the cost and profit per unit, absorbing all the overheads on the basis
of labour hours.
(ii) Calculate the cost and profit per unit absorbing the overheads using an
Activity Based Costing approach. [4+4 =8]

3. (a)
I. The following data has been extracted from the cost records of CYTOGEN
Inc.For a particular period, the Sales revenue is ` 2,00,000 and the profit is
` 20,000. If it is known that the variable Cost ratio is 60% you are required
to calculate:
(i) the Contribution to Sales Ratio
(ii) the Fixed Cost and
(iii) the Sales volume to earn a profit of ` 50,000
II. What do you mean by Angle of Incidence in a Break-Even Chart? Can it be
used in managerial decision making? [4+4 =8]
(b) An exporter of auto machine parts is earning a profit of ` 1,00,000 on a sale of
` 12,00,000. Selling price is ` 40 per part and variable cost is `. 30 per part. The
exporter incurs an additional fixed cost of `. 3,00,000 on product improvement
which also enables him to economise ` 5 in per part variable cost. As per trade
agreements, the sale of his parts is restricted to the old value of ` 12,00,000.
Determine the selling price per part so that the exporter earns the same profit at the
same sales value? [7]

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MANAGEMENT ACCOUNTING

4. (a) A company has two divisions, X and Y. Division X manufactures a component

which is used by Division Y to produce a finished product. For the next period,
output and costs have been budgeted as follows.
Particulars Division X Division Y
Component units 50,000
Finished units 50,000
Total variable costs ` 2,50,000 ` 6,00,000
Fixed Costs ` 1,50,000 ` 2,00,000

You, as a cost accountant, are required to advise on the transfer price to be fixed
for Division X’s component under the following circumstances:
(i) Division X can sell the component in a competitive market for`10 per unit.
Division Y can also purchase the component from the open market at that
price.
(ii) Further to the situation mentioned in (i) above, assume that Division Y
currently buys the component from an external supplier at the market price
of `10 and there is reciprocal agreement between the external supplier and
another Division Z, within the same group. Under this agreement, the
external supplier agrees to buy one product unit from Division Z at a profit
of `4 per unit to that division, for every component which Division Y buys
from the supplier. [3 + 4 = 7]

(b) As a Management Accountant of Bush Radio Company you find that while it costs
` 12.50 to make a component X, the same is available in the market at ` 11.50 with
an assurance of continued supply. The break-down of the cost is:
Elements of cost `
Materials ` 5.50
Labour ` 3.50
Other variable overheads ` 1.00
Depreciation & other fixed cost ` 2.50
Total Cost ` 12.50

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a. Analyse the above situation and submit the needful cost related information
to enable the management to take a make or buy decision?
b. Examine the possibility of accepting an offer of ` 9.70 each per unit received
from the supplier. [4 + 4 = 8]

5. (a) LOTUS Inc has reported annual operating profits for the year of ` 89.2 million
after charging ` 9.6 million for the full development costs of a new product that is
expected to last for the current year and two further years. The cost of capital is 13
per cent per annum. The balance sheet for the company shows fixed assets with a
historical cost of ` 120 million. A note to the balance sheet estimates that the
replacement cost of these fixed assets at the beginning of the year is ` 168 million.
The assets have been depreciated at 20 per cent per year. The company has a
working capital of ` 27.2 million. Ignore the effects of taxation.
You as a cost accountant is asked to calculate the economic valued added (EVA) of
the company. [7]

(b) (i) Carson, Inc., uses a learning curve of 80 percent for all new products it
develops. A trial run of 500 units of a new product shows total labour-related
costs (direct, indirect labour, and fringe benefits) of ` 1,20,000. Management
plans to produce 1,500 units of the new product during the next year.
Compute the expected labour-related costs for the year to produce the 1,500
units.
Find the unit cost of production for next year.
(ii) State the limitations and the problems associated with learning curve
analysis. [5 + 3 = 8]

6. (a) Zee Co. Ltd. wishes to arrange overdraft facilities with its bankers from the period
August to October 2022 when it will be manufacturing mostly for stock. Prepare a
cash budget for the above period from the following data given below:
Month Sales Purchases Wages Manufacturing Office Selling
Exp. Exp. Exp.
June 1,80,000 1,24,800 12,000 3,000 2,000 2,000
July 1,92,000 1,44,000 14,000 4,000 1,000 4,000
August 1,08,000 2,43,000 11,000 3,000 1,500 2,000
September 1,74,000 2,46,000 12,000 4,500 2,000 5,000
October 1,26,000 2,68,000 15,000 5,000 2,500 4,000
November 1,40,000 2,80,000 17,000 5,500 3,000 4,500
December 1,60,000 3,00,000 18,000 6,000 3,000 5,000

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MANAGEMENT ACCOUNTING
Additional Information:
a. Cash on hand 1-08-2022 ` 25,000.
b. 50% of credit sales are realized in the month following the sale and the
remaining 50% in the second month following. Creditors are paid in the
month following the month of purchase.
c. Lag in payment of manufacturing expenses half month.
d. Lag in payment of other expenses one month [8]

(b) When the financial controller of Better Company set the budget for the year ahead,
it was expected that monthly output of cake packages would be 12,000 units. In
March the output was increased to 14,000 per month following negotiation with a
chain of corner shops. The following table contains the original budget and the
actual outcome for the month of March.

Particulars Original Budget Actual for March

Amount (`.) Amount (`.)
Cake packages output 12,000 14,000
Direct materials 48,000 53,000
Direct labour 24,000 29,000
Variable overhead 6,000 7,200
Fixed overhead 4,000 4,500
Total production costs 82,000 93,700

The Financial Controller wants you to analyse the variances in order to prepare a
report. [7]

7. (a) AB Ltd. has furnished the following information:

Budgeted Actual (for March 2023)
Number of working days 25 27
Production (in Units) 20000 22000
Fixed Overheads ` 30000 ` 31000

Budgeted fixed overhead rate is ` 1.00 per hour. In March 2023, the actual hours
worked were 31500.
Calculate:
(i) Fixed overhead Efficiency Variance
(ii) Fixed overhead Capacity Variance

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(iii) Fixed overhead Calendar Variance
(iv) Fixed overhead Volume Variance
(v) Fixed overhead Expenditure Variance [7]

(b) SK Limited makes and sells a single product ‘Jay’ for which the standard cost per
unit is as follows;

` per unit
Direct Material 4 kg @ ` 12.00 per kg 48.00
Direct Labour 5 hours @ ` 7.00 per hour 35.00
Variable production overhead 5 hours @ ` 2.00 per hour 10.00
Fixed production overhead 5 hours @ ` 10.00 per hour 50.00
143.00
The variable production overhead varies with the hours worked. Overhead is
absorbed into production on the basis of standard hours of production and the
normal volume of production for the period just ended was 20 000 units (100 000
standard hours of production).

For the period under consideration, the actual results were;

Production of ‘Jay’ 18000 units (`)

Direct material used – 76000 kg at a cost of 8,36,000
Direct labour cost incurred – for 84000 hours worked 6,04,800
Variable production overhead incurred 1,72,000
Fixed production overhead incurred 10,30,000
You are required
(i) to analyse and show, by element of cost, standard cost for the output for the
period;
(ii) to scrutinize and list relevant variances in a way which reconciles standard
cost with actual cost;
(Note: Fixed production overhead sub-variances of capacity and volume efficiency
(productivity) are not required); [2 + 6 = 8]

8. (a) Farmer Visal can plant either corn or soybeans. The probabilities that the next
harvest prices will go up, stay the same, or go down are 0.25, 0.30, and 0.45,
respectively. If the prices go up, the corn crop will net ` 30,000 and the soybeans
will net ` 10,000. If the prices remain unchanged, McCoy will (barely) break even.

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But if the prices go down, the corn and soybeans crops will sustain losses of
` 35,000 and ` 5000, respectively.
(i) Represent McCoy’s problem as a decision tree.
(ii) Suggest Visal on the crop that he should plant. [7]

(b) For the upcoming planting season, farmer Visal can plant corn (A1), wheat (A2),
or soybeans (A3) or use the land for grazing (A4). The payoffs associated with the
different actions are influenced by the amount of rain: heavy rainfall (S1), moderate
rainfall (S2), light rainfall (S3), or drought (S4). The payoff matrix (in thousands
of rupees) is estimated as;
S1 S2 S3 S4
A1 -20 60 30 -5
A2 40 50 35 0
A3 -50 100 45 -10
A4 12 15 15 10

Develop a course of action for farmer Visal based on each of the four decision
criterion under uncertainty. [8]

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Directorate of Studies, The Institute of Cost Accountants of India
 INTERMEDIATE EXAMINATION SET 1
MODEL ANSWER TERM – JUNE 2023
PAPER - 12
MANAGEMENT ACCOUNTING
Time Allowed: 3 Hours Full Marks: 100
The figures in the margin on the right side indicate full marks.
Where considered necessary, suitable assumptions may be made and
clearly indicated in the answer.
Answer Question No. 1 and any five from Question No. 2, 3, 4, 5, 6, 7 and 8.

SECTION - A
(Compulsory)

1. (a)
(i) (ii) (iii) (iv) (v) (vi) (vii) (viii) (ix) (x) (xi) (xii)
c c b d d d c c a c a d

(b)
(i) (ii) (iii) (iv) (v) (vi) (vii)
True True True True True True False
(c)
(i) (ii) (iii) (iv) (v) (vi)
Excess just-in-time (JIT)
Cost capacity, production systems, strategic Variable
probabilities
centres variable advanced manufacturing analysis cost
cost technologies (AMTs).

SECTION - B
(answer any five questions)

2. (a) There has been a paradigm shift in the role of the management accountant in the
era of globalisation. The focus shifted to strategic analysis. This ushered in the
fourth stage of the evolution of management accounting. Authors have opined that
most of the management accounting practices used, were actually developed by
1925, and for the next 60 years there was a slowdown, or even a halt, in
management accounting innovation.
Globalisation brought about significant changes in the business environment.
Along with the changes the roles of the management accountant had to be
redefined. In the following lines some of the impacts of the new business
environment on management accounting is discussed.

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Directorate of Studies, The Institute of Cost Accountants of India
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 Global competition - Prior to the era of globalisation, many organizations
operated in a protected competitive environment. Globalisation ushered in
changes where there have been reductions in tariffs and duties on imports and
exports as well as dramatic improvements in transportation and
communication systems. By this firms operate globally and results in stiff
competition from the very best organisations with changed business
operation worldwide. The new competitive environment has increased the
demand relating to quality and customer satisfaction. Customer profitability
analysis and value analysis are important issues in the arena of management
accounting.
 Changing product life cycles – Changing profile of the customer along with
behavioural issues have contributed to drastically reduce the product life
cycle, the management accountant plays a crucial role as in order to compete
successfully. Companies must be able to manage their costs effectively at the
design stage, have the capability to adapt to new environment, different and
changing customer requirements and reduce the time to market of new and
modified products.
 Advances in manufacturing technology - In order to compete effectively,
companies must be able to manufacture high quality innovative products at a
low cost, and also provide a first-class customer service. Flexibility to cope
with short product life cycles, demands for greater variety of product, more
discriminating customers and increasing international competition has
created enormous pressure on the operational activities of the business.
 The impact of information technology - The use of information technology
(IT) to support business activities has increased dramatically. Along with
electronic business communication technologies known as e-business, e-
commerce or internet commerce have also developed significantly.
Consumers have become more discerning in their purchases as in online
transactions it is relatively easy to compare the merits of different products
and services. This have a significant impact on the work of management
accountants. The role of the management accountant as a gatherer and
processor of information is lost as the managers can directly access the
management accounting system on their personal computers to derive the
information they require for decision making.
 Environmental and sustainability issues – In recent times, ESG4 has
become the focal point in the operations of the company. Along with this,
ethical issues have also come to the forefront as the business has to deal with
customers who are more aware of this issues then they were a decade back.

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 Deregulation and privatization – Prior to the era of globalization,
companies in many industrial sectors were government – owned monopolies
and operated in a highly regulated, protected and non-competitive
environment. Thus the organizations, especially those incurring losses, were
not under any pressure to improve the quality and efficiency of their
operations and to improve profitability by adding or dropping particular
products or services from their array of product or service. Globalization
ushered in the privatization and deregulation which resulted in the
elimination of pricing and competitive restrictions and made Companies to
realize their cost base and determine the source of profitability for their
products, customers and markets.
 Focus on value creation – The scope of management accounting is
enormous. Managers who are in charge of the operations of the organisations
depends on the management accountants in realisation of the strategic goal
of the organisations. With the advent of time, the role of the management
accountant has changed from merely interpreting, managing and recording
costs to creating value. Though cost reduction still remains as the basic
function of the management accountant as it has specific impact on selling
price fixation which impacts customer value. The new business environment
resulted in management accounting distinguishing between value-added and
non-value-added activities.

(b) (i) Total overheads ₹1,90,000

Total labour hours:
A = (20,000 × 2) = 40,000
B = (25,000 × 1) = 25,000
C = (2,000 × 1) = 2,000
67,000
Overhead Absorption Rate = ₹1,90,000 ÷67,000 hours = ₹2.836 per hour
= ₹2.84 per hour

(ii) Statement of Cost and Profit (Amount in ₹)

Particulars A B C
Materials 5 10 10
Labour 10 5 5
Overheads (at ₹2.84 per hr) 5.68 2.84 2.84
20.68 17.84 17.84

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Selling price 20 20 20
Profit / Loss (0.68) 2.16 2.16
(b) Total A B C
Set-up costs ₹90,000 36,000 46,800 7,200
(Cost per set up= ₹90,000÷25)
Receiving ₹30,000 13,636 13,636 2,728
(Cost per delivery = ₹30,000÷22)
Dispatch
(Cost per order = ₹ 15,000÷60) ₹15,000 5,000 5,000 5,000
Machining ₹55,000 ₹23,404 ₹29,256 ₹2,340
(Cost per machine hour =₹55,000
÷94,000)
Total ₹1,90,000 78,040 94,692 17,268
Number of units 20,000 25,000 2,000
Overheads p.u. ₹3.90 ₹3.79 ₹8.63

Statement of Cost and Profit (Amount in ₹)

Particulars A B C
Materials 5 10 10
Labour 10 5 5
Overheads 3.90 3.79 8.63
18.90 18.79 23.63
Selling price 20.00 20.00 20.00
Profit /(Loss) ₹1.10 ₹1.21 (₹3.63)

3. (a) I. Sales = ` 2,00,000

Variable Cost = 60% = ` 1,20,000
(1) P/V Ratio = 40%
(2) Contribution = ` 80,000
Contribution = Fixed Cost + Profit
Or, fixed Cost = ` 62,000
(3) Sales volume to earn a profit of ` 50,000 = Fixed Cost + Desired Profit
÷ P/V Ratio = ` 2,75,000

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Directorate of Studies, The Institute of Cost Accountants of India
 INTERMEDIATE EXAMINATION SET 1
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MANAGEMENT ACCOUNTING
II.

(b) Units sold = Sales ÷ Selling Price per unit = ` 12,00,000 ÷ ` 40 = 30,000 units
Sales 40 12,00,000
Less: Variable Cost 30 9,00,000
Contribution 10 3,00,000
Less: Profits 1,00,000
Fixed cost 2,00,000
Hence, total fixed cost in the new case = ₹ 2,00,000 + ₹ 3,00,000 = ₹ 5,00,000
Contribution in the New Case = New Fixed Cost + Profits = 5,00,000 + 1,00,000
= ₹6,00,000
Since as per agreement the sale value is restricted to the old value that is
₹12,00,000. Hence P/V Ratio will be: ₹ 6,00,000 ÷ ₹12,00,000 × 100 = 50%
The variable cost in the new case = ₹ 30 - ₹ 5 = ₹ 25
Variable Cost Ratio = 100 - P/V Ratio = 100 - 50 = 50%
Computation of New Selling Price:
If VC is 50, then SP = ₹ 100
If VC is 1, then SP = 100 ÷ 50
If VC is 25, then SP = 100 ÷ 50 × 25 = ₹ 50 per unit

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Directorate of Studies, The Institute of Cost Accountants of India
 INTERMEDIATE EXAMINATION SET 1
MODEL ANSWER TERM – JUNE 2023
PAPER - 12
MANAGEMENT ACCOUNTING
4. (a) (i) In this case the transfer price is to be fixed up as follows
Transfer Price = Marginal Cost + Opportunity Cost i.e. ` (5 + 5) = `10
Note: Marginal Cost = `2,50,000 / 50,000 units = `5
Opportunity cost `5 is computed on the basis that the Division A will sacrifice
` 5 if they sell the product to Division Y.

(ii) In this situation, the transfer price will be worked out as under:
Transfer price = Marginal Cost + Contribution + Profit foregone by Division Z
= `(5 + 5 + 4) = `14
In situation (ii), if Division Y purchases from Division X, it will not purchase
from external supplier.
Hence, the supplier will stop purchasing from Division Z, which will result in a
loss of profit to Division Z @ `4 per unit, and therefore this amount will be
recovered from the transfer price.

(b) Marginal Cost Statement

Particulars Per Unit ₹
Materials 5.50
Labour 3.50
Variable Overheads 1.00
Marginal Cost 10.00

1. The marginal cost of producing the component is ₹ 10 per unit and fixed cost
per unit is ₹ 2.50, thereby making a total cost of ₹ 12.50 per unit. But this
component is available in the market at ₹ 11.50. As the market price per unit
is less than the total cost, apparently it looks better to buy the component
instead of making it. But a close observation reveals that the component will
actually cost ₹ 14 (i.e. 11.50+2.50) if it is purchased, as the fixed cost of ₹
2.50 is required to be incurred even if the component is purchased. Therefore,
it may not be wise to buy a component which will actually cost ₹ 14, which
is being manufactured at ₹ 12.50.

2. If the price offered by the supplier is ₹ 9.70 per unit, then it is advisable to
purchase the component from the outside market as the outside market price
of ₹ 9.70 is less than marginal cost of ₹ 10. There will be saving of ₹0.30 per
unit if the component is purchased from outside market.

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Directorate of Studies, The Institute of Cost Accountants of India
 INTERMEDIATE EXAMINATION SET 1
MODEL ANSWER TERM – JUNE 2023
PAPER - 12
MANAGEMENT ACCOUNTING
One of the best ways for sales promotion is to offer quotations at low rates.
A company is producing 80,000 units (80% of capacity) and making a profit
of ₹ 2,40,000. Suppose the Central Government has given a tender notice for
20,000 units. It is expected that the units taken by the Government will not
affect the sale of 80,000 units which the company is already selling and the
company also wishes to submit the lowest possible quotation. The company
may quote any amount above marginal cost, because it will give an additional
marginal contribution and hence profit.
5. (a)
Profit ₹ 89.20
Add back:
Current depreciation (₹120 × 20%) ₹ 24.00
Development Costs (₹9.60 × 2/3) ₹ 6.40
Less: Replacement depreciation (₹168 × 20%) ₹ 33.60
Adjusted profit 86.00
a
Less: Cost of capital charge (13% × ₹168) 21.84
EVA 64.16
a
Note: 13% × [Fixed assets (₹168 - (₹33.6) + working capital (₹27.2) +
development costs (₹6.4)]

(b) (i) 1st Batch = 500 units

Quantity Cumulative Average Cost Cumulative Total Cost
500 units 240 (120000 ÷ 500) 1200000 (given)
1000 units 192 (80% of 240) 192000
2000 units 153.6 (80% of 192) 307200

Cost of producing 2000 units ` 3,07,200

Less Initial Cost of producing 500 units ` 1,20,000
Cost of production of 1500 units (in next year) ` 1,87,200
Per Unit Cost ` 1,87,200 ÷ 1500 Units 1,24,800

(ii) Limitations and problems associated with learning curve analysis

include:
a. Learning curve analysis is appropriate only for labour-intensive
operations involving repetitive tasks where repeated trials improve
performance. If the production process primarily relies on robotics and
computer controls, little repetitive labour is involved and thus little
opportunity exists for learning to take place.

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b. The learning rate is assumed to be constant. In real life, the decline in
labour time might not be constant.
c. The reliability of a learning curve calculation can be jeopardized
because an observed change in productivity might actually be
associated with factors other than learning, such as a change in the
labour mix, the product mix, or other factors. If some factor or factors
other than learning are affecting productivity, a learning model
developed using the affected historical data will produce in-accurate
estimates of labour time and cost.

6. (a) Cash Budget

For 3 months from August to October 2022
Particulars August (`) September (`) October (`)
Receipts:
Opening balance 25,000 44,500 (66,750)
Sales 1,86,000 1,50,000 1,41,000
Total Receipts (A) 2,11,000 1,94,500 74,250
Payments:
Purchases 1,44,000 2,43,000 2,46,000
Wages 14,000 11,000 12,000
Mfg. Exp. 3,500 3,750 4,750
Office Exp. 1,000 1,500 2,000
Selling Exp. 4,000 2,000 5,000
Total payments (B) 1,66,500 2,61,250 2,69,750
Closing Balance (A-B) 44,500 (66,750) (1,95,500)

Notes to Solution:
1. Manufacturing Expense:
Particulars August (`) September (`) October (`)
July (`4,000/2) 2,000 -- --
August (`3,000/2) 1,500 1,500 --
September (`4,500/2) -- 2,250 2,250
October (`5,000/2) -- -- 2,500
Total 3,500 3,750 4,750

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2. Sales
Particulars August (`) September (`) October (`)
June (`1,80,000/2) 90,000 -- --
July (`1,92,000/2) 96,000 96,000 --
August (`1,08,000/2) -- 54,000 54,000
September (`1,74,000/2) -- -- 87,000
Total 1,86,000 1,50,000 1,41,000

(b) The report should contain the following:

Original Flexible Actual for Variance
Particulars budget budget March
(1) (2) (3) (2) – (3)
Units manufactured 12,000 14,000 14,000
` ` ` `
Direct materials 48,000 56,000 53,000 3,000 (F)
Direct labour 24,000 28,000 29,000 1,000 (A)
Variable overhead 6,000 7,000 7,200 200 (A)
Fixed overhead 4,000 4,000 4,500 500 (A)
Total costs 82,000 95,000 93,700 1,300 (F)
The direct materials variance is 5.4% of the flexible budget amount and needs
investigating even although it is favourable.
Two possible questions to investigate are:
(1) Did the budget estimates use outdated prices?
(2) Has the buying department chosen low price materials without perhaps
considering the quality?
The labour variance is 3.6% of the flexible budget amount. Questions that could be
asked here are:
(1) Has there been a rise in pay rates since the budget was set?

7. (a) Standard rate per unit (Budgeted overheads/Budgeted output) i.e.,

= (`30‚000/20‚000 units) = ` 1.50
Standard time per unit (30‚000/20‚000) = 1.50 hours

(i) Efficiency Variance = Standard overhead rate (Standard hours for actual
output – Actual hours worked)
`1.00 (33,000 – 31,500) = ` 1,500 (F)
Standard hour for actual output = 22,000 units @ 1.5 hours = 33,000 hours.

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(ii) Capacity Variance = Standard rate per hour (Actual hours worked – Budgeted
hours for 27 days)
`1 (31,500 – 32,400) = ` 900 (A)
Budgeted hrs for 25 days = 30,000 therefore, budgeted hours for 27 days
= 32,400 i.e., (30‚000÷25 ×27)

(iii) Calendar Variance

Standard Overheads rate per day (Actual working days – Budgeted working
days)
`1,200× (27 – 25) = ` 2,400 (F), where, Standard Overheads rate per day
= `30,000÷25 days = `1,200

(iv) Volume Variance

Standard rate per unit (Actual Output – Budgeted output)
` 1.50 × (22,000 – 20,000) = ` 3,000 (Favourable).

(v) Expenditure Variance

Budgeted overheads – Actual overheads
` 30,000 – ` 31,000 = `1,000 (Adverse).

(b) Standard cost of output produced (18000 units)

(₹)
Direct Material 8,64,000
Direct Labour 6,30,000
Variable production overhead 1,80,000
Fixed production overhead 9,00,000
25,74,000

Standard cost of output Variances Actual cost

(₹) (₹) (₹)
Direct materials 8,64,000
Price variance a 76,000 (F)
Usage variance b 48,000 (A)
Actual cost 8,36,000
Direct labour 6,30,000
Rate variance c 16,800 (A)

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Efficiency variance d 42,000 (F)
Actual cost 6,04,800
Variable production overhead 1,80,000
Expenditure variance e 4,000 (A)
Efficiency variance f 12,000 (F)
Actual cost 1,72,000
Fixed production ove1head 9,00,000
Expenditure variance g 30,000 (A)
Volume variance h 1,00,000 (A)
Actual cost 10,30,000
25,74,000 68,800 (A) 26,42,800
Notes
a
(Standard price - Actual price) x Actual quantity
(₹12 - ₹8,36,000/76,000) x 76,000
(₹12 - ₹11) ×76,000 = ₹76,000 (F)
b
(Standard quantity - Actual quantity) x Standard price
(18,000 x 4 kg – 76,000) x ₹12
(72000 kg – 76,000 kg) × 12 = ₹48,000 (A)
c
(Standard rate - Actual rate) x Actual hours
(₹7 - ₹6,04,800/84,000) x 84,000
 (₹7 - ₹7.2) × 84,000 hours = ₹16,800 (A)
d
(Standard hours - Actual hours) x Standard rate
(18,000 x 5 hrs – 84,000) x ₹7 = ₹42,000 (F)
e
(Actual hours x Standard rate) - Actual cost
(84,000 x ₹2 - ₹1,72,000) = ₹4,000 (A)
f
(Standard hours - Actual hours) x Standard rate
(18,000 x 5 hrs – 84,000 hours) x ₹2 = ₹12,000 (F)
g
Budgeted fixed overheads - Actual fixed overheads
(20,000 x ₹50 - ₹10,30,000) = ₹30,000 (A)
h
(Actual output - Budgeted output) x Standard rate
(18,000 – 20,000) x ₹50 = ₹1,00,000 (A)

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8. (a) (i)

Prices will go
` 30,000
up (0.25)
Prices will
Corn stay the same `0
(0.30)
Prices will go
` -35,000
down (0.45)
Decision
Point
Prices will go
` 10,000
up (0.25)

Prices will
Soyabeans `0
stay the same

Prices will go
` -5,000
down (0.45)

(ii) EV(corn) = - ` 8,250, [(30000 × 0.25) + (- 35000 × 0.45)]

EV(soybeans) = ` 250, [(10000 × 0.25) + (- 5000 × 0.45)]
Therefore, select soybeans.
(b) The four criterions under uncertainty1 are
1. The maximin Criterion
2. The Lapse Criterion
3. The savage Criterion
4. The Hurwicz Criterion

These are given below

(i) The Minimax Criterion (since it is a payoff maximisation)
S1 S2 S3 S4 Row min
A1 -20 60 30 -5 -20
A2 40 50 35 0 0
A3 -50 100 45 -10 -50
A4 12 15 15 10 10 ← maximin

1
It is to be noted that this is a payoff maximisation problem and not a cost minimization problem.

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(ii) The Laplace Criterion - Assume equal probabilities (1/4) as there are four
states of finance
S1 S2 S3 S4 EV= ∑ 𝑷(𝑿𝒊) × 𝑿𝒊 Figures in ₹ thousand
A1 -20 60 30 -5 ¼(-20+60+30-5)=16.25 ₹16,250
A2 40 50 35 0 ¼(40+50+35+0)=31.75 ₹ 31,250
A3 -50 100 45 -10 ¼(-50+100+45-10)=21.25 ₹ 21,250
A4 12 15 15 10 ¼(12+15+15+10)=13 ₹ 13,000
Since it is a payoff maximization problem, decision A2 would be selected
which implicates highest payoff of ₹31,250
(iii) Savage Criterion
This criterion posits the formulation of a regret matrix. The original matrix
S1 S2 S3 S4
A1 -20 60 30 -5
A2 40 50 35 0
A3 -50 100 45 -10
A4 12 15 15 10

The regret matrix is determined by subtracting 40, 100, 45, and 10 from
columns 1 to 4, respectively, and so the following regret matrix is obtained.
Now we can calculate maximin (since it is a payoff maximization problem)
S1 S2 S3 S4
A1 -60 -40 -15 -15 -15 ← maximin
A2 0 -50 -10 -10 0
A3 -90 0 0 -20 0
A4 -38 -20 -30 0 0

(iv) The Hurwicz Criterion

The following table summarizes the computation
Alternative Rowmin Row Max [α(Rowmax)+(1-α)(Rowmin)] 2
A1 [α(60)+(-20)(1-α)]= 60α -20+20α
-20 60
= 80α – 20 3
A2 0 50 [α(50)+(0)(1-α)]=50𝛼
A3 -50 100 [α(100)+(-50)(1-α)]=150α - 50
A4 10 15 [α(15)+(10)(1-α)]=5α +10
The decision maker will have to decide upon the appropriate α. And thus he can
decide upon the optimum alternative.
2
Since this is a Payoff Maximisation model.
3
[α(60)+(-20)(1-α)]= 60α -20+20α and so forth (for the remaining values in the column).

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Directorate of Studies, The Institute of Cost Accountants of India
 INTERMEDIATE EXAMINATION SET 2
MODEL QUESTION PAPER TERM – JUNE 2023
PAPER - 12
MANAGEMENT ACCOUNTING
Time Allowed: 3 Hours Full Marks: 100
The figures in the margin on the right side indicate full marks.
Where considered necessary, suitable assumptions may be made and
clearly indicated in the answer.
Answer Question No. 1 and any five from Question No. 2, 3, 4, 5, 6, 7 and 8.

SECTION - A
(Compulsory)

1. (a) Choose the correct alternative [1 × 12 = 12]

(i) In a product mix decision, which is the most important factor to consider in
order trying to maximise profit?
a. contribution per unit of a scarce resource used to make the product
b. contribution per unit of the product
c. variable cost per unit of the product
d. product unit selling price
(ii) Which of the following costs incurred by a commercial airline can be
classified as variable?
a. Interest costs on leasing of aircraft
b. Pilots' salaries
c. Depreciation of aircraft
d. None of these three costs can be classified as variable
(iii) A large margin of safety indicates _________________.
a. Over capitalization
b. The soundness of business
c. Overproduction
d. None of the above
(iv) Usually the production budget is stated in terms of ______________.
a. Money
b. Quantity
c. Both of the above
d. None of the above

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Directorate of Studies, The Institute of Cost Accountants of India
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(v) Revision of budgets is necessary when original budget was prepared with
___________.
a. only management’s direction
b. judgement of employees only
c. Inappropriate data
d. All of the above
(vi) Which of the following is NOT a method of transfer pricing?
a. Cost plus transfer price
b. Internal price plus transfer price
c. Market-based transfer price
d. Two-part transfer price
(vii) What transfer pricing method is preferred by Cost Accountant?
a. Cost Based
b. Negotiated
c. Market Based
d. Dual Pricing
(viii) Management accounting deals with _______________ data.
a. qualitative
b. quantitative
c. both qualitative and quantitative
d. only non-financial
(ix) The following is the limitation of management accounting –
a. Costly Affair
b. Evolutionary Stage
c. Psychological Resistance
d. All of the above
(x) Objectives of Management Accounting ________________.
a. Policy formulation
b. Helpful in decision making
c. Helpful in controlling
d. All of the above
(xi) Which of the following costs is relevant in decision-making?
a. committed costs
b. accounting costs
c. historical costs
d. cash costs

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(xii) The cost data provide invaluable information for taking the following
managerial decision(s)
a. To make or buy
b. To own or hire fixed asset
c. Determining the expansion or contraction policy
d. All of the above

(b) State True or False [1 × 7 = 7]

(i) Management Accounting reports are public documents.

(ii) The budgetary control system is designed to fix responsibilities on executives
through preparation of budgets.
(iii) A cash budget is a summary of all functional budgets.
(iv) Experience curve effects are reinforced when two or more products do not
share a common activity or resource.
(v) Differential Cost is the change in the costs which results from the adoption
of an alternative course of action.
(vi) While marginal costing excludes the entire fixed costs, some of the fixed
costs may be taken into account as being relevant for the purpose of
differential cost analysis.
(vii) The early identification of principal budget factor is important in the
budgetary planning process because it indicates which budget should be
prepared first.

(c) Fill in the blanks [1 × 6 = 6]

(i) The preparation of Du Pont Control chart is related to analysis of _________.

(ii) __________ contains the picture of total plans during the budget period and
it comprises information relating to sales, profit, cost, production etc.
(iii) _________ is stated as a budget which is made to change as per the levels of
activity attained.
(iv) ___________________ are often quoted in management literature as those
areas in which an organization needs to perform best if it is to achieve overall
success.
(v) If a decision maker can estimate the _______________ of future events,
these should be incorporated into the decision model.
(vi) Direct costing is also referred as ________________.

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Directorate of Studies, The Institute of Cost Accountants of India
 INTERMEDIATE EXAMINATION SET 2
MODEL QUESTION PAPER TERM – JUNE 2023
PAPER - 12
MANAGEMENT ACCOUNTING
SECTION - B
(answer any five questions)

2. (a) “The evolution of managerial accounting has been through four particular phases”
– explain the four phases. Also discuss the various tools and techniques that
developed during each particular phase clearly demarcating the contemporary
techniques against the traditional techniques. [7]

(b) (i) Kalyani Manufacturing Company has three salaried accounts payable clerks
responsible for processing purchase invoices. Each clerk is paid a salary of
`30,000 and is capable of processing 5,000 invoices per year (working
efficiently). In addition to the salaries, Kalyani spends `9,000 per year for
forms, postage, checks, and so on (assuming 15,000 invoices are processed).
During the year, 12,500 invoices were processed.
Required
 Calculate the activity rate for the purchase order activity. Break the
activity into fixed and variable components.
 Compute the total activity availability, and break this into activity
usage and unused activity.
 Calculate the total cost of resources supplied, and break this into
activity usage and unused activity

(ii) “The basic idea justifying the use of Activity-Based Costing (ABC) and
Activity-Based Budgeting (ABB) are well publicized, and the number of
applications has increased. However, there are apparently still significant
problems in changing from existing systems” – in reference to the context,
provide explanation as to
 Which characteristics of an organization, such as its structure, product
range, or environment, may make the use of activity based techniques
particularly useful.
 The problems that may cause an organization to decide not to use, or
to abandon theS use of, activity based techniques. [4 + 4 = 8]

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Directorate of Studies, The Institute of Cost Accountants of India
 INTERMEDIATE EXAMINATION SET 2
MODEL QUESTION PAPER TERM – JUNE 2023
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3. (a) (i) Z plc 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 per cent; for product Bee it is 50 per cent and the total is 48 per cent. If
fixed costs are unaffected by mix and are currently 20 per cent of sales. If the
product mix is changed to: Aye 40% Bee 25% Cee 35%
Calculate the new total contribution/total sales ratio.

(ii) RT plc sells three products.

Product R has a contribution to sales ratio of 30%.
Product S has a contribution to sales ratio of 20%.
Product T has a contribution to sales ratio of 25%.
Monthly fixed costs are `100 000.
If the products are sold in the ratio: R: 2 S: 5 T: 3
Calculate the monthly breakeven point (to nearest `) [4 + 4 = 8]

(b) An exporter of garments is earning a profit of ` 1,00,000 on a sale of ` 12,00,000.

Selling price is ` 40 per garment and variable cost is `. 30 per garment. The
exporter incurs an additional fixed cost of `. 3,00,000 on product improvement
which also enables him to economise ` 5 in per garment variable cost. As per trade
agreements, the sale of his garments is restricted to the old value of ` 12,00,000.
What should be the selling price per garment so that the exporter earns the same
profit at the same sales value? [7]

4. (a) Division A is a profit centre, which produces four products P, Q, R and S. Each
product is sold in the external market also. Data for the period is as follows:
P Q R S
Market Price per unit (`) 350 345 280 230
Variable Cost of production per unit (`) 330 310 180 185
Labour hours required per unit 3 4 2 3

Product S can be transferred to Division B but the maximum quantity that might
be required for transfer is 2,000 units of S.
The maximum sales in the external market are:
P 3,000 units
Q 3,500 units
R 2,800 units
S 1,800 units

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Directorate of Studies, The Institute of Cost Accountants of India
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Division B can purchase the same product at a slightly cheaper price of ` 225 per
unit instead of receiving transfers of products S from Division A.
Suggest the transfer price for each unit for 2,000 units of S, if the total labour hours
available in Division A are?
(i) 24,000 hours?
(ii) 32,000 hours? [8]

(b) XYZ Ltd which has a system of assessment of Divisional Performance on the basis
of residual income has two Divisions, X and Y. X has annual capacity to
manufacture 15,00,000 numbers of a special component that it sells to outside
customers, but has idle capacity. The budgeted residual income of Y is `
1,20,00,000 while that of X is ` 1,00,00,000. Other relevant details extracted from
the budget of X for the current year were as follows:
Sale (outside customers) 12,00,000 units @` 180 per unit
Variable cost per unit ` 160
Divisional fixed cost ` 80,00,000
Capital employed ` 7,50,00,000
Cost of Capital 12%

Y has just received a special order for which it requires components similar to the
ones made by X. Fully aware of the idle capacity of X, Y has asked X to quote for
manufacture and supply of 3,00,000 numbers of the components with a slight
modification during final processing. X and Y agree that this will involve an extra
variable cost of ` 5 per unit.

Suggest the transfer price which X should quote to Y to achieve its budgeted
residual income. [7]

5. (a) (i) MI Ltd. has earned a net profit of ` 15 lakhs after Tax at 30%. Interest cost
charged by the financial institutions was ` 10 lakhs. The Invested capital is `
95 Lakhs of which 55% is debt. The company maintains a weighted average
cost of capital of 13%.
 Compute the operating Income.
 Compute the Economic Value Added.
 The company has 6 lakhs equity shares outstanding. How much
dividend can the company pay before the value of the entity starts
declining?

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Directorate of Studies, The Institute of Cost Accountants of India
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(ii) The following data are given for the Rajasthan division for 2022:
Return on investment (ROI) 25%
Sales ` 12,00,000
Margin 10%
Minimum required rate of return 18%
 Compute the division’s operating assets. (use the DuPont analysis of
ROI)
 Compute the division’s residual income (RI). [5 + 4 = 9]

(b) MAGNA CARTA LTD a manufacturers of fountain pens received an order for 16
units of a new fountain pen called the DENIMA. The first unit required 40 direct
labour hours.So far, 4 units have been completed and a total of 102.40 direct labour
hours has been recorded for the 4 units. The Production Manager expects on 80%
learning effect for this type of work.

The direct cost attributed to the centre in which the unit is manufactured and its
costs are as follows:
`
Direct Material 30.00 per unit
Direct Labour 6.00 per hour
Variable overhead 0.50 per direct labour hour
Fixed overheads apportioned 5.00 per direct labour hour

You are required to calculate the estimated product cost for the initial order based
on the cost data given. [6]

6. (a) Prepare a Cash Budget for the three months ending 30th June, 2023 from the
information given below:
Month Sales (`) Materials (`) Wages (`) Overhead (`)
February 14,000 9,600 3,000 1,700
March 15,000 9,000 3,000 1,900
April 16,000 9,200 3,200 2,000
May 17,000 10,000 3,600 2,200
June 18,000 10,400 4,000 2,300

Credit terms are:

 Sales / Debtors: 10% sales are on cash, 50% of the credit sales are collected
next month and the balance in the following month.

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 Creditors: Materials 2 months
Wages 1⁄4 month
Overheads 1⁄2month
 Cash and bank balance on 1st April, 2023 is expected to be ` 6,000.
Other relevant information are:
 Plant and machinery will be installed in February 2017 at a cost of
` 96,000. The monthly instalment of ` 2,000 is payable from April
onwards.
 Dividend @ 5% on preference share capital of ` 2, 00,000 will be paid
on 1st June.
 Advance to be received for sale of vehicles ` 9,000 in June.
 Dividends from investments amounting to `1,000 are expected to be
received in June [8]

(b) (i) What is budgetary control? What are the objectives of budgetary control?

(ii) Analyse the importance of revenue centre and investment centre from the
view point of operations management. [4 + 3 = 7]

7. (a) Pradeep LLP of Delhi follows a standard cost system. For a particular month the
following is extracted from their cost records.

Budgeted Actual
Product Quantity Value Quantity Value
Price (`) Price (`)
(Units) (`) (Units) (`)
X 600 3 1800 800 4 3200
Y 800 4 3200 600 3 1800

Analyse Sales Variances [8]

(b) ACE LLP follows a standard costing system and produces a product called the
‘PRO GEAR’. You are recently appointed as the cost accountant of the Company.
The established standards for materials and labour follow:
Material A: 3 Kg @ ` 6 ----- ` 18
Labour: 4 hr @ ` 7.50 per hr ----------- ` 30

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Directorate of Studies, The Institute of Cost Accountants of India
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MODEL QUESTION PAPER TERM – JUNE 2023
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The operating data for the month of January 2023 are as under:
Work in process, January 1: 200 units, all materials, and 20% complete as to
labour.
Work in process, January 31: 600 units, all materials, and 80% complete as to
labour.

During the month of January 2023, 6400 units of the product was completed.
All materials are added at the beginning of processing in the department.
20,900 Kgs of materials were used in production during the month, at a total cost
of ` 1, 23,310.

Direct labour amounted to ` 2, 08,670, which was at a rate of ` 7.70 per hour.

You are required to critically analyse the necessary variances and comment. [7]

8. (a) TIKLIBUKLI School is situated in the outskirts of a town and the school is
preparing a summer camp in the jungles of Sonargaon, to train the students in
wilderness survival. The school estimates that attendance can fall into one of four
categories: 200, 250, 300, and 350 persons. The cost of the camp will be the
smallest when its size meets the demand exactly. Deviations above or below the
ideal demand levels incur additional costs resulting from constructing more
capacity than needed or losing income opportunities when the demand is not met.
Letting a1 to a4 represent the sizes of the camp (200, 250, 300, and 350 persons)
and s1 to s4 the level of attendance, the following table summarizes the cost matrix
(in thousands of Rupees) for the situation:
s 1 s2 s3 s4
a1 5 10 18 25
a2 8 7 12 23
a3 21 18 12 21
a4 30 22 19 15

The authorities request your consultancy to apply the following decision criterion
and determine the appropriate course of action;
(i) The Minimax Criterion
(ii) The Laplace Criterion
(iii) The Savage Criterion
(iv) The Hurwicz Criterion [1 + 2 + 2 + 2 = 7]

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(b) (i) How will you use the concept of Expected Value of Perfect Information
(EVPI) in managerial decision making?

(ii) A company wishes to go ahead with one of two mutually exclusive projects,
but the profit outcome from each project will depend on the strength of sales
demand, as follows.

Strong Demand Moderate Demand Weak Demand

Profit (`) Profit (`) Profit/(Loss) (`)
Project 1 80,000 50,000 (5,000)
Project 2 60,000 25,000 10,000
Probability of
0.2 0.4 0.4
demand

The company could purchase market research information at a cost of

` 4,500. This would predict demand conditions with perfect accuracy.

What value the company obtain from this perfect market research
information? [8]

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Time Allowed: 3 Hours Full Marks: 100
The figures in the margin on the right side indicate full marks.
Where considered necessary, suitable assumptions may be made and
clearly indicated in the answer.
Answer Question No. 1 and any five from Question No. 2, 3, 4, 5, 6, 7 and 8.

SECTION - A
(Compulsory)

1. (a)
(i) (ii) (iii) (iv) (v) (vi) (vii) (viii) (ix) (x) (xi) (xii)
a d b c c b b c d d a d
(b)
(i) (ii) (iii) (iv) (v) (vi) (vii)
False True False False True True True
(c)
(i) (ii) (iii) (iv) (v) (vi)
Return Master Flexible Budget Critical Probabilities Marginal
on Budget success costing
Equity factor(CSFs)

SECTION - B
(answer any five questions)

2. (a) Management accounting is an offshoot of financial accounting and has specific linkages
with cost accounting. Financial literature suggests that the beginning of management
accounting is linked with the requirement for accounting information to optimize
economic resources during the Industrial Revolution. The International Accounting
Federation (IFAC, 1998) has described the evolution of managerial accounting through
four phases.
 First stage (prior to 1950s).
 Second stage (1950s – 1965)
 Third stage (1965 – 1985).
 Fourth stage (1985 – till date)

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Explanation of four stages and faces are given below:
(1) The first stage (prior to 1950) Cost determination and financial control, which is
also referred as the ‘classical era’ is the period where the focus was on cost determination
and financial control. At this stage, the development of managerial accounting was
oriented to determining costs and financial control of business processes. IFAC describes
this period of Management accounting as ‘the technical activity needed to achieve
organizational objectives’. Managerial accounting before the 1950s was mainly focused
on determining the cost of the product.
The second stage (1950-1965) is referred as the age of information for management
planning and control.
During this period the main focus of managerial accounting was to provide information
on planning and control issues. This phase is characterized by the use of traditional
accounting management techniques that support decision making and responsibility
accounting. Management accounting techniques such as: Standard Costs and Profitability
Analysis were introduced during this period. The second phase is described as
‘management activity, but in the role of staff’. During this period, the management was
focused on the company’s production process and internal analysis and paid less attention
to external business environment.
The third stage (1965 - 1985) is referred as reduction of waste of resource in business
operation.
Management accounting focussed on reduction of waste of resources in production
processes by eliminating ‘no-value activities’. During this period, Japan’s economic
progress and rapid technological developments contributed to the growth of global
competition. The priority for the companies was to adapt to the new business
environment. Companies began to seek both cost reduction and quality improvement at
the same time. The use of robotics and computer-controlled processes enabled companies
to improve their quality and in many cases impact on cost reduction.
The Fourth Stage (1985-2000) is refereed as Creation of value through effective
resource:
During this period, technological innovations were at the forefront, competition was
intensified, companies, as they were faced with major business uncertainties, and thus
made them focus on value creation through effective use of resources, which could be
achieved ‘with the use of technology that drives companies to create costumer value,
shareholder value, and organizational innovations’. The managerial accounting
techniques that dominated this period are: Activity-based Cost (ABC); Production just in
time (JIT); Target cost; balanced scorecard; Value chain analysis and strategic
management accounting.

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The various tools and techniques that developed during each particular phase /stage
are given below:
Cost Information for Reduction of waste Creation of Value
Focus determination planning and of resource in through effective
and financial control Business operation resource use
control
Stages → 1760 -1950 1950 -1965 1965 -1985 1985 - till date
Methods ↓
Cost determination Standard cost
accounting
- developments
Cost Standard costing Marginal costing
determination Direct Costing Target costing
and accounting Records of cost Activity based
accounting costing
allocation of Activity based
indirect cost management
Uniform costing
Absorption costing
Application of
Budgeting discounted cash
Planning
flow
Transfer costing
Return on Responsibility Application of
Controlling investments (ROI) accounting Kaizen
ton -mile ratio Gentani system Just in time system
Kaizen costing
Life Cycle costing Value chain
analysis
Five Forces
Model
PEST, SWOT
analysis
Strategic Customer
analysis profitability
analysis
Competitor
analysis
Balanced
scorecard

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(b) i. 1. Activity rate = [(3 x ₹ 30,000) +₹ 9,000] ÷15,000
= ₹ 6.60 per invoice
2. Fixed activity rate = ₹ 90,000÷15,000
= ₹ 6.00 per invoice
3. Variable activity rate = ₹ 9,000÷15,000
= ₹ 0.60 per invoice
Activity availability = Activity usage + Unused activity
15,000 invoices = 12,500 invoices + 2,500 invoices

 Cost of resources supplied = Cost of activity used + Cost of unused activity

= ₹90,000 + (₹0.60 x 12,500)
= (₹6.60 x 12,500) + (₹6.00 x 2,500)
= ₹82,500 + ₹15,000
= ₹97,500
ii.
 Activity-based costing (ABC) is a costing method that identifies activities in
an organization and assigns the cost of each activity to all products and
services according to the actual consumption by each. Therefore, this model
assigns more indirect costs (overhead) into direct costs compared to
conventional costing.
a. ABC system is a very valuable tool of control. It offers a number of
advantages to the management and the following are the main
advantages:
(i) It brings accuracy and reliability of the costing data in
determination of the cost of the products.
(ii) It facilitates cause and effect relationship to exercise effective cost
control.
(iii) It provides necessary cost information to the management to take
decisions on any matter, relating to the business.
(iv) It is much helpful in fixing the cost and selling price of a product.
(v) It facilitates overhead costs allocate directly to the specific
product.
(vi) It enables to manage the activities rather than costs.
(vii) It helps to remove all types of wastages and inefficiencies.
(viii) It provides valuable information to evaluate on the relative
efficiencies of various plants and machinery.
(ix) Cost Driver Rates will help in significant impact on the
development of new products or modification of existing
products.

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 This will arise when the products manufactured by the manufacturing
companies are not standardized and labour hours are predominating. Further
a clear distinction between value added and non-value added activities are
difficult to make

3. (a) Let contribution to sales ratio of product Cee is C

(i)  Contribution/sales (%) = (0.33 × 40%) + (0.33 × 50%) + (0.33 × C) = 48%
0.33C = 0.48 – 0.132 – 0.65
0.183
C = = 54 %
0.33
Cee = 𝟓𝟒% (Balancing figure)
The total contribution/sales ratio for the revised sales mix is:
= (0.40 × 40% ) + (0.25 × 50% ) + (0.35 3 54% )
= 𝟒𝟕. 𝟒%
(30% × 2)+ (20% × 5)+ (25% × 3)
(ii) Weighted average contribution to Sales ratio= = 23.5%
10
𝐹𝑖𝑥𝑒𝑑 𝑐𝑜𝑠𝑡𝑠 (₹ 1,00,000)
Break even sales = 𝐶𝑜𝑛𝑡𝑟𝑖𝑏𝑢𝑡𝑖𝑜𝑛 𝑡𝑜 𝑠𝑎𝑙𝑒𝑠 𝑟𝑎𝑡𝑖𝑜 (23.5%) = ₹ 𝟒, 𝟐𝟓, 𝟓𝟑𝟐

(b) Units sold = Sales÷ Selling Price per unit = ₹ 12,00,000 ÷ ₹ 40 = 30,000 units
Sales 40 12,00,000
Less: Variable Cost 30 9,00,000
Contribution 10 3,00,000
Less: Profit 1,00,000
Fixed Cost 2,00,000

Hence, total fixed cost in the new case = ₹ 200,000 + ₹ 300,000 = ₹ 500,000
Contribution in the New Case =New Fixed Cost+ Profits =5,00,000+1,00,000 =₹6,00,000
Since as per agreement the sale value is restricted to the old value that is ₹ 12,00,000.
Hence P/V Ratio will be:
₹ 6,00,000 ÷ ₹ 12,00,000 x 100 = 50%
The variable cost in the new case = ₹ 30 - ₹ 5 = ₹ 25
Variable Cost Ratio = 100 - P/V Ratio = (100 - 50) % = 50%
Computation of New Selling Price:
If VC is 50, then SP = ₹ 100
If VC is 1, then SP = ₹100÷50%
If VC is 25, then SP = 100÷50 % x ₹ 25 = ₹ 50 per unit

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4. (a) Statement showing contribution per unit and per labour hour
Particulars P Q R S
Selling Price per unit (₹) 350 345 280 230
Variable Cost per unit (₹) 330 310 180 185
Contribution per unit (₹) 20 35 100 45
Labour Hours per unit 3 4 2 3
Contribution per labour hour (₹) 6.67 8.75 50 15
Ranking IV III I II

(i) Statement Showing Production Plan

Total Hours Products Hours/unit Allocation of Hours
24,000 P 3 -
Q 4 13,000*
R 2 5,600*
S 3 5,400*
24,000
* R = (2800x2) =5600, S = (1800x3) = 5400,
Therefore, [24000 hours – (5600+5400)] = 13000 hours is allocated to product Q.
As maximum allocation is (3500 units x 4) = 14000 hours.

Statement showing Transfer Price per unit of Product S

Total Labour Hours require for S (2,000 units x 3 hours per unit) 6,000
Hours derived from Product Q (1,500 units x 4 hours per unit) 6,000
Variable manufacturing cost for Product ‘S’ (2,000x₹185) = ₹3,70,000
Contribution foregone/Opportunity Cost of Product Q (1,500 x ₹35) ₹52,500
₹4,22,500
Hence Transfer Price per unit (₹4,22,500  2,000 units) = ₹211.25

(ii) Statement Showing Production Plan

Total Hours Products Hours/unit Allocation of Hours
32,000 P 3 7,000
Q 4 14,000
R 2 5,600
S 3 5,400
32,000

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Statement showing Transfer Price per unit of Product S
Total Labour Hours require for S (2,000 units x 3 hours per unit) 6,000
Hours derived from Product P (2,000 units x 3 hours per unit) 6,000
Variable manufacturing cost for Product ‘S’ (2,000x₹185) = ₹3,70,000
Contribution foregone/Opportunity Cost of Product PQ (2,000 x ₹20) ₹40,000
₹4,10,000
Hence Transfer Price per unit ( ₹ 4,10,000  2,000 units) = ₹ 205.00

(b) Contribution required at Budgeted Residual Income

Fixed cost ₹80,00,000
Profit on ₹7,50,00,000x 12% =₹ 90,00,000
Residual Income = ₹ 1,00,00,000
Total Contribution required = ₹ (80,00,000+90,00,000+1,00,00,000)
= ₹ 2,70,00,000
Contribution derived from existing units = 12,00,000 x ₹20=₹2,40,00,000
Contribution required on 3,00,000 units = ₹2,70,00,000 - ₹ 2,40,00,000 = ₹ 30,00,000
Contribution per unit = ₹30,00,000 / 3,00,000 units = ₹ 10
Increase in Variable Cost = ₹5
Transfer price = Variable Cost + Desired Residual Income + Increase in Variable Cost
= ₹160+₹10+₹5
=₹175

5. (a) (i) Taxable Income = ₹15 lac ÷ (1- 0.30)

= ₹ 21,42,857 or ₹ 21.43 lacs
 Operating Income = Taxable Income + Interest
= ₹21,42,857 +₹10,00,000
= ₹31,42,857 or ₹ 31.43 lacs
 EVA = EBIT (1-Tax Rate) – WACC × Invested Capital
= ₹ 31,42,857 (1 – 0.30) – 13% × ₹ 95,00,000
= ₹ 22,00,000 – ₹12,35,000
= ₹ 9,65,000
 EVA Dividend = ₹95,00,000 ÷ 6,00,000 = ₹ 1.6083
(ii)
𝑃𝑟𝑜𝑓𝑖𝑡 𝑆𝑎𝑙𝑒𝑠
 By definition (DuPont), ROI= × = 𝑀𝑎𝑟𝑔𝑖𝑛 ×
𝑆𝑎𝑙𝑒𝑠 𝑂𝑝𝑒𝑟𝑎𝑡𝑖𝑛𝑔 𝐴𝑠𝑠𝑒𝑡𝑠
𝐴𝑠𝑠𝑒𝑡 𝑇𝑢𝑟𝑛𝑜𝑣𝑒𝑟
 25% = 10% × 𝐴𝑠𝑠𝑒𝑡 𝑇𝑢𝑟𝑛𝑜𝑣𝑒𝑟

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Therefore, the turnover must be 2.5 times.
𝑠𝑎𝑙𝑒𝑠
Since, the 𝐴𝑠𝑠𝑒𝑡 𝑡𝑢𝑟𝑛𝑜𝑣𝑒𝑟 = 𝑜𝑝𝑒𝑟𝑎𝑡𝑖𝑛𝑔 𝑎𝑠𝑠𝑒𝑡𝑠
₹ 1200000
2.5 𝑡𝑖𝑚𝑒𝑠 = 𝑂𝑝𝑒𝑟𝑎𝑡𝑖𝑛𝑔 𝑎𝑠𝑠𝑒𝑡𝑠
Therefore, 𝑂𝑝𝑒𝑟𝑎𝑡𝑖𝑛𝑔 𝑎𝑠𝑠𝑒𝑡𝑠 = ₹ 4,80,000
 Residual Income (RI) = Operating income - Minimum required operating
income
Given, 𝑀𝑎𝑟𝑔𝑖𝑛 = 10%
𝑂𝑝𝑒𝑟𝑎𝑡𝑖𝑛𝑔 𝐼𝑛𝑐𝑜𝑚𝑒
We know 𝑀𝑎𝑟𝑔𝑖𝑛 (10%) = 𝑆𝑎𝑙𝑒𝑠
𝑂𝑝𝑒𝑟𝑎𝑡𝑖𝑛𝑔 𝑖𝑛𝑐𝑜𝑚𝑒
=
₹ 12,00,000
= ₹ 12,00,000 x 10%
Therefore, the 𝑜𝑝𝑒𝑟𝑎𝑡𝑖𝑛𝑔 𝑖𝑛𝑐𝑜𝑚𝑒 = ₹ 1,20,000
Residual Income (RI) = ₹ 120,000 − (18% × ₹ 480,000)
= ₹ 120,000 − ₹ 86,400
= ₹ 𝟑𝟑, 𝟔𝟎𝟎

(b) MAGNA CARTA LTD received an order for 16 units of a new fountain pen called the
DENIMA. The first unit required 40 direct labour hours. The production schedule is
subject to 80% learning effect which implies that for every doubling of production the
cumulative average labour hour would be 80% of the previous and the total would be the
multiplied effect of the number of units produced and the cumulative average labour hour.
The table shown below shows the effect of 80% learning effect.

Production (units) Cumulative Average labour hour Total labour hour

1 40 40
2 32 (0.80×40) 64
4 25.6 (0.80×32) 102.40
8 20.48 (0.80×25.6) 163.843
16 16.384 (0.80×20.48) 262.144

Computation of total cost for the initial order of 16 units:

₹
Material (30 ×16) 480.00
Direct labour (262.144 [as calculated in above table] × 6) 1572.86
Variable overheads (0.5 × 262.144) 131.07
Fixed overhead apportioned (5 × 262.144) 1310.72
Total cost 3494.65

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6. (a) Cash Budget for the 3 Months Ending 30th June 2023 (Amount in ₹ )
Particulars April May June
Opening Balance (A) 6,000 3,950 3,000
Add: Receipts : (B)
Cash Sales 1,600 1,700 1,800
Collection from debtors [see note(i)] 13,050 13,950 14,850
Advance for sale of vehicles - - 9,000
Dividends from Investments - - 1,000
Total (A+B) 20,650 19,600 29,650
Less: Payments :
Materials 9,600 9,000 9,200
Wages [see note (ii)] 3,150 3,500 3,900
Overheads 1,950 2,100 2,250
Instalment of Plant & Machinery 2,000 2,000 2,000
Preference dividend - - 10,000
Total (C) 16,700 16,600 27,350
Closing Balance (A+B-C) 3,950 3,000 2,300

Working Notes:
(i) Computation of Collection from Debtors (Amount in ₹)

Month Total Sales Credit Sales Feb Mar Apr May June
Feb 14,000 12,600 --- 6,300 6,300 --- ---
Mar 15,000 13,500 --- --- 6,750 6,750 ---
Apr 16,000 14,400 --- --- --- 7,200 7,200
May 17,000 15,300 --- --- --- --- 7,650
13,050 13,950 14,850
(ii) Wages payment in each month is to be taken as three-fourths of the current month
plus one-fourth of the pre-vious month.

(b) (i) Budgetary Control is defined as “the establishment of budgets, relating the
responsibilities of executives to the requirement of a policy, and the continuous
comparison of actual with budgeted results either to secure by individual action the
objective of that policy or to provide a base for its revision.” Budgetary control is
intimately connected with budgets. The Chartered Institute of Management

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Accountants, London defines ‘Budgetary control; as “the establishment of budgets,
relating the responsibilities of executive to the requirements of a policy and the
continuous comparison of actual with budgeted results either to secure by individual
action the objectives of that policy or to provide a firm basis for its revision”. The
process of budgetary control is set up with the objective to closely monitor whether
or not the actual sales and expenses are in line with the financial plan.

Objectives of Budgetary Control:

Budgeting is a forward planning. It serves basically as a tool for management
control; it is rather a pivot of any effective scheme of control. The objectives of
budgeting may be summarized as follows:
 Planning: Planning has been defined as the design of a desired future position
for an entity and it rests on the belief that the future position can be attained
by uninterrupted management action.
 Co-ordination: Budgeting plays a significant role in establishing and
maintaining coordination
 Measurement of Success: Budgets present a useful means of informing
manager how well they are performing in meeting targets they have
previously helped to set.
 Motivation: Budget is always considered a useful tool for encouraging
manager to complete things in line with the business objectives.
 Communication: A budget serves as a means of communicating information
within a firm.
 Control: Control is essential to make sure that plans and objectives laid down
in the budget are being achieved.

(ii) 1. Revenue Centre

A revenue center is strictly defined as an organizational unit that is
responsible for the generation of revenues and has no control over setting
selling prices or budgeting costs. In a revenue center, performance evaluations
are limited because the manager has control over only one item: revenues.
The importance of revenue centre is to analyse the comparison between actual
performance (as well as in any other area that has revenue control) with
budgeted performance to determine variances from expectations. Budgeted
and actual revenues may differ because of either volume of units sold or price
of units sold. To compare budgeted and actual revenues, the price and volume
components of revenue must be distinguished from one another.

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2. Investment Center
An investment center is an organizational unit whose manager is responsible
for managing revenues and current expenses.
The investment center is particularly appropriate for those cases where
investment decisions must be made very rapidly in order to take advantage of
changes in local business conditions. This is a particularly important issue for
those companies in rapidly expanding markets, or where consumer needs
change rapidly, where waiting for investment approval from a central
authority may result in lost sales.
In addition, the center’s manager has the authority to acquire, use, and dispose
of plant assets to earn the highest feasible rate of return on the center’s asset
base. Many investment centers are independent, free standing divisions or
corporate subsidiaries.

7. (a) (i) Sales Value Variance= Actual Value of Sales – Standard Value of Sales
Total Actual Value of Sales = ₹ 3,200 + ₹ 1,800
= ₹ 5,000
Total Standard Value of Sales = ₹1,800 + ₹3,200 = ₹ 5,000 Sales Value Variance
= (₹5,000 – ₹ 5,000) = Nil
(ii) Sales Price Variance= Actual Quantity Sold× (Actual Price – Standard Price)
Product A → 800 × (₹4 – ₹ 3) = ₹ 800 Favourable
Product B→ 600 × (₹3–₹4) = ₹ 600 Unfavourable
Total Sales Price Variance = ₹(800-600) = ₹ 200 Favourable
(iii) Sales Volume Variance= Standard Price× (Actual Units – Standard Units) Product A
→ ₹ 3× (800 – 600) = ₹ 600 Favourable
Product B→ ₹4 × (600–800) = ₹ 800 Unfavourable Total Sales Volume Variance
= ₹(600 – 800) = ₹200 Unfavourable.

(b) It is important to note that in addition to the usual procedures used to solve standard cost
problems, equivalent production (FIFO) must be calculated. The equivalent production
determined by the FIFO method will be used to calculate the standard materials and
standard labour allowed. Two variances (price and quantity) must be determined for
materials, and two variances (rate and efficiency) must be determined for labour.

With the results of equivalent production as calculated above the variances are to be
calculated as follows;

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Calculation of Equivalent Production for Materials and Labour by the FIFO
Method:
Materials:
Work in process, May 1: 200 units (all materials added last period) 0
Units started and finished during May (6,400 – 200) 6,200
Work in process, May 31: 600 units (all materials added) 600
Total equivalent production—materials 6,800

Labour:
Work in process, May 1: 200 units (80% of labour required) 160
Units started and finished during May 6,200
Work in process, May 31: 600 units (80% labour added) 480
Total equivalent production—labour 6,840

Determining the Materials and Labour Variances:

Materials Variances
Materials price variance = (Actual Price – Standard Price) × Actual quantity
= (₹ 5.90 - ₹ 6.00)
= ( ₹ 5.90 - ₹ 6.00) × 20,900
= ₹ 2,090 (F)

Materials Quantity variance = (Actual Quantity –Standard Quantity)×Standard Price

= [20,900 – (6,800 × 3)] × ₹6.00
= [20,900 – 20,400] x ₹ 6.00
= ₹3,000 (A)
Note: ₹ 1,23,310 ÷ 20,900 = ₹5.90 per kg.

Labour Variances
Labour Rate Variance = (Actual Rate - Standard Rate) × Actual hours
= (₹7.70 – ₹7.50) × 27,100
= ₹5,420 (A)
Labour Efficiency Variance = (Actual Hours – Standard Hours) × Standard Rate
= [27,100 – (6,840 × 4)] × ₹7.50
= ₹1,950 (F)
Note: ₹2,08,670 ÷ ₹7.70 = 27,100 hours

The Manager (Cost) should write a ‘Report’ to the MD showing the above variance
calculations.

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MANAGEMENT ACCOUNTING

8. (a) (i) The Minimax Criterion

s1 s2 s3 s4 Row Max
a1 5 10 18 25 25
a2 8 7 12 23 23
a3 21 18 12 21 21 Minimax
a4 30 22 19 15 30

(ii) The Laplace Criterion

Assume equal probabilities (1/4) as there are four states of nature.

s1 s2 s3 s4 EV= ∑ 𝑃(𝑋𝑖 ) × 𝑋𝑖 Figures in ₹ thousand
1
a1 5 10 18 25 (5 + 10 + 18 + 25) = 14.5 ₹ 14,500
4
1
a2 8 7 12 23 (8 + 7 + 12 + 23) = 12.5 ₹ 12,500
4
1
a3 21 18 12 21 (21 + 18 + 12 + 21) = 18.0 ₹ 18,000
4
1
a4 30 22 19 15 (30 + 22 + 19 + 15) = 21.5 ₹ 21,500
4

Since it is a cost minimisation problem, decision a2 would be selected which

implicates the lowest cost of ₹ 12500.

(iii) The Savage Criterion

This criterion posits the formulation of a regret matrix. The regret matrix is
determined by subtracting 5, 7, 12, and 15 from columns 1 to 4, respectively. And
so the following regret matrix is got.

s1 s2 s3 s4 Row Max
a1 0 3 6 10 10
a2 3 0 0 8 8 Minimax
a3 16 11 0 6 16
a4 25 15 7 0 25

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(iv) The Hurwicz Criterion

The following table summarizes the computation
Alternative Row Min Row Max α (Row Min) + (1-α) (Row Max)
a1 5 25 25 -20α1
a2 7 23 23 -16α
a3 12 21 21 - 9α
a4 15 30 30 -15α
The decision maker will have to decide upon the appropriate α. And thus he can
decide upon the optimum alternative.

(b) i. Expected Value of Perfect Information (EVPI) is the maximum amount that is worth
paying for additional information in an uncertain situation, calculated by comparing
the expected value of a decision if the information is acquired against the expected
value in the absence of the information. It is calculated by comparing the expected
value of a decision if the information is acquired against the expected value in the
absence of the information.

ii. Expected value in the absence of the information = ₹ 1,500

𝐸𝑉 𝑜𝑓 𝑃𝑟𝑜𝑗𝑒𝑐𝑡 1 = (0.2 × ₹ 80,000) + (0.4 × ₹ 50,000) – (0.4 × ₹ 5,000)
= ₹ 34,000
𝐸𝑉 𝑜𝑓 𝑃𝑟𝑜𝑗𝑒𝑐𝑡 2 = (0.2 × ₹60,000) + (0.4 × ₹25,000) + (0.4 × ₹10,000) =
₹ 26,000
Project 1 would be chosen on the basis if EV without perfect information. With
perfect information, this decision would be changed to Project 2 if market research
indicates weak demand.
𝐸𝑉 𝑤𝑖𝑡ℎ 𝑝𝑒𝑟𝑓𝑒𝑐𝑡 𝑖𝑛𝑓𝑜𝑟𝑚𝑎𝑡𝑖𝑜𝑛: (0.2 × ₹ 80,000) + (0.4 × ₹ 50,000)
+ (0.4 × ₹ 10,000)
= ₹ 𝟒𝟎, 𝟎𝟎𝟎
𝑉𝑎𝑙𝑢𝑒 𝑜𝑓 𝑝𝑒𝑟𝑓𝑒𝑐𝑡 𝑖𝑛𝑓𝑜𝑟𝑚𝑎𝑡𝑖𝑜𝑛 = ₹(40,000 – 34,000) – ₹4,500 𝑐𝑜𝑠𝑡 =
₹ 𝟏, 𝟓𝟎𝟎

1α(5) + (1-α)(25) = α5+ 25 -25α = 25 -20α. And so forth (for the remaining values in the column).

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Directorate of Studies, The Institute of Cost Accountants of India
 INTERMEDIATE EXAMINATION SET - 1
MODEL ANSWERS TERM – DECEMBER 2023
PAPER – 12 SYLLABUS 2022
MANAGEMENT ACCOUNTING
Time Allowed: 3 Hours Full Marks: 100
The figures in the margin on the right side indicate full marks.

SECTION – A

1. Multiple Choice Questions: [15 x 2 = 30]

(i) ____________ is the study of managerial aspects of financial accounting

a. Cost accounting
b. Financial accounting
c. Management accounting
d. Business accounting

(ii) X Company uses activity-based costing for Product B and Product D. The total estimated
overhead cost for the parts administration activity pool was ₹5,50,000 and the expected
activity was 2000 part types. If Product D requires 1200 part types, the amount of overhead
allocated to product D for parts administration would be:
a. ₹2,75,000
b. ₹3,00,000
c. ₹3,30,000
d. ₹3,45,000

(iii) Cost attribution to cost units on the basis of benefit received from indirect activities, such as
ordering, setting-up, assuring quality is known as:
a. Allocation
b. Activity-based costing
c. Always better control
d. Absorption

(iv) What is Margin of Safety if Sales is 20,000 units and B.E.P is 15,000 units?
a. 15000 units
b. 5000 units
c. 10000 units
d. 20000 units

(v) Fixed cost per unit decrease when

a. Production volume increases
b. Production volume decreases
c. Variable costs per unit decreases
d. Prime costs per unit decreases

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MANAGEMENT ACCOUNTING
(vi) The break-even point of a manufacturing company is ₹1,60,000. Fixed cost is ₹48,000. Variable
cost is ₹12 per unit. The PV ratio will be:
a. 20%
b. 40%
c. 30%
d. 25%

(vii) A radio manufacturer finds that it costs ₹6.25 per unit to make component M-140 and the
same is available in the market at ₹5.75 each. Continuous supply is also fully assured. The
break-down cost per unit as follows: Materials ₹2.75, Labour ₹1.75 other variable expenses
₹0.50, Depreciation and other fixed cost ₹1.25. What would be your decision, if the supplier
offered the component at ₹4.85 per unit?
a. Make
b. Buy
c. Sell
d. None of the above

(viii) Which one of the following is not considered as a method of Transfer Pricing?
a. A Negotiated Transfer Pricing
b. B Market Price Based Transfer Pricing
c. C Fixed Cost Based Transfer Pricing
d. D Opportunity Cost Based Transfer Pricing

(ix) Standard quantity of material for one unit of output is 10 kgs @ ₹8 per kg. Actual output
during a given period is 800 units. The standards quantity of raw material
a. 8,000 kgs
b. 6,400 Kgs
c. 64,000 Kgs
d. None of these

(x) Standard price of material per kg is ₹20, standard usage per unit of production is 5 kg. Actual
usage of production 100 units is 520 kgs, all of which was purchase at the rate of ₹ 22 per kg.
Material cost variance is
a. ₹ 2,440 (A)
b. ₹ 1,440 (A)
c. ₹ 1,440 (F)
d. ₹ 2,300 (F)

(xi) Given Production at 60% activity, 600 units, Material ₹50 per unit, Labour ₹ 20 per unit,
Direct expenses ₹5 per unit, Factory overheads ₹20,000 (60% variable) and Administration
expenses ₹15,000 (60% fixed). What will be the total cost per unit for production at 80%
capacity?
a. ₹ 1,01,000
b. ₹ 126.25
c. ₹ 122

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MANAGEMENT ACCOUNTING
d. ₹ 1,22,000

(xii) __________________ is prepared for single level of activity and single set of business
conditions.
a. Fixed budget
b. Flexible budget
c. Both a and b
d. None of the above

(xiii) If the time taken to produce the first unit of a product is 4000 hrs, what will be the total time
taken to produce the 5th to 8th unit of the product, when a 90% learning curve applies?
a. 10,500 hours
b. 12,968 hours
c. 9,560 hours
d. 10,368 hours

(xiv) In responsibility cost accounting the costs in focus are _____________________.

a. Controllable costs
b. Uncontrollable costs
c. Both A and B
d. None of the above

(xv) ABC stocks a weekly lifestyle magazine. The owner buys the magazines for ₹0.30 each and
sells them at the retail price of ₹0.50 each.

At the end of the week unsold magazines are obsolete and have no value. The estimated
probability distribution for weekly demand is shown below.

Weekly demand in units Probability

20 0.20
30 0.55
40 0.25
1.00

What is the expected value of demand?

a. 30
b. 20
c. 25
d. None of the above

Answer:

(i) (ii) (iii) (iv) (v) (vi) (vii) (viii) (ix) (x) (xi) (xii) (xiii) (xix) (xv)
c c b b a c b c a b b a d a a

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Directorate of Studies, The Institute of Cost Accountants of India
 INTERMEDIATE EXAMINATION SET - 1
MODEL ANSWERS TERM – DECEMBER 2023
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MANAGEMENT ACCOUNTING

SECTION-B
(Answer any 5 questions out of 7 questions given. Each question carries 14 marks.)

2. (a) Describe the differences between Management Accounting and Financial Accounting. [7]

(b) Your Cost Controller is not happy about the existing system of charging overheads to its
Products, A and B. You have been newly appointed as a Management Accountant of the
company and you are asked to implement the ABC Costing for allocation of overheads to the
Products. You have identified the following activities, budgeted costs, and activity
consumption cost drivers as follows:

Activity Budgeted Cost Activity Consumption Cost Driver

₹
Engineering 1,25,000 Engineering hours
Setups 3,00,000 Number of setups
Machine operation 15,00,000 Machine hours
Packing 75,000 Number of packing orders
Total 20,00,000

You have also gathered the following operating data pertaining to each of its products:
Product A Product B Total
Engineering hour 5,000 7,500 12,500
Number of setups 200 100 300
Machine hours 50,000 1,00,000 1,50,000
Number of packing orders 5,000 10,000 15,000

You are now required to provide with necessary calculations and relevant information, in the
form of a report to the Cost Controller about the allocation of overheads costs to the products.
[7]

Answer:

(a) Differences between Management Accounting and Financial Accounting:

Basis for
Comparison Financial Accounting Management Accounting

Financial Accounting classifies, analyses, Management accounting helps management

records, and summarizes the financial make effective decisions about the
Purpose transactions of a particular period of the business.
company.

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Directorate of Studies, The Institute of Cost Accountants of India
 INTERMEDIATE EXAMINATION SET - 1
MODEL ANSWERS TERM – DECEMBER 2023
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MANAGEMENT ACCOUNTING

Financial accounting is prepared to reflect Management accounting helps

Application true and fair picture of financial affairs. managementto take meaningful steps and
strategize.
The scope is pervasive, but not as much The scope is much broader.
Scope as the management accounting.

Informationtype Quantitative. Quantitative and qualitative.

It is not dependent on management Management accounting is basically

Inter dependence
accounting. decision making accounting and depends on
information created by Financial
Accounting as well as Cost Accounting.

It is legally mandatory to prepare financial Management accounting has no

accounts of all companies. (for example in statutoryrequirement.
Statutory
the Indian Context Companies Act 2013,
requirement
relevant rules of Accounting standards
furnishes the statutory requirements)

Financial accounting has specific formats There’s no set format for presenting
Format for presenting and recording information. information in management accounting.

Mainly for potential investors as well as Only for management.

Users all stakeholders.

The information presented is predictive and

Verifiable The information presented is verifiable. not immediately verifiable.

(b) Basic Calculation and Working:

Activity
Activity Consumption Cost Budgeted Budgeted Activity
Consumption Rate
Driver Cost (₹) Consumption
(₹)
Engineering hours 1,25,000 12,500 10 per hour
Number of setups 3,00,000 300 1,000 per setup
Machine hours 15,00,000 1,50,000 10 per hour
Number of packing Orders 75,000 15,000 5 per order

Factory overhead costs are assigned to both products by these calculations:

Product A (5,000 units)
Activity
Activity Overheads
Consumption Cost
Activity Consumption Consumption for per unit
Rate ₹
Total Overheads ₹
(₹)
Engineering hours 10 5,000 50,000 10
Number of Setups 1,000 200 2,00,000 40
Machine hours 10 50,000 5,00,000 100
Number of packing orders 5 5,000 25,000 5

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Directorate of Studies, The Institute of Cost Accountants of India
 INTERMEDIATE EXAMINATION SET - 1
MODEL ANSWERS TERM – DECEMBER 2023
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MANAGEMENT ACCOUNTING
Overhead cost per unit 155

Product B (20,000 units)

Activity Total Overheads
Activity Consumption Cost Activity
Consumption Rate Overheads per unit
Driver Consumption
₹ ₹ ₹
Engineering hours 10 7,500 75,000 3.75
Number of Setups 1,000 100 1,00,000 5.00
Machine hours 10 1,00,000 10,00,000 50.00
Number of packing orders 5 10,000 50,000 2.50
Overhead cost per unit 61.25

The report should cover the above calculations and necessary explanations, about the selection of
Cost Drivers and calculation of Cost Driver rates, for the allocations of overheads to the Products
A and B.

3. A review, made by the top management of Sweet and Struggle Ltd. which makes only one product,
of the result of two first quarters of the year revealed the following:
Sales in units 10,000
Loss ₹ 10,000
Fixed Cost (for the year ₹1,20,000) 30,000 Quarter
Variable cost per unit ₹8

The Finance Manager who feels perturbed suggests that the company should at least break-even in
the second quarter with a drive for increased sales. Towards this the company should introduce a
better packing which will increase the cost by ₹ 0.50 per unit.

The Sales Manager has an alternate proposal. For the second quarter additional sales promotion
expenses can be increased to the extent of ₹ 5,000 and a profit; of ₹ 5,000 can be aimed at for the
period with increased sales.

The Production Manager feels otherwise. To improve the demand the selling price per unit has to be
reduced by 3%. As a result the sales volume can be increased to attain a profit level of ₹ 4,000 for
the quarter.

The Managing Director asks for as a cost Accountant to evaluate these three proposals and calculate
the additional units required to reach their respective targets help him to make a decision.
[14]
Answer:

Results of the first quarter: Sales 10,000 units

Particulars (₹)
Total Variable Cost (10,000x ₹8) 80,000
(+) Fixed Cost 30,000
Total Cost 1,10,000
(+) Loss (10,000)

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Directorate of Studies, The Institute of Cost Accountants of India
 INTERMEDIATE EXAMINATION SET - 1
MODEL ANSWERS TERM – DECEMBER 2023
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MANAGEMENT ACCOUNTING
Sales 1,00,000

Comparative Statement of 3 proposals

Computation of total no. of units and additional units required to retain the target of respective Managers
Finance Sales Production
Manager Manager Manager
Selling Price ₹10 ₹10 ₹10
Variable Cost ₹8.50 ₹8 ₹8
Contribution ₹1.50 ₹02 ₹1.70
Fixed Cost ₹30,000 ₹35,000 ₹30,000
Target Break Even Profit of ₹5000 Profit of ₹4000
30,000 30,000 + 5000 30,000 + 4000
No. of Units required
1.5 2 2
Sales (Units) in First Quarter 20,000 20,000 20,000
Additional Sales volume
required in Second Quarter
10,000 10,000 10,000
as Compared to first
Quarter

4. (a) S Ltd. furnishes you the following information relating to the half year ended 30th June, 2022.

Fixed expenses ₹ 45,000

Sales value ₹ 1,50,000
Profit ₹ 30,000
During the second half the year the company has projected a loss of ₹10,000.

Calculate:
(i) The B.E.P and M/S for six months ending 30th June, 2022.
(ii) Expected sales volume for the second half of the year assuming that the P/V Ratio and
Fixed expenses remain constant in the second half year also.
The B.E.P and M/S for the whole year for 2022. [7]

(b) XYZ Ltd which has a system of assessment of Divisional Performance on the basis of residual
income has two Divisions, Alfa and Beta. Alfa has annual capacity to manufacture 15,00,000
numbers of a special component that it sells to outside customers, but has idle capacity. The
budgeted residual income of Beta is ₹1,20,00,000 while that of Alfa is ₹1,00,00,000. Other
relevant details extracted from the budget of Alfa for the current years were as follows:

Particulars
Sale (outside customers) 12,00,000 units @ ₹180 per unit
Variable cost per unit ₹ 160
Divisional fixed cost ₹ 80,00,000
Capital employed ₹ 7,50,00,000
Cost of Capital 12%

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Directorate of Studies, The Institute of Cost Accountants of India
 INTERMEDIATE EXAMINATION SET - 1
MODEL ANSWERS TERM – DECEMBER 2023
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MANAGEMENT ACCOUNTING
Beta has just received a special order for which it requires components similar to the ones
made by Alfa. Fully aware of the idle capacity of Alfa, beta has asked Alfa to quote for
manufacture and supply of 3,00,000 numbers of the components with a slight modification
during final processing. Alfa and Beta agree that this will involve an extra variable cost of ₹5
per unit.
Advice the transfer price which Alfa should quote to Beta to achieve its budgeted residual
income. [7]
Answer:

𝐹𝑖𝑥𝑒𝑑 𝐶𝑜𝑠𝑡+𝑃𝑟𝑜𝑓𝑖𝑡
(i) P/V Ration = 𝑋 100
𝑆𝑎𝑙𝑒𝑠
₹45,000+₹30,000
= 𝑋 100 = 50%
1,50,000
₹45,000
B.E Sales for half year = = ₹90, 000
0,5
M/S for half year = ₹1,50,000 – ₹90,0000 = ₹60,000

₹45,000+(−₹10,000)
(ii) Expected Sales = = 50%
𝑆
0.5S = ₹35,000
₹35,000
S= = ₹70,000
0.5
₹90,000
B.E Sales for Whole year = = ₹1,80,000
5
Margin of safety for whole year = (₹1,50,000 + ₹70,000) – ₹1,80,000 =₹40,000

(b) (i) Contribution required at Budgeted Residual Income:

Particulars (₹)
Fixed cost 80,00,000
Profit on `7,50,00,000 × 12% 90,00,000
Residual Income 1,00,00,000
Total Contribution required 2,70,00,000

Particulars (₹)
Contribution derived from 12,00,000 × ` 20 2,40,00,000
existing units
Contribution required on ` 2,70,00,000 – ` 30,00,000
3,00,000 units 2,40,00,000
Contribution per unit ` 30,00,000 / 10
3,00,000 units
Variable cost per unit (existing) 160
Increase in Variable Cost 5
∴ Transfer price = Variable `160 + `10 + `5 175
Cost + Desired Residual
Income + Increase in Variable
Cost

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Directorate of Studies, The Institute of Cost Accountants of India
 INTERMEDIATE EXAMINATION SET - 1
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MANAGEMENT ACCOUNTING

5. ABC Ltd adopts a standard costing system. The standard output for a period is 20,000 units and the
standard cost and profit per unit is as under:
₹
Direct Material (3 units @ ₹1.50) 4.50
Direct Labour (3 Hrs. @ ₹1.00 ) 3.00
Direct Expenses 0.50
Factory Overheads : Variable 0.25
Fixed 0.30
Administration Overheads 0.30
TOTAL COST 8.85
PROFIT 1.15
SELLING PRICE (FIXED BY GOVERNMENT) 10.00

The actual production and sales for a period was 14,400 units. There has been no price revision by
the Government during the period.

The following are the variances worked out at the end of the period.
Favourable (₹) Adverse (₹)
Direct Material
Price 4,250
Usage 1,050
Direct labour
Rate 4,000
Efficiency 3,200
Factory Overheads
Variable – Expenditure 400
Fixed – Expenditure 400
Fixed – Volume 1,680
Administration Overheads
Expenditure 400
Volume 1,680

You are required to:

Ascertain the details of actual costs and prepare a Profit and Loss Statement for the period showing
the actual Profit/Loss. Show the workings clearly.
Reconcile the Actual Profit with Standard Profit. [14]

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MANAGEMENT ACCOUNTING

Answer:

Statement showing the Actual Profit and Loss Statement

Particulars Amount (₹) Amount (₹)

Standard Material Cost (14,400 × 4.50) 64,800
Add: Price Variance 4,250
Less: Usage Variance (1,050) 68,000
Standard Labour Cost (14,400 × 3) 43,200
Add: Rate Variance 4,000
Less: efficiency Variance (3,200) 44,000
Direct expenses (14,400 × 0.50) 7,200
Prime Cost 1,19,200
Factory overhead:
Variable (14,400 × 0.25) 3,600
Less: expenditure Variance (400) 3,200
Fixed (14,400 × 0.30) 4,320
Add: Volume Variance 1,680
Less: expenditure Variance (400) 5,600
Administration overhead (14,400 × 0.3) 4,320
Add: Volume Variance 1,680
Add: exp. Variance 400 6,400
Total Cost 1,34,400
Profit (B/F) 9,600
Sales 1,44,000

Statement showing Reconciliation of Standard Profit with Actual Profit

Particulars ` `
Standard Profit (14,400 × 1.15) 16,560
Add: Material usage Variance 1,050
Labour efficiency Variance 3,200
Variable overhead expenditure Variance 400
Fixed overhead expenditure Variance 400 5,050
21,610
Less: Material Price Variance 4,250
Labour Rate Variance 4,000
Fixed overhead Volume Variance 1,680
Administration expenditure Variance 400
Administration Volume Variance 1,680 12,010

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Directorate of Studies, The Institute of Cost Accountants of India
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Actual Profit 9,600

6. (a) The cost accountant of a Co. was given the following information regarding the OHs for Feb,
2022:
a. Overhead cost variance ₹1,400 (A)
b. Overheads volume variance ₹1,000 (A)
a. Budgeted hours for Feb, 2022: 1,200 Hours
b. Budgeted OH for Feb, 2022: ₹ 6,000
c. Actual rate of recovery of OH ₹ 8 per hour

You are required to assist him in computing the following for Feb, 2022
(i) OH expenditure variance
(ii) Actual OH incurred
(iii) Actual hours for actual production
(iv) OH capacity variance
(v) OH efficiency variance
(vi) Standard hours for actual production [7]

(b) Draw up a flexible budget for overhead expenses on the basis of the following data and
determine the overhead rates at 70%, 80% and 90% [7]
Plant Capacity At 80% capacity
₹
VARIABLE OVERHEADS:
Indirect labour 12,000
Stores including spares 4,000

SEMI VARIABLE:
Power (30% - Fixed: 70% -Variable) 20,000
Repairs (60%- Fixed : 40% -Variable) 2,000
Fixed Overheads
Depreciation 11,000
Insurance 3,000
Salaries 10,000
Total overheads 62,000
Estimated Direct Labour Hours 1,24,000

Answer:

(a)
1 2 3 4
SRSH SRAH SRBH ARAH
5 X 1000 5 X 800 5 X 1200 8 X 800
5000 4000 6000 6400
SRSH – SRBH = Volume Variance
SRSH – 6000 = -1000 (A)
SRSH = 5000
SRSH – ARAH = Cost Variance

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5000 – ARAH = -1400(A)
ARAH = 6400
1) OH Expenditure Variance = 6000 – 6400 = 400(A)
2) Actual Over Incurred ARAH = 6400
3) Actual Hrs for Actual production = AH = 800
4) OH Capacity Variance = 4000 – 6000 = 2000(A)
5) OH Efficiency Variance = 5000 – 4000 = 1000(F)
6) Std. Hrs for Actual Production = SH = 1000
𝐵𝑢𝑑𝑔𝑒𝑡𝑒𝑑 𝐹𝑖𝑥𝑒𝑑 𝑂𝐻 6000
SR = = =5
𝐵𝑢𝑑𝑔𝑒𝑡𝑒𝑑 𝐻𝑜𝑢𝑟𝑠 1200

(b) Flexible budget showing OH rate par labour hour

Flexible Budget at Different Capacities and Determination of Overhead Rates

Particulars 70% (₹) 80% (₹) 90% (₹)
(A) Variable overheads:
Indirect labour 10,500 12,000 13,500
Stores including spares 3,500 4,000 4,500
Total (A) 14,000 16,000 18,000
(B) Semi Variable overheads:
Power (Working Note) 18,250 20,000 21,750
Repairs (Working Note) 1,900 2,000 2,100
Total (B) 20,150 22,000 23,850
(C) Fixed overheads:
Depreciation 11,000 11,000 11,000
Insurance 3,000 3,000 3,000
Salaries 10,000 10,000 10,000
Total (C) 24,000 24,000 24,000
Grand Total (A+B+C) 58,150 62,000 65,850
70% 90%
Labour Hours 1,24,000 × = 1,24,000 1,24,000 × =
80% 80%
1,08,500 1,39,500
Overhead rate per hour (`) 58,150 62,000 65,850
= 0.536 = 0.50 = 0.472
1,08,500 1,24,000 1,39,500

Working notes: Semi Variable overheads

70% 90%
Power:
70% 90%
Variable (70%) 14,000 × = 12,250 14,000 × = 15,750
80% 80%
Fixed (30%) 6,000 6,000
Total 18,250 21,750
Repairs:
70% 90%
Variable (40%) 800 × = 700 800 × = 900
80% 80%
Fixed (60%) 1,200 1,200

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Directorate of Studies, The Institute of Cost Accountants of India
 INTERMEDIATE EXAMINATION SET - 1
MODEL ANSWERS TERM – DECEMBER 2023
PAPER – 12 SYLLABUS 2022
MANAGEMENT ACCOUNTING
Total 1,900 2,100

7. (a) Consider the following:

Division A Division B
Operating assets ₹ 50,00,000 ₹ 1,25,00,000
Operating income ₹ 10,00,000 ₹ 22,50,000
ROI 20% 18%
(i) Identify which is the more successful division in terms of ROI?
(ii) Using 16 percent as the minimum required rate of return compute the residual income
for each division. Which division is more successful under this rate? [7]

(b) A firm received an order to make and supply eight units of standard product which involves
intricate labour operations. The first unit was made in 10 hours. It is understood that this type
of operations is subject to 80% learning rate. The workers are getting a wages rate of ₹ 12
per hour. [7]
(i) Compute the total time and labour cost required to execute the above order.
(ii) If a repeat order of 24 units is also received from the same customer, compute the labour
cost necessary for the second order?

Answer:

(a) (i) Division A is more successful as since it returns ₹0.20 for each rupee invested (as compare
to ₹ 0.18 for Division B).
(ii) The residual income at 16 percent for each division is computed as follows:
Division A Division B
Operating income ₹10,00,000 ₹ 22,50,000
Minimum required income ₹ 8,00,000 ₹20,00,000
(16% × 50,00,000) (16% × ₹1,25,00,000)
RI ₹ 2,00,000 ₹2,50,000
Division B is more successful.

(b) (i) 80% Learning Curve results are given below:

Production (Units) Cumulative Average Time (hours) Total Time (hours)
1 10 10
2 8 16
4 6.4 25.6
8 5.12 40.96
16 4.096 65.54
32 3.2768 104.86
Labour time required for first eight units = 40.96 hours
Labour cost required for 8 units = 40.96 hours × ₹ 12/hr = ₹ 491.52

(ii) Labour time for 32 units = 104.86 hours

Labour time for first eight units = 40.96 hours
Labour time required for 2nd order for 24 units = 63.90 hours (104.86 - 40.96)

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Directorate of Studies, The Institute of Cost Accountants of India
 INTERMEDIATE EXAMINATION SET - 1
MODEL ANSWERS TERM – DECEMBER 2023
PAPER – 12 SYLLABUS 2022
MANAGEMENT ACCOUNTING
Labour cost for 24 units = 63.90 hours × ₹12/hr = ₹ 766.80

8. (a) Describe the meaning of uncertainty in decision making. [7]

(b) Explain the relation between decentralization and responsibility accounting. [7]

Answer:

(a) In case of certainty, the future is known and the decision maker, thus, need not worry about the
happening /not happening of a particular state of nature as the future is cent percent assured.
Whereas under condition of uncertainty, the future states of nature are unknown. There is no
information available on the happening /not happening of the future stateof nature. In decision
making under uncertainty, the probability distribution associated with the states is either unknown
or cannot be determined. This lack of information has led to the development of special decision
criteria.
In simple terms, situations where objectives probabilities cannot be assigned to the states of the
nature as no prior information is available gives rise to the condition of decision making under
uncertainty.
Uncertainty, in common parlance, is a state of not knowing whether a proposition is true or false.
Suppose Mr A went to a casino. There the dealer is about to roll a dice. If the result is a six, Mr A is
going to lose ₹100.
What is Mr A’s risk? What, is the subjective opinion (subjective probability) that Mr A will lose
₹100?
It may seem to be one chance in six (which is a general answer). But it is not known from previous
how may sidesthe dice have. The information that the die is 10 sided one changes the perspective
about probability of throwinga six. This example illustrates how one can be uncertain but not realize
it. To clarify, an individual is uncertain of a proposition if she

 does not know it to be true or false or

 is oblivious to the proposition.
Probability is often used as a metric of uncertainty, but its usefulness is limited. At best, probability
quantifies
perceived uncertainty.
A decision problem, where a decision-maker is aware of various possible states of nature but has
insufficient information to assign any probabilities of occurrence to them, is termed as decision-
making under uncertainty. Adecision under uncertainty is when there are many unknowns and no
possibility of knowing what could occur inthe future to alter the outcome of a decision.
The decision maker feels the uncertainty about a situation when he can’t predict with complete
confidence whatthe outcomes of the actions will be. The decision maker experiences uncertainty
about a specific question when he can’t give a single answer with complete confidence.

(b) A responsibility accounting system facilitates decentralization by providing information about the
performance, efficiency, and effectiveness of organizational subunits and their managers.
Responsibilityaccounting is the key management control tool in a decentralized organization.

The term ‘responsibility accounting’ refers to the accounting process that reports how well managers
(of responsibility centres) have fulfilled their responsibility. It is a system that measures the plans

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Directorate of Studies, The Institute of Cost Accountants of India
 INTERMEDIATE EXAMINATION SET - 1
MODEL ANSWERS TERM – DECEMBER 2023
PAPER – 12 SYLLABUS 2022
MANAGEMENT ACCOUNTING
(by budgets)and actions (by actual results) of each responsibility centre. Also known as activity or
profitability accounting, it is an information system that personalizes control reports by
accumulating and reporting cost and revenue information according to defined responsibility centres
within a company. Responsibility accounting systems are tailored to the organizational structure so
that revenue and costs are accumulated and reported by centres of responsibility within the
organization.
Responsibility accounting is the system for collecting and reporting revenue and cost information
by areas of responsibility. It operates on the premise that managers should be held responsible for
their performance, the performance of their subordinates, and all activities within their responsibility
center. Responsibility accounting,also called profitability accounting and activity accounting
A responsibility accounting system produces responsibility reports that assist each successively
higher level of management in evaluating the performances of subordinate managers and their
respective organizational units. The reports should be tailored to fit the planning, controlling, and
decision-making needs of subordinate managers and should include both monetary and nonmonetary
information.
In the past, the major emphasis in organizational planning was on optimizing economic resources to
achieve company objectives. However, in recent years the value of human resources has been
recognized and become an important consideration in planning. In general, a company is organized
along lines of responsibility. The traditional organizational chart, with its pyramid shape, illustrates
the lines of responsibility flowing from the CEO down through the vice presidents to middle- and
lower-level managers. It indicates, as organizations growlarger, these lines of responsibility become
longer and more numerous. The structure becomes cumbersome. Contemporary practice is moving
toward a flattened hierarchy. This structure— emphasizing teams—is consistent with
decentralization. Organizing divisions as responsibility centers creates the opportunity to controlthe
divisions through the use of responsibility accounting. Revenue center control is achieved by
evaluating theefficiency and the effectiveness of divisional managers on the basis of sales revenue.

15
Directorate of Studies, The Institute of Cost Accountants of India
 INTERMEDIATE EXAMINATION SET - 2
MODEL ANSWERS TERM – DECEMBER 2023
PAPER – 12 SYLLABUS 2022
MANAGEMENT ACCOUNTING
Time Allowed: 3 Hours Full Marks: 100
The figures in the margin on the right side indicate full marks.

SECTION – A (Compulsory)

1. Choose the correct alternative: [15 x 2 = 30]

(i) Management accounting deals with _______ data.

A. Qualitative
B. Quantitative
C. Both qualitative and quantitative
D. Non-financial

(ii) According to the Chartered Institute of Management Accountants (CIMA), cost attribution
to cost units on the basis of benefits received from indirect activities e.g. ordering, setting up,
and assuring quality is known as:
A. Absorption costing
B. Marginal costing
C. Activity-based costing
D. Job costing

(iii) The following information relate to ABC

Activity level 60% 80%
Variable costs (₹) 12,000 16,000
Fixed costs (₹) 20,000 22,000

The differential cost for 20% capacity is___________.

A. ₹4,000
B. ₹2,000
C. ₹6,000
D. ₹5,000

(iv) The break-even point is the point at which:

A. There is no profit, no loss;
B. Contribution margin is equal to total fixed cost;
C. Total revenue is equal to total cost;
D. All of the above.

(v) A decrease in sales price ________________________.

A. does not affect the break-even point
B. lowers the fixed cost
C. Increases the break-even point
D. lowers the break-even point

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Directorate of Studies, The Institute of Cost Accountants of India
 INTERMEDIATE EXAMINATION SET - 2
MODEL ANSWERS TERM – DECEMBER 2023
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MANAGEMENT ACCOUNTING

(vi) What will be sales in rupees for desired profit if fixed cost is ₹30,000, desired profit is ₹15,000
and P/V ratio is 30%?
A. ₹1,50,000
B. ₹1,00,000
C. ₹2,00,000
D. None of the above

(vii) Variable cost is also referred to as in the marginal costing technique:

A. Total cost
B. Product cost
C. Period cost
D. None of the above

(viii) The sales and profit of a firm for the year 2021 are ₹1,50,000 and ₹20,000 and for the year
2022 are ₹1,70,000 and ₹ 25,000 respectively. The P/V Ratio of the firm is _______________.
A. 15%
B. 20%
C. 25%
D. 30%

(ix) A company manufactures and sells three types of product namely A, B and C. Total sales per
month is ₹ 80,000 in which the share of these three products are 50%, 30% and 20%
respectively. The variable cost of these products is 60%, 50% and 40% respectively. The
combined P/V Ratio will be:
A. 49%
B. 48%
C. 47%
D. 50%

(x) M Group has two divisions, Division P and Division Q. Division P manufactures an item that
is transferred to Division Q. The item has no external market and 6,000 units produced are
transferred internally each year. The costs of each division are as follows?
Division P Division Q
Variable Cost ₹100 per unit 120 per unit
Fixed cost each year ₹1,20,000 90,000
Head Office management decided that a transfer price should be set that provides a profit of
₹30,000 to Division P. What should be the transfer price per unit?
A. ₹145
B. ₹125
C. ₹120
D. ₹135

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Directorate of Studies, The Institute of Cost Accountants of India
 INTERMEDIATE EXAMINATION SET - 2
MODEL ANSWERS TERM – DECEMBER 2023
PAPER – 12 SYLLABUS 2022
MANAGEMENT ACCOUNTING

(xi) Standard costing is a tool, which replaces the bottleneck of the _________________ costing.
A. Present
B. Future
C. Historical
D. None of the above

(xii) During the month of December actual direct labour cost amounted to ₹39,550, the standard
direct labour rate was ₹10 per hour and the direct labour rate variance amounted to ₹450
favourable. The actual direct labour hours worked was:
A. 3,955 hours
B. 4,000 hours
C. 3,910 hours
D. 4,500 hours

(xiii) A factory produces two types of articles Y and Z. Article Y takes 8 hours to make and Z takes
16 hours. In a month (25 days x 8 hours) 600 units of X and 400 units of Z are produced. Given
budgeted hours 8000 per month and men employed are 50. Determine Activity ratio, Capacity
ratio and efficiency ratio.
A. 112%, 140%, 140%
B. 140%, 112%, 140%
C. 140%, 140%, 112%
D. None of the above

(xiv) According to Kaplan & Norton, which of the balanced scorecard perspectives serves as the
focus of the other perspectives?
A. Financial.
B. Customer.
C. Internal business processes.
D. Learning & growth.

(xv) If a decision maker is risk averse, then the best strategy to select is the one that yields the
___________.
A. Highest expected payoff.
B. Lowest coefficient of variation.
C. Highest expected utility.
D. Lowest standard deviation

Answer:

(i) (ii) (iii) (iv) (v) (vi) (vii) (viii) (ix) (x) (xi) (xii) (xiii) (xix) (xv)
C C C A C A B C C B C B C A C

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Directorate of Studies, The Institute of Cost Accountants of India
 INTERMEDIATE EXAMINATION SET - 2
MODEL ANSWERS TERM – DECEMBER 2023
PAPER – 12 SYLLABUS 2022
MANAGEMENT ACCOUNTING
SECTION – B
(Answer any five questions out of seven questions given. Each question carries 14 Marks.)

2. (a) Management Accounting serves as a tool to management – discuss. [7]

(b) M Ltd. was absorbing overheads on the basis of direct labour hours. A newly appointed CMA
has suggested that the company should introduced ABC system and has identified cost drivers
and cost pools as follows:
Activity Cost Pool Cost Driver Associated Cost (₹)
Stores Receiving Purchase Requisitions 2,96,000
Inspection Number of Production Runs 8,94,000
Dispatch Orders Executed 2,10,000
Machine set-up Number of set-up 12,00,000

The following information is also supplied:

Product A Product B Product C
No. of Set-up 360 390 450
No. of Orders Executed 180 270 300
No. of Production Runs 50 1,050 1,200
No. of Purchase Requisitions 300 450 500

Calculate activity based production cost of all the three products. [7]

Answer:
(a) Strategies are long term plans which help organisations to realise its goal. Strategy is defined as a
general direction set for the company and its various components to achieve a desired state in the future.
A company’s strategy specifies how the organisation matches its own capabilities with the opportunities
in the marketplace. Basically businesses follow one of two broad strategies. Some companies follow a
cost leadership strategy. These companies, for long term sustenance, choose to provide quality products
or services at low prices and by cautiously managing their costs. Other companies follow a product
differentiation strategy. These companies offer differentiated or unique products or services that appeal
to their customers. The products are often priced higher than the products or services of their
competitors.
Mangers are faced with various challenges. One such is to decide between the two strategies discussed
above. The crucial issue is that this have long term impact on profitability and growth of the company.
Management accountants work closely with managers in various departments to formulate strategies
by providing information about the sources of competitive advantage, such as:
 the company’s cost, productivity, or efficiency advantage relative to competitors or
 the superior prices the company can charge relative to the costs of adding features that make its
products or services distinctive.
Strategic cost management describes cost management that specifically focuses on strategic issues.
Management accounting information helps managers formulate strategy by answering the following
questions:
A) Who are the most important customers, and how can the company deliver value to the customers?
B) What substitute products exist in the marketplace, and how do they differ from products of the
company in terms of features, price, cost, and quality?
C) What is most critical capability of the company which may be technology, production, or
marketing?

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Directorate of Studies, The Institute of Cost Accountants of India
 INTERMEDIATE EXAMINATION SET - 2
MODEL ANSWERS TERM – DECEMBER 2023
PAPER – 12 SYLLABUS 2022
MANAGEMENT ACCOUNTING
D) How can we leverage it for new strategic initiatives?
E) Will adequate cash be available to fund the strategy, or will additional funds need to be raised?
The best-designed strategies and the best-developed capabilities are useless unless they are effectively
executed which depends primarily on the information generated and provided by the management
accountant. This linkage between successful implementation of strategy and the accounting information
generated by management accounting is the subject matter of strategic cost management.

(b) Selection and computation of Cost Driver Rates:

1. Stores Receiving – No. of Purchase Requisitions = 2,96,000 ÷1250 = 236.8
2. Inspection Cost - No. of Production runs = 8,94,000 ÷2300 = 388.6956
3. Dispatch Cost – No. of orders executed = 2,10,000 ÷750 = 280
12,00,000
4. Machine Setup Costs - No. of setups = = 1000
1200

Computation of Production Cost of Three products

A B C Total
Stores Receiving 71,040 1,06,560 1,18,400 2,96,000
Inspection 19,435 4,08,130 4,66,435 8,94,000
Dispatch 50,400 75,600 84,000 2,10,000
Machine Setup 3,60,000 3,90,000 4,50,000 12,00,000
5,00,875 9,80,290 11,18,835 26,00,000

3. Division A is a profit centre that produces three products X, Y and Z and each product has an
external market.
The relevant data is as:
X Y Z
External market price per unit (₹) 48 46 40
Variable cost of production (division A) (₹) 33 24 28
Labour hours per unit (division A) 3 4 2
Maximum external sales units 800 500 300
Up to 300 units of Y can be transferred to an internal division B.
Division B has also the option of purchasing externally at a price of ₹45 per unit.
Calculate the transfer price for Y the total labour hours available in division A is:
(a) 3800 hours
(b) 5600 hours [14]

Answer:

X (`) Y (`) Z (`)

Selling Price 48 46 40
Variable Cost 33 24 28
Contribution 15 22 12
Contribution per Hr 5 (15/3) 5.5 (22/4) 6 (12/2)
III II I

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Directorate of Studies, The Institute of Cost Accountants of India
 INTERMEDIATE EXAMINATION SET - 2
MODEL ANSWERS TERM – DECEMBER 2023
PAPER – 12 SYLLABUS 2022
MANAGEMENT ACCOUNTING
Computation of Transfer Price at 3800 hrs. (`)
Variable cost per unit of Y 24
Add: Opportunity Cost
As there is no idle capacity for division A. It has to sacrifice 1200 hrs production of any
product i.e. production X because contribution per hr is less
Total contribution = 1200 X 5 = 6000
Contribution/Unit = 6000/300 = 20 20
44

Computation of Transfer Price at 5600 hrs available (`)

Variable cost per unit 24
Add: Opportunity cost
Out of the 1200 hrs required to transfer product Y, 600 Hrs are available and
another 600 hrs they have to give up the production of X.
Total Contribution = 600 X 5 = 3000
Contribution/Unit = 3000 / 300 = 10 10
Transfer Price 34

4. (a) From the following information calculate: [7]

(1) P/V Ratio
(2) Break-Even Point
(3) If the selling price is reduced to ₹ 80, calculate New Break-Even Point:
`
Total sales 5,00,000
Selling price per unit 100
Variable cost per unit 60
Fixed cost 1,20,000

(b) Y Company has just been incorporated and plan to produce a product that will sell for ₹10
per unit. Preliminary market surveys show that demand will be around 10,000 units per year.
The company has the choice of buying one of the two machines ‘A’ would have fixed costs of
₹30,000 per year and would yield a profit of ₹30,000 per year on the sale of 10,000 units.
Machine `B’ would have fixed costs ₹18,000 per year and would yield a profit of ₹22,000 per
year on the sale of 10,000 units. Variable costs behave linearly for both machines.
Required to calculate:
(i) Break-even sales for each machine
(ii) Sales level where both machines are equally profitable
(iii) Range of sales where one machine is more profitable than the other. [7]

Answer:
(a) (1) P/V Ratio = Contribution ÷ Sales × 100
Contribution = Sales - Variable Cost
Total Sales = ₹ 5,00,000
Selling price per unit = ₹ 100

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Directorate of Studies, The Institute of Cost Accountants of India
 INTERMEDIATE EXAMINATION SET - 2
MODEL ANSWERS TERM – DECEMBER 2023
PAPER – 12 SYLLABUS 2022
MANAGEMENT ACCOUNTING
Sales in units = 5,000 units
Contribution = ₹ 2,00,000
P/V Ratio = 40%

(2) Break-Even Point in sales = Fixed Cost ÷ P/V Ratio = ₹ 3,00,000

(3) If the Selling price is reduced to ₹ 80:

Sales =₹ 4,00,000
P/V Ratio = (80 - 60) ÷ 80 = 25%, Contribution per unit = 80 - 60 = ₹ 20
Break-Even Point (in units) = 1,20,000 ÷ 20 = 6,000 units
Break-Even Point in Sales = 1,20,000 ÷ 25% = ₹4,80,000

(b) Computation of Break Even of each machine and other required information:
A (`) B (`)
Selling price 10 10
Units 10,000 10,000
Sales 1,00,000 1,00,000
Fixed Cost 30,000 18,000
Contribution (F+P) 60,000 40,000
Contribution/Unit 6 4
Variable Cost per unit 4 6
30000 18000
= 5000 units (or) = 4500 units (or)
(i) Break Even Units 6 4
` 50,000 ` 45,000

(ii) Sales level where both machine are equally profitable

Differences in Fixed Cost 30,000−18,000
= = = 6000 Units
Differences in V.C per Unit 6−4

(iii) For sales level of 6000 and above units, machine A would be more profitable because variable
cost/unit is less and on the other hand, if sales level below 6000 units Machine B would be more
profitable.

5. Prepare Cash Budget for M/s Alpha Manufacturing Co. on the basis of the following information for
the first six months of 2022.
(i) Costs and prices remain unchanged.
(ii) Cash Sales are 25% of the total sales and 75% credit sales.
(iii) 60% of credit sales are collected in the month after sales, 30% in the second month and 10%
in the third, no bad debts are anticipated.
(iv) Sales forecasts are as follows:
October 2021 ₹ 12,00,000 November 2021 ₹14,00,000
December 2021 ₹16,00,000 January 2022 ₹6,00,000
February 2022 ₹8,00,000 March 2022 ₹8,00,000
April 2022 ₹12,00,000 May 2022 ₹10,00,000
June 2022 ₹ 8,00,000 July 2022 ₹12,00,000
(v) Gross profit margin 20%

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Directorate of Studies, The Institute of Cost Accountants of India
 INTERMEDIATE EXAMINATION SET - 2
MODEL ANSWERS TERM – DECEMBER 2023
PAPER – 12 SYLLABUS 2022
MANAGEMENT ACCOUNTING
(vi) Anticipated Purchases:
January 2022 ₹6,40,000 February 2022 ₹6,40,000
March 2022 ₹9,60,000 April 2022 ₹8,00,000
May 2022 ₹6,40,000 June 2022 ₹9,60,000
(vii) Wages and Salaries to be paid:
January 2022 ₹1,20,000 February 2022 ₹1,60,000
March 2022 ₹2,00,000 April 2022 ₹2,00,000
May 2022 ₹1,60,000 June 2022 ₹1,40,000
(viii) Interest on ₹ 20,00,000 @ 6% on debentures is due by end of March and June.
(ix) Excise deposit due in April ₹2,00,000
(x) Capital expenditure on Plant and Machinery planned for June ₹1,20,000
(xi) Company has a cash balance of ₹4,00,000 at 31.12.2021
(xii) Company can borrow on monthly basis.
(xiii) Rent is ₹8,000 per month. [14]

Answer:

Cash Credit Oct Nov Dec Jan Feb Mar Apr May June July Aug
Oct 3,00,000 9,00,000 - 5,40,000 2,70,000 90,000 - - - - - - -
Nov 3,50,000 10,50,000 - - 6,30,000 3,15,000 1,05,000 - - - - - -
Dec 4,00,000 12,00,000 - - - 7,20,000 3,60,000 1,20,000 - - - - -
Jan 1,50,000 4,50,000 - - - - 2,70,000 1,35,000 4,50,000 - - - -
Feb 2,00,000 6,00,000 - - - - - 3,60,000 1,80,000 60,000 - - -
Mar 2,00,000 6,00,000 - - - - - 3,60,000 1,80,000 60,000 - -
April 3,00,000 9,00,000 - - - - - - 5,40,000 2,70,000 90,000 -
May 2,50,000 7,50,000 - - - - - - - 4,50,000 2,25,000 -
June 2,00,000 7,50,000 - - - - - - - - 3,60,000 -

Jan Feb Mar April May June

Opening Balance 4,00,000 9,07,000 10,34,000 6,51,000 3,28,000 5,50,000
Receipts
Cash sales 1,50,000 2,00,000 2,00,000 3,00,000 2,50,000 2,00,000
Collection from Dr’s 11,25,000 7,35,000 6,15,000 5,85,000 7,80,000 7,80,000
Total 16,75,000 18,42,000 18,49,000 15,36,000 13,58,000 15,30,000
Payments
Purchases 6,40,000 6,40,000 9,60,000 8,00,000 6,40,000 9,60,000
Wages & salaries 1,20,000 1,60,000 2,00,000 2,00,000 1,60,000 1,40,000
Int. on debentures - - 1,30,000 - - 1,30,000
(20,00,000*6%*1/4) (20,00,000*6%*1/4)
Payment of Exice duty - - - 2,00,000 - -
Expn on Plant & Mach - - - - - 1,20,000
Rent Exp 8,000 8,000 8,000 8,000 8,000 8,000
Total 7,68,000 8,08,000 11,98,000 12,08,000 8,08,000 12,58,000
Closing Bal 9,07,000 10,34,000 6,51,000 3,28,000 5,50,000 2,72,000

6. (a) The standard mix of product M5 is as follows:

LBs Material Price Per LB

50 A 5.00
20 B 4.00
30 C 10.00

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Directorate of Studies, The Institute of Cost Accountants of India
 INTERMEDIATE EXAMINATION SET - 2
MODEL ANSWERS TERM – DECEMBER 2023
PAPER – 12 SYLLABUS 2022
MANAGEMENT ACCOUNTING
Standard loss is 10% of input. There is no scrap value. Actual production for month was
LB.7240 of M5 from 80 mixes. Purchases and consumption is as follows:

LBs Material Price

4160 A 5.5
1680 B 3.75
2560 C 9.5
Calculate variances. [7]

(b) A Glass Manufacturing Company requires you to calculate and present the budget for the
next year from the following information:
Sales: Toughened glass ₹3,00,000
Bent toughened glass ₹5,00,000
Direct Material cost 60% of sales
Direct Wages 20 workers @ ₹150 p.m.

Factory Overheads:
Indirect Labour: Works Manager ₹ 500 per month
Foreman ₹ 400 per month
Stores and spares 2½% on sales
Depreciation on machinery ₹ 12,000
Light and power ₹ 5,600
Repairs and maintenance ₹ 8,000
Other sundries 10% on direct wages.
Administration, selling and distribution expenses ₹14,000 per year. [7]

Answer:
(a)
Standard Data Actual Data
Quantity Price Value Quantity Price Value
A 4200 5 21000 4160 5.50 22880
B 1680 4 6720 1680 3.75 6300
C 2520 10 25200 2560 9.50 24320
8400 52920 8400 53500
- Loss@ 10% 840 - 1160 -
7560 52920 7240 53500

SQSP (1) RSQSP (2) AQSP (3) AQAP (4)

A 4022.22×5 = 20111 4160×5 = 20800
B 1608.89×4 = 6436 1680×4 = 6720
C 2413.33×10 = 24133 2560×10 = 25600
50680 52920 53120 53500

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Directorate of Studies, The Institute of Cost Accountants of India
 INTERMEDIATE EXAMINATION SET - 2
MODEL ANSWERS TERM – DECEMBER 2023
PAPER – 12 SYLLABUS 2022
MANAGEMENT ACCOUNTING
4200
𝑆𝑄 𝑓𝑜𝑟 𝐴 = × 7240
7500
1680
𝑆𝑄 𝑓𝑜𝑟 𝐵 = × 7240
7560
2520
𝑆𝑄 𝑓𝑜𝑟 𝐶 = × 7240
7560

A) Material yield Variance (1 – 2) = 2240 (A)

B) Material Mix Variance (2 – 3) = 200 (A)
C) Material usage Variance (1 – 3) = 2440 (A)
D) Material Price Variance (3 – 4) = 380 (A)
E) Material Cost Variance (1 – 4) = 2820 (A)

(b) Budget Showing Profit for Next Year:

Particulars Amount (`) Amount (`)
Sales: Toughened Glass 3,00,000
Bent Toughened Glass 5,00,000 8,00,000
Less: Cost:
Material @ 60% 4,80,000
Direct Wages (20 × `150 × 12) 36,000 5,16,000
Gross Profit 2,84,000
Less: Factory Overheads:
Indirect Labour: Works Manager’s Salary [` 500 × 12] = 6,000
Foreman’s Salary [` 400 × 12] = 4,800 10,800
Stores & Spares 20,000
Depreciation 12,000
Light & Power 5,600
Repairs & Maintenance 8,000
Other Sundries 3,600
Administration & Selling Expenses 14,000 74,000
Profit 2,10,000

7. (a) H Ltd’s current financial year’s income statement reports its net income as ₹15,00,000. H’s
marginal tax rate is 40% and its interest expense for the year was ₹15,00,000. The company
has ₹1,00,00,000 of invested capital, of which 60% is debt.
In addition, H Ltd. tries to maintain a Weighted Average Cost of Capital (WACC) of 12.6%.
(i) Compute the operating income or EBIT earned by H Ltd. in the current year.
(ii) What is H Ltd’s Economic Value Added (EVA) for the current year? [7]

(b) The learning curve as a management accounting has now become or going to become an
accepted tool in industry, for its applications are almost unlimited. When it is used correctly,
it can lead to increase business and higher profits; when used without proper knowledge, it
can lead to lost business and bankruptcy. State precisely:
(i) Your understanding of the learning curve:
(ii) Illustrate the use of learning curve for calculating the expected average unit cost of
making, (a) 4 machines (b) 8 machines using the data below:

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Directorate of Studies, The Institute of Cost Accountants of India
 INTERMEDIATE EXAMINATION SET - 2
MODEL ANSWERS TERM – DECEMBER 2023
PAPER – 12 SYLLABUS 2022
MANAGEMENT ACCOUNTING
Data:
Direct Labour need to make first machine = 1000 hrs.
Learning curve = 90%
Direct Labour cost = ₹15 per hour.
Direct materials cost = ₹1,50,000
Fixed cost for either size orders = ₹60,000. [7]

Answer:

(a) (i) Taxable income = Net Income ÷ (1 – Tax Rate) or, Taxable income
= ₹15,00,000 ÷ (1 – 0.40)
= ₹ 25,00,000

Again, taxable income = EBIT – Interest or, EBIT

= Taxable Income + Interest
= ₹25,00,000 + ₹ 15,00,000
= ₹40,00,000

(ii) EVA = EBIT (1 – T) – (WACC × Invested capital)

= ₹40,00,000 (1 – 0.40) – (0.126 × ₹1,00,00,000)
= ₹24,00,000 – ₹12,60,000
= ₹11,40,000.

(b) The term “learning curve” refers to the idea that efficiency increases the more experience a person has
with a given task. As a result, the time required for performing the task decreases as increases occur in
the number of times the task has been performed.

Higher costs per unit early in production are part of the start-up costs when a new activity is begun. It
is commonly accepted that new products and production processes experience a period of low
productivity followed by increasing productivity. However, the rate of productivity improvement
declines over time until the improvement stops. The required production time reaches a level where it
remains until another change in production occurs.

Learning curve analysis is used in planning, budgeting, and forecasting and also to determine estimated
labour costs when bidding on a contract. A company needs to be able to estimate what the long-term
costs of production will be.

Statement showing computation of cost of making 4 machines & 8 machines:

No of machines Average time Hours Labour cost Material Fixed cost Total
₹ ₹ ₹ ₹
1 1,000 15,000 1,50,000 60,000 2,25,000
2 900 13,500 1,50,000 30,000 1,93,500
4 810 12,150 1,50,000 15,000 1,77,150
8 729 10,935 1,50,000 7,500 1,68,435

Average cost of making 4 machines = ₹1,77,150 Average cost of making 8 machines = ₹1,68,435

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Directorate of Studies, The Institute of Cost Accountants of India
 INTERMEDIATE EXAMINATION SET - 2
MODEL ANSWERS TERM – DECEMBER 2023
PAPER – 12 SYLLABUS 2022
MANAGEMENT ACCOUNTING
8. (a) The following information is available for a Company:
Sales Volume (units) Probability (%)
10,000 10
12,000 15
14,000 25
16,000 30
18,000 20
Projected sales and costs are as under:
Sales Price per unit: ₹6;
Variable Cost per unit: ₹3.50;
Fixed Costs: ₹34,000

Compute:
(i) Probability that the Company will at least Break-even
(ii) Probability that the Profit will be at least ₹10,000. [7]

(b) List the characteristics of responsibility reporting. [7]

Answer:

(a) (i) Contribution per unit = ₹ 2.50 (₹ 6 - ₹ 3.50)

BEP (units) = Total Fixed Costs ÷ Contribution per unit = ₹ 34,000 ÷ ₹ 2.50 = 13,600 units.
The probability that at least Break-even = 0.25 + 0.30 + 0.20 = 0.75 = 75%.

(ii) The Profit will be at least ₹ 10,000:

Then, BEP (units) = ₹ 34,000 + ₹ 10,000 ÷ ₹ 2.50 = 17,600 units.
The required Probability = 20%.

(b) The characteristics of responsibility reporting:

1. Reports should fit the organization chart, that is, the report should be addressed to the individual
responsible for the items covered by it, who, in turn, will be able to control those costs under his
jurisdiction. Managers must be educated to use the results of the reporting system.
2. Report should be prompt and timely. Prompt issuance of a report requires that cost records be
organized so that information is available when it is needed.
3. Reports should be issued with regularity. Promptness and regularity are closely tied up with the
mechanical aids used to assemble and issue reports.
4. Reports should be easy to understand. Often they contain accounting terminology that managers
with little or no accounting training find difficult to understand, and vital information may be
incorrectly communicated. Therefore, accounting terms should be explained or modified to fit the
user. Top management should have some knowledge of the kind of items chargeable to an account
as well as the methods used to compute overhead rates, make cost allocations and analyze
variances.
5. Reports should convey sufficient but not excessive details. The amount and nature of the details
depend largely on the management level receiving the report. Reports to management should
neither be flooded with immaterial facts nor so condensed that management lacks vital
information essential to carrying out its responsibilities.
6. Reports should give comparative figures, i.e., a comparison of actual with budgeted figures or of
predetermined standards with actual results and the isolation of variances.
7. Reports should be analytical. Analysis of underlying papers, such as time tickets, scraps tickets,
work orders, and materials requisitions, provide reasons for poor performance which might have

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Directorate of Studies, The Institute of Cost Accountants of India
 INTERMEDIATE EXAMINATION SET - 2
MODEL ANSWERS TERM – DECEMBER 2023
PAPER – 12 SYLLABUS 2022
MANAGEMENT ACCOUNTING
been due to power failure, machine breakdown, an inefficient operator, poor quality of materials,
or many other similar factors.
8. Reports for operating management should, if possible, be stated in physical units as well as in
terms of money since monetary information may give a foreman not trained in the language of
the accountant a certain amount of difficulty.
9. Reports may tend to highlight departmental efficiencies and inefficiencies, results achieved future
goals or targets.

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Directorate of Studies, The Institute of Cost Accountants of India
 INTERMEDIATE EXAMINATION SET 1
MODEL ASNWERS TERM – JUNE 2024
PAPER – 12 SYLLABUS-2022
MANAGEMENT ACCOUNTING
Time Allowed: 3 Hours Full Marks: 100
The figures in the margin on the right side indicate full marks.

SECTION – A (Compulsory)

1. Choose the correct option: [15 x 2 = 30]

(i) __________________ is the study of managerial aspects of financial
accounting.
a. Cost accounting
b. Financial accounting
c. Management accounting
d. Business accounting

(ii) Process of Cost allocation under Activity Based Costing is:

a. Cost of Activities—Activities—Cost Driver – Cost allocated to cost
objects
b. Cost Driver — Cost of Activities— Cost allocated to cost objects –
Activities
c. Activities— Cost of Activities—Cost Driver – Cost allocated to cost
objects
d. Activities—Cost Driver – Cost allocated to cost objects — Cost of
Activities

(iii) Plant depreciation is an example of which activity-level group?

a. Unit-level activity
b. Facility-level activity
c. Batch-level activity
d. Product-level activity

(iv) A decrease in sales price

a. does not affect the break-even point
b. lowers the fixed cost
c. Increases the break-even point
d. lowers the break-even point

(v) What will be the margin of safety if sales is ₹3,00,000 and B.E.P is ₹ 4,50,000?
a. ₹1,00,000
b. ₹1,50,000

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Directorate of Studies, The Institute of Cost Accountants of India
 INTERMEDIATE EXAMINATION SET 1
MODEL ASNWERS TERM – JUNE 2024
PAPER – 12 SYLLABUS-2022
MANAGEMENT ACCOUNTING
c. Amount of sales < B.E.P, therefore no margin of safety
d. None of the above

(vi) The costing method where fixed factory overheads are added to inventory, is
called:
a. Activity-based costing
b. Absorption costing
c. Marginal costing
d. All of the above

(vii) Product A generates a contribution to sales ratio of 40%. Fixed cost directly
attributable to Product A amounted to ₹60,000. The sales revenue required to
achieve a profit of ₹15,000 is:
a. ₹ 2,00,000
b. ₹ 1,85,000
c. ₹1,87,500
d. ₹ 2,10,000

(viii) M Group has two divisions, Division P and Division Q. Division P

manufactures an item that is transferred to Division Q. The item has no
external market and 6,000 units produced are transferred internally each
year. The costs of each division are as follows:
Division P Division Q
Variable Cost ₹ 100 per unit ₹ 120 per unit
Fixed cost each year ₹ 1,20,000 ₹ 90,000

Head Office management decided that a transfer price should be set that
provides a profit of ₹ 30,000 to Division P. What should be the transfer price
per unit?
a. ₹ 145
b. ₹ 125
c. ₹ 120
d. ₹ 135

(ix) Which one of the following is not considered as a method of Transfer

Pricing?
a. Negotiated Transfer Pricing
b. Market Price Based Transfer Pricing
c. Fixed Cost Based Transfer Pricing
d. Opportunity Cost Based Transfer Pricing

(x) If standard cost ˃ actual, then it is:

a. Not favourable

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Directorate of Studies, The Institute of Cost Accountants of India
 INTERMEDIATE EXAMINATION SET 1
MODEL ASNWERS TERM – JUNE 2024
PAPER – 12 SYLLABUS-2022
MANAGEMENT ACCOUNTING
b. Favourable
c. Neither favourable nor not favourable
d. None of the above.

(xi) What is the labour rate variance if standard hours for 100 units of output are
400 @ ` 2 per hour and actual hours taken are 380 @ ` 2.25 per hour?
a. `120 (A)
b. `100 (A)
c. `95 (A)
d. ` 25 (F)

(xii) A budgeting process which demands each manager to justify his entire budget
in detail from beginning is:
a. Functional budget
b. Master budget
c. Zero base budgeting
d. None of the above

(xiii) The following ratios have been calculated for a company:

Gross profit margin 42%
Operating profit margin 28%
Gearing (debt/equity) 40%
Asset turnover 65%
What is the return on capital employed for the company?
a. 27·3%
b. 18·2%
c. 11·2%
d. 16·8%

(xiv) Which of the following is responsibility center?

a. Expense center
b. Profit center
c. Investment center
d. All of the above.

(xv) The minimum expected opportunity loss (EOL) is

a. Equal to EVPI
b. Minimum regret
c. Equal to EMV
d. Both (A) and (B)

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Directorate of Studies, The Institute of Cost Accountants of India
 INTERMEDIATE EXAMINATION SET 1
MODEL ASNWERS TERM – JUNE 2024
PAPER – 12 SYLLABUS-2022
MANAGEMENT ACCOUNTING
Answer:
i ii iii iv v vi vii viii ix x
c c b c a b c b c b
xi xii xiii xiv xv
c c b d d

SECTION-B
(Answer any 5 questions out of 7 questions given. Each question carries 14 marks.)
[5x14=70]

2. (a) Describe the functions of a Management Accountant in Modern Business

World. [7]

(b) A manufacturing company has three accounts clerks responsible for

processing purchase invoices of suppliers. Each clerk is paid a salary of
₹1,50,000 per annum and is capable of processing 5,000 purchase invoices per
year. In addition to the salary, the company spends ₹45,000 per year for
printing of forms, postage etc. (assuming that 15,000 purchase invoices are
processed).
During the year, 12,500 purchase invoices were processed. You are required
to:
1. Calculate the activity rate for the purchase order activity. Break the activity
rate into fixed and variable components.
2. Calculate the total activity availability and break this into activity usage
and unused activity.
3. Calculate the total cost of resources supplied and break this into activity
usage and unused activity. [7]
Answer:
2.(a) The functions of a management accountant can be categorized as below:
1. Planning and Accounting - Management accountants prepare an accounting
system covering costs, sales forecasts, profit planning, production planning, and
allocation of resources. It should also include capital budgeting, short-term and
long-term financial planning. They also prepare the procedures necessary to
implement the plan effectively.
2. Controlling - Management accountants assist in the control of an organisation’s
performance through the use of standard costing, budget control, accounting
ratios, funds flow statements, cost-cutting initiatives, and assessing capital
expenditure proposals and returns on investment.
3. Reporting - Management accountants assist the top management in finding out
the root cause of an unfavourable operation or event by identifying the real

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Directorate of Studies, The Institute of Cost Accountants of India
 INTERMEDIATE EXAMINATION SET 1
MODEL ASNWERS TERM – JUNE 2024
PAPER – 12 SYLLABUS-2022
MANAGEMENT ACCOUNTING
reasons for the adverse events as well as the responsible parties and
comprehensively reporting them.
4. Coordinating - Management accountants improve an organisation’s efficiency
and profits by providing various coordination tools such as budgeting, financial
reporting, financial analysis and interpretation, and so on. These tools aid
management by comparing cost and financial records, preparing financial
budgets and establishing standard costs, and analyzing cost deviations to enable
management by exception.
5. Communication - Management accountants create a wide range of reports to
communicate results to the superiors. Through published financial statements
and returns, they also inform the outside world about their company’s success.
6. Financial evaluation and Interpretation - Management accountants analyze the
data and present it to the management in a non-technical approach, together with
their comments and ideas, so that the shareholders and senior management can
understand it and make informed decisions.
7. Tax Administration - Management accountants are in charge of tax policies and
processes. They make the reports that are required by various authorities.
Further, they ensure that quarterly tax payments are made in advance, as
required by the relevant Act, to prevent the payment of penal interest on late tax
payments.
8. Evaluation of external effects - There may be changes in government policy and
existing laws. These amendments and policy changes can affect business goals.
Management accountants assess the extent of any impact of these external
factors on the business and report it to the stakeholder to take necessary
precautionary measures.
9. Economic appraisal - When the government makes regular announcements
about the country’s economic situation, management accountants is entrusted
with making the economic study and determine the influence of current
economic conditions on the company’s operations. They compile a report
containing their observations and present it to high management.
10. Asset Protection - Management accountants separate fixed asset registers for
each type and provide internal checks and controls to protect the company’s
assets. They also create the rules and regulations for each type of fixed asset and
get insurance coverage for all types of fixed assets.

2.(b)
1. Activity Rate = [(3 × ₹1,50,000) + ₹45,000] ÷ 15,000 = ₹33 per invoice
Fixed Activity Rate = ₹4,50,000 ÷ 15,000 = ₹30 per invoice
Variable Activity Rate = ₹45,000 ÷ 15,000 = ₹3 per invoice.
2. Activity availability = Activity usage + Unused Activity
15,000 invoices = 12,500 invoices + 2,500 invoices
3. Cost of resources supplied = Cost of activity used + Cost of unused activity
or, ₹4,50,000 + (₹3 × 12,500) = (₹33 × 12,500) + (₹30 × 2,500)
or, ₹4,87,500 = ₹4,12,500 + ₹75,000.

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Directorate of Studies, The Institute of Cost Accountants of India
 INTERMEDIATE EXAMINATION SET 1
MODEL ASNWERS TERM – JUNE 2024
PAPER – 12 SYLLABUS-2022
MANAGEMENT ACCOUNTING

3. Susma Products Co. Ltd. manufactured and sold in a year 15,000 units of a
particular product fetching a sales value of ₹15 lakhs. After charging direct material
@ 30% on sales value, direct labour 20% on sales value, variable overheads ₹10 per
unit, the company earned profit of ₹ 16⅔ per unit during the year. The existing
equipment can produce a maximum of 20,000 units per annum. In case, the demand
exceeds the maximum output, new equipment will be required which will cost ₹10
lakhs and it will have a life span of 10 years, with no residual value.
A prospective customer is willing to place an order on the company for 10,000 units
per year regularly at 90% of the present selling price, which will be, if accepted, over
and above the existing market for 15,000 units.
Irrespective of the fact whether or not the new order materializes, the cost increases
with immediate effect are:
1. 10% in the Direct Materials.
2. 25% in the Direct Labour.
3. ₹50,000 in Fixed Overheads per year.
If the order of additional 10,000 units is accepted, the fixed overhead will increase
by another ₹50,000 by way of increased administration expenses.
You are required to determine whether the company should accept the new business
at the stipulated price or decline the new offer and make a concerted sales drive to
sell the present unused capacity at the present selling price. The sales drive will cost
₹ 60,000 per year.
Ignore the financial charges on the cost of the equipment and assume there is no
opening and closing inventories. Variable costs will increase in direct proportion to
the output. [14]

Answer:
Present Selling price = ₹ 15,00,000/15,000 units = ₹ 100 per unit
Present Cost Structure: ₹
Direct materials (30% of sales value) 4,50,000
Direct labour (20% of sales value) 3,00,000
Variable overheads (₹10 per unit) 1,50,000
9,00,000
Contribution (₹ 15,00,000 -₹9,00,000) 6,00,000
Profit (₹ 16 2/3 per unit ) 2,50,000
Fixed Overheads 3,50,000

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Directorate of Studies, The Institute of Cost Accountants of India
 INTERMEDIATE EXAMINATION SET 1
MODEL ASNWERS TERM – JUNE 2024
PAPER – 12 SYLLABUS-2022
MANAGEMENT ACCOUNTING
Comparative statement of the proposals (Revised cost basis)
Particulars Present Maximum Present plus
capacity Capacity 10,000 units
Units 15,000 20,000 25,000
Sales value (₹) 15,00,000 20,00,000 15,00,00 (+)
9,00,000
= 24,00,000
Direct materials (33% on 4,95,000 6,60,000 4,95,000
sales value)(₹)
(10/15 × ₹4,95,000) (+) 3,30,000
Direct labour (25% on sales 3,75,000 5,00,000 3,75,000
value) (₹)
(10/15 × 3,75,000) (+) 2,50,000
Variable overhead (₹10 per 1,50,000 2,00,000 2,50,000
unit)
Fixed overhead 3,50,000 3,50,000 3,50,000
(+) 50,000 (+)50,000 (+)50,000
Sales drive Costs - 60,000 -
Depreciation on new - - 1,00,000
Equipment
Total costs 14,20,000 18,20,000 22,00,000
Profit 80,000 1,80,000 2,00,000
It will be advisable for the company not to accept the offer. The Company should instead
to sell 20,000 units @₹100 per unit, since the acceptance of the offer will reduce the
amount of profit.

4. (a) Reaxon Ltd. a manufacturing company provides you the following details for
the year 2023:
Sales (16,000 units) `16,00,000
Less Expenses (including ` 8,00,000 Fixed `17,60,000
Expenses)
Net loss ` 1,60,000
The manager believes that an increase of `4,00,000 in advertising outlays will
increase sales substantially. His plan was approved by the chairman of the
board.
Required:
(i) Calculate P/V Ratio and Break Even Sales.
(ii) Calculate what additional sales will be required to offset that increase
in advertisement outlays.

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Directorate of Studies, The Institute of Cost Accountants of India
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MODEL ASNWERS TERM – JUNE 2024
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(iii) Determine what should be selling price per unit if the breakeven point
is brought down to 20,000 units? [7]

(b) XYZ Co. purchases 40,000 glass cases per annum from an outside supplier at
` 5 each. The production manager feels that these should be manufactured and
not purchased. A machine costing ` 1,00,000 (no salvage value) will be required
to manufacture the item within the factory. The machine has an annual
capacity of 60,000 units and life of 5 years. The costs required for manufacture
of each glass case is as follows:
Direct Materials ` 2.00
Direct Labour ` 1.00
Variable overheads 100% of Labour Cost
You are required to solve and decide:
(i) should the company continue to purchase the glass cases from outside
supplier or should it make them in the factory?
(ii) should the company accept an order to supply 10000 glass cases to the
market at a selling price of ` 4.50 per unit? [7]
Answer:
4.(a)
(i) Calculation of P/V Ratio and Break Even Sales (BES):
P/V Ratio = (Sales -Variable Cost)/ Sales× 100
P/V Ratio = (16,00,000 - 9,60,000)/ 16,00,000× 100
P/V Ratio = 40%
BEP (Sales) = (Fixed Cost)/ (P/ V Ratio)
= (` 8,00,000 + ` 4,00,000)/40%
= ` 30,00,000
Or,
BEP (Sales) Unit = (`8,00,000+`4,00,000)/ (`100-`60)
= `12,00,000/`40
= 30,000 units.
(ii) Additional Sales Volume = (Proposed Expenditure)/ (P/V Ratio)
= `4,00,000/40%
= `10,00,000
(iii) Selling price if BEP is 20000 units:
BEP = Fixed cost / contribution
20,000 = 12,00,000/C,
or C =`12,00,000/20,000
=`60

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Directorate of Studies, The Institute of Cost Accountants of India
 INTERMEDIATE EXAMINATION SET 1
MODEL ASNWERS TERM – JUNE 2024
PAPER – 12 SYLLABUS-2022
MANAGEMENT ACCOUNTING
S-V=C
Sales – `60 = `60
Sales = `60 + `60 = `120
Or,
SP per unit = VC Per unit + (Contribution/BEP)
= `60+(`12,00,000/20,000)
= `120

4.(b)
(i) Total variable cost of manufacturing one glass case = ` 4.00
Additional Fixed cost of manufacture p.a.
Depreciation (1,00,000 x 1/5) = ` 20,000
Since the marginal cost of manufacturing the case is less than the supplier's
price of ` 5, there shall be a saving of ` (` 5 - 4) or ` 1 per case if the Case is
manufactured within the factory. Manufacturing will however result in an
additional fixed cost of ` 20,000 p.a.
Total saving = 40,000 cases @ ` 1 = ` 40,000
Less additional fixed cost (depreciation) = ` 20,000
Net Savings = ` 20,000
Therefore, it is advisable to manufacture the cases in the factory.

(ii) If the company accepts to sell additional 10,000 units at 4.50, then additional
contribution is 10,000 × 0.50 = ` 5,000. This will add to total profit.

5. Z Limited manufactures a standard product. The standard mix of it is:

Material X: 60% at `15 per kg.
Material Y: 40% at `10 per kg.
Normal loss in output is 20 percent of input due to shortage of material Y. The actual
results for May, 2023 were:
Material X: 210 kg at `16 per kg.
Material Y: 190 kg at `10.50 per kg.
Actual output: 330 kg.
You are required to calculate:
(i) Material Cost Variance
(ii) Material Price Variance
(iii) Material Usage Variance

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Directorate of Studies, The Institute of Cost Accountants of India
 INTERMEDIATE EXAMINATION SET 1
MODEL ASNWERS TERM – JUNE 2024
PAPER – 12 SYLLABUS-2022
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(iv) Material Mix Variance
(v) Material Yield Variance.
[14]
Answer:

Working notes:
1. Total SQ for Actual output= 330 × 100 ÷ 80 = 412.50 kg.
Standard Quantity for X = 412.50 × 60% = 247.50 kg.
Standard Quantity for Y = 412.50 × 40 % = 165.00 kg.

2. RSQ = Total Actual quantity × Standard proportion

Revised Standard Quantity for X = (210 + 190) = 400 × 60% = 240 kg.
Revised Standard Quantity for Y = = (210 + 190) = 400 × 40% = 160 kg.

3. Standard Yield (SY) by using actual quantity: 400kg × 80% = 320 kg.

Computation of Material Variances:

(i) Material Cost Variance = (SQ × SP) – (AQ × AP)
For material X: (247.5 × `15) – (210 × `16) = `3,712.50 – ` 3,360 = `352.50
(F)
For material Y: (165 × ` 10) – (190 × ` 10.50) = ` 1,650 – ` 1,995 = ` 345 (A)
Total Material Cost Variance = ` 7.50 (F)
(ii) Material Price Variance = AQ (SP – AP)
For X: 210 (` 15 – ` 16) = ` 210 (A)
For Y: 190 (` 10 – ` 10.50) = ` 95 (A)
Total Material Price Variance = ` 305 (A)
(iii) Material Usage Variance = SP (SQ – AQ)
For X: `15 (247.50 – 210) = `562.50 (F)
For Y: 10 (165 – 190) = ` 250.00 (A)
Total Material Usage Variance = ` 312.50 (F)
(iv) Material Mix Variance = SP (RSQ – AQ)
For X: ` 15 (240 – 210) = ` 450 (F)
For Y: ` 10 (160 – 190) = ` 300 (A)
Total Material Mix Variance = ` 150 (F)
(v) Material Yield Variance = Standard Cost per unit (SC) (AY – SY)

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Directorate of Studies, The Institute of Cost Accountants of India
 INTERMEDIATE EXAMINATION SET 1
MODEL ASNWERS TERM – JUNE 2024
PAPER – 12 SYLLABUS-2022
MANAGEMENT ACCOUNTING
= ` 16.25 (330 – 320)
= ` 162.50(F)
Standard Cost (SC) per unit = ` 16.25, calculated as under:
X: 247.50 × `15 = `3712.50
Y: 165 × ` 10 = `1650.00
`5,362.50
Total Standard Cost for 330 units of output = ` 5362.50
Hence, SC per unit = ` 5362.50 ÷ 330= ` 16.25

6. (a) The following information is extracted from the records of Aljhon Ltd. a
manufacturing company using standard costing system for the month ending
October, 2023:
Budget Actual
Fixed Overhead 10,000 12,000
Production(units) 2,000 2,100
Standard Time per Unit (hours) 10 —
Actual Hours Worked — 21,000

Required to calculate the following Fixed Overhead Variances:

(i) Fixed Overhead Cost Variance
(ii) Fixed Overhead Expenditure Variance
(iii) Fixed Overhead Volume Variance.
[7]

(b) With the following data for a 60% activity, prepare a budget for production at
80% and 100 % capacity Production at 60% capacity 300 units.
Materials: ` 100 per unit
Labour: ` 40 per unit
Expenses: ` 10 per unit
Factory expenses: ` 40,000 (40% fixed)
Administrative expenses: ` 30,000 (60% fixed).
[7]
Answer:
6.(a)
For Fixed Overhead Variance:
Actual Fixed Overhead incurred (Given) `12,000
Budgeted Fixed Overhead for the period `10,000
Standard Fixed overhead for production
= (Standard output for actual time X Standard Fixed Overhead per unit)
= 2,100 unit X (` 10,000 ÷ 2,000 unit) `10,500

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 INTERMEDIATE EXAMINATION SET 1
MODEL ASNWERS TERM – JUNE 2024
PAPER – 12 SYLLABUS-2022
MANAGEMENT ACCOUNTING

(i) Fixed Overhead Variance = Standard F.O. – Actual F.O.

= `10,500 – `12,000
= `1,500 (A)

(ii) F.O. Expenditure Variance = Budgeted F.O. – Actual F.O.

= `10,000 – `12,000
= `2,000 (A)

(iii) F.O. Volume Variance = Standard F.O. – Budgeted F.O.

= `10,500 – `10,000
= `500 (F)

6.(b)
Flexible Budget
(`)
Particulars 60% Capacity 80% Capacity 100%
Capacity
300 units 400 units 500 units
Material (` 100 per unit) 30,000 40,000 50,000
Labour (` 40 per unit) 12,000 16,000 20,000
Expenses (`10 per unit) 3,000 4,000 5,000
Variable Factory Expenses (`80 per unit) 24,000 32,000 40,000
Variable Administrative Expenses (`40 per 12,000 16,000 20,000
unit)
Fixed Factory Expenses (40 % of `40,000) 16,000 16,000 16,000
Fixed Administrative Expenses (60% of ` 18,000 18,000 18,000
30,000)
Total 1,15,000 1,42,000 1,69,000

7. (a) An investment centre has net assets of ₹8,00,000, and made profits before
interest of ₹1,60,000. The notional cost of capital is 12%. This is the company’s
target return.
An opportunity has arisen to invest in a new project costing ₹1,00,000.
The project would have a four-year life, and would make profits of ₹15,000
each year.
Required to compute:
(A) What would be the ROI with and without the investment? (Base your
calculations on opening book values). Determine would the investment
centre manager wish to undertake the investment if performance is judged
on ROI.

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 INTERMEDIATE EXAMINATION SET 1
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MANAGEMENT ACCOUNTING
(B) What would be the average annual RI with and without the investment?
(Base your calculations on opening book values). Determine would the
investment centre manager wish to undertake the investment if
performance is judged on RI? [7]

(b) Describe the four perspectives of the Balanced Scorecard. [7]

Answer:
7.(a)

(A) ROI
Without the With the
investment investment
Profit ₹ 1,60,000 ₹ 1,75,000
Capital employed ₹ 8,00,000 ₹ 9,00,000
ROI =(Profit/ Capital 20.0% 19.4%
Employed× 100)

ROI would be lower; therefore, the centre manager will not want to make the
investment. Since his performance will be judged as having deteriorated. However,
this result in dysfunctional behaviour since the company’s target is only 12%.

(B) RI
Without the Investment with the investment
Profit 1,60,000 1,75,000
Less: Notional Interest 96,000 1,08,000
RI (₹ 8,00,000 × 12%) 64,000 (₹ 9,00,000 ×12%) 67,000

The investment centre manager will want to undertake the investment because it
will increase RI. This is the correct decision for the company since RI increases by
₹3,000 as a result of the investment.

7.(b)
The four Perspectives of the Balanced Scorecard:
1. Financial Perspective:
This perspective evaluates the Profitability of the strategy. Because cost
reduction relative to competitors, costs and sales growth are key strategic
initiatives, the financial perspectives focuses on how much of operating income

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Directorate of Studies, The Institute of Cost Accountants of India
 INTERMEDIATE EXAMINATION SET 1
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MANAGEMENT ACCOUNTING
and return on capital results from reducing costs and selling more units.
2. Customers Perspective:
This perspective identifies the targeted market segments and measures the
company’s success in these
segments. To monitor its growth objectives, number of new customers and
customer’s satisfaction.
3. Internal business process Perspective:
This perspective focuses on internal operations that further the customers’
perspective by creating value for customers and further the financial perspective
by increasing shareholder value. Chipset determines internal business process
improvement targets after benchmarking against its main competitors. The
internal business process perspective comprises three sub processes:
 The innovation process:
Creating products, services and processes that will meet the
needs of customers, aiming at lowering costs and promote growth
by improving the technology of its manufacturing.
 The operations process:
Producing and delivering existing products and services that will
meet the needs of customers. The strategic initiatives are (A)
improving manufacturing quality reducing delivery time to
customers and (B) Meeting specified delivery dates.
 Post sales service providing service and support to the customer after the
sale of a product of service. Although customers do not require much
post sales service.
4. Learning & Growth Perspectives:
This perspective identifies the capabilities of the organization must excel at to
achieve superior internal processes that create value for customers and
shareholders.
A Company’s learning and growth perspectives emphasize three capabilities:
 Employee Capabilities measured using employee education and skill levels.
 Information system capabilities, measured by percentage of manufacturing
processes with real-time feedback and
 Motivation measured by employee satisfaction and percentage of
manufacturing and sales employees (line employees) empowered to manage
processes.

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Directorate of Studies, The Institute of Cost Accountants of India
 INTERMEDIATE EXAMINATION SET 1
MODEL ASNWERS TERM – JUNE 2024
PAPER – 12 SYLLABUS-2022
MANAGEMENT ACCOUNTING
8. (a) B Ltd. has a new wonder product, the V, of which it expects great things. At
the moment the company has two courses of action open to it, to test market
the product or abandon it.
If the company test markets it, the cost will be ₹ 1,00,000 and the market
response could be positive or negative with probabilities of 0.60 and 0.40.
If the response is positive the company could either abandon the product or
market it full scale.
If it markets the V in full scale, the outcome might be low, medium or high
demand, and the respective net gains/ (losses) would be (200), 200 or 1,000 in
units of ₹1,000 (the result could range from a net loss of ₹ 2,00,000 to a gain of
₹10,00,000). These outcomes have probabilities of 0.20, 0.50 and 0.30
respectively.
If the result of the test marketing is negative and the company goes ahead
and markets the product, estimated losses would be ₹ 6,00,000.
If, at any point, the company abandons the product, there would be a net gain
of ₹ 50,000 from the sale of scrap. All the financial values have been discounted
to the present.
Required:
Prepare and draw a decision tree and also include figures for cost, loss or profit
on the appropriate branches of the tree. [7]

(b) Explain briefly the concept of Revenue Center. [7]

Answer:
8.(a)
The starting point for the tree is to establish what decision has to be made now.
What are the options?
(A) To test market
(B) To abandon
The outcome of the ‘abandon’ option is known with certainty. There are two
possible outcomes of the option to test market, positive response and negative
response.
Depending on the outcome of the test marketing, another decision will then be
made, to abandon the product or to go ahead.

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Directorate of Studies, The Institute of Cost Accountants of India
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MANAGEMENT ACCOUNTING

8.(b)
A revenue center is strictly defined as an organizational unit that is responsible
for the generation of revenues and has no control over setting selling prices or
budgeting costs. For instance, in many retail stores, each sales department is
considered an independent unit and managers are evaluated based on their
departments’ total revenues.

A revenue center is one where the employees located in a specific functional area
are solely responsible for attaining preset revenue levels. The sales department is
sometimes considered to be a revenue center. In this capacity, employees are
essentially encouraged to obtain new sales without regard to the cost of obtaining
them. This can be a dangerous way to run a function, unless strict guidelines are
set up that control the overall spending limits allowed, the size and type of
customer solicited, and the size and type of orders obtained. Otherwise, the sales
staff will obtain orders from all kinds of customers, including those with poor
credit records or histories of returning goods, not to mention orders that are so
small that the cost of processing the order exceeds the profit gained from the sale.

Other counterproductive activities associated with revenue centers are the

inordinate use of travel funds to meet with customers, selling products at large
discounts from the standard price, offering special promotional guarantees to
customers, allowing credits on previously purchased products if the price
subsequently declines, and offering to extend payment terms. For all of these
reasons, revenue centers are not recommended without the addition of stringent
controls to ensure that the sales staff obtains only revenues that will result in
adequate levels of profitability.

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 INTERMEDIATE EXAMINATION SET 1
MODEL ASNWERS TERM – JUNE 2024
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MANAGEMENT ACCOUNTING
In a revenue center, performance evaluations are limited because the manager has
control over only one item: revenues. Actual performance in revenue centers (as
well as in any other area that has revenue control) should be compared against
budgeted performance to determine variances from expectations. Budgeted and
actual revenues may differ because of either volume of units sold or price of units
sold. To compare budgeted and actual revenues, the price and volume
components of revenue must be distinguished from one another. The sales price
variance is calculated by multiplying the actual number of units sold by the
difference between actual and budgeted sales prices. This variance indicates the
portion of the total revenue variance that is related to a change in selling price.
The sales volume variance is calculated by multiplying the budgeted sales price
by the difference between the actual and budgeted sales volumes.

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Directorate of Studies, The Institute of Cost Accountants of India
 INTERMEDIATE EXAMINATION SET - 1
MODEL ANSWERS TERM – DEC 2024
PAPER – 12 SYLLABUS 2022
MANAGEMENT ACCOUNTING
Time Allowed: 3 Hours Full Marks: 100
The figures in the margin on the right side indicate full marks.

SECTION – A (Compulsory)
1. Choose the correct option: [15 x 2 = 30]

(i) Which of the following is not a characteristic of management accounting?

(a) Forward-looking
(b) Historical orientation
(c) Internal focus
(d) Decision - making

(ii) The break-even point is where:

(a) Total costs equal total revenue
(b) Total revenue exceeds total costs
(c) Variable costs equal fixed costs
(d) Contribution margin is negative

(iii) Variance analysis is used to:

(a) Identify the root causes of inefficiencies
(b) Calculate contribution margin
(c) Prepare financial statements
(d) Determine break-even point

(iv) Which of the following is not a relevant cost information in a make or buy decision in
short run (i.e., in marginal costing)?
(a) Burglary
(b) Fire
(c) Marine
(d) None of the above

(v) If Sales - ₹ 9,00,000 ; Margin of safety = 40% ; P/V Ratio = 2/3, then what is the Break-
even Sales?
(a) ₹ 4,50,000
(b) ₹ 3,60,000
(c) ₹ 5,40,000
(d) ₹ 6,00,000

(vi) Sale for two consecutive months, of a company are ₹3,80,000 and ₹ 4,20,000.The
company‘s net profits for these months amounted to ₹ 24,000 and ₹ 40,000
respectively. There is no change in contribution/sales ratio or fixed costs. The
contribution/sales ratio of the company________ is.

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MANAGEMENT ACCOUNTING
(a) 1/3
(b) 2/5
(c) 1/4
(d) 3/8

(vii) Standard Cost is______ a cost.

(a) Pre-determined
(b) Actual
(c) Historical
(d) Short-term

(viii) Which of the following budgets should be prepared first?

(a) Production Budget
(b) Purchase Budget
(c) Master Budget
(d) Sales Budget

(ix) Labour Turnover _________

(a) The number of people working in the current period
(b) The number of people who left the organisation in the previous period
(c) Rate of change of labour force
(d) The rate of the change in the wages of the labour force

(x) The per unit expenses of the_______portion varies with the volume of production
while portion remains the same with volume.
(a) Fixed; Variable
(b) Variable; Fixed
(c) Variable; Semi-Variable
(d) Fixed; Semi-Variable

(xi) Which method of costing is commonly used by companies that produce unique
products or services?
(a) Process costing
(b) Job costing
(c) Batch costing
(d) Both A and C

(xii) Material price variance is calculated by________.

(a) Standard Price × Actual Quantity - Actual Price × Actual Quantity
(b) Standard Price × Actual Quantity - Actual price × Standard Quantity
(c) Actual Price × Actual Quantity - Standard price × Standard Quantity
(d) Actual price × Standard Quantity - Standard price × Standard Quantity

(xiii) Calculate the material price variance from the following:

Actual Quantity - 2.5 kgs

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Directorate of Studies, The Institute of Cost Accountants of India
 INTERMEDIATE EXAMINATION SET - 1
MODEL ANSWERS TERM – DEC 2024
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MANAGEMENT ACCOUNTING
Standard Price - ₹ 3 per kg
Actual Price - ₹ 5 per kg
Standard Quantity - 4.5 kgs
(a) ₹ 3(F)
(b) ₹ 5(A)
(c) ₹ 12(A)
(d) ₹ 6 (F)

(xiv) Which budgeting technique involves preparing budgets from the bottom of the
organization hierarchy to the top?
(a) Top-down budgeting
(b) Zero-based budgeting
(c) Incremental budgeting
(d) Bottom-up budgeting

(xv) A manufacturing company budgets to produce 10,000 units during a period. It

expects to incur ₹50,000 in fixed overhead costs and ₹3 per unit in variable overhead
costs. If the actual production turns out to be 9,500 units, what is the company's
flexible budget overhead cost?
(a) ₹74,500
(b) ₹77,000
(c) ₹79,500
(d) ₹78,500
Answer:

(i) (ii) (iii) (iv) (v) (vi) (vii) (viii) (ix) (x)
b a a b c b a d c a
(xi) (xii) (xiii) (xiv) (xv)
b a b d d

SECTION – B

(Answer any 5 questions out of 7 questions given. Each question carries 14 marks.)
[5 x 14 = 70]
2. (a) Globalisation brought about significant changes in the business environment. Along
with the changes the roles of the management accountant had to be redefined. In the
following lines, discuss some of the impacts of the new business environment on
management accounting.
[7]

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Directorate of Studies, The Institute of Cost Accountants of India
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MODEL ANSWERS TERM – DEC 2024
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MANAGEMENT ACCOUNTING
(b) ABC & Associates provides consulting and tax preparation services to its clients. It charges
a ₹100 fee per hour for each service. The firm’s revenues and costs for the month March
2022 are shown in the following income statement:

Particulars Tax Preparation Tax Consulting Total

Revenue - Amount (₹) 1,30,000 2,70,000 4,00,000
Expenses:
Secretarial support 80,000
Supplies 72,000
Computer costs, etc 40,000
Profit 1,92,000

The firm uses ABC and the following are the cost drives:

Overhead Cost Cost Driver Tax Tax

Preparation Consulting
Secretarial support Number of clients 72 48
Supplies Transactions with 200 300
clients
Computer costs Computer hours 1,000 600

Required:
(i) Prepare the income statement using activity-based costing and the firm’s three cost
drivers.
(ii) Calculate the income statement using direct-labour hours as the only allocation base:
1,300 hours for tax preparation; 2,700 hours for tax consulting.
(iii) How might the firm’s decisions be altered if it were to allocate all overhead costs using
direct labour hours?
(iv) Under what circumstances would the about-based allocation and activity-based costing
(using the three cost drivers) result in similar profit results?
[7]

Answer:

2. (a) The impacts of the new business environment on management accounting are: -
• Global competition - Prior to the era of globalisation, many organizations operated in a
protected competitive environment. Globalisation ushered in changes where there have been
reductions in tariffs and duties on imports and exports as well as dramatic improvements in
transportation and communication systems. This has facilitated firms to operate globally and
resulted in stiff competition from the very best organisations worldwide. Business operations
also changed significantly. The new competitive environment has increased the demand for
information relating to quality and customer satisfaction. Customer profitability analysis and
value analysis are important issues being incorporated in the arena of management
accounting.

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Directorate of Studies, The Institute of Cost Accountants of India
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• Changing product life cycles – Changing profile of the customer along with behavioural
issues have contributed to drastically reduce the product life cycle. First mover advantage is
critical and every organisation is desperately seeking the advantage by increasing their
investment in research and development. In this respect, the management accountant
plays a crucial role as in order to compete successfully, companies must be able to manage
their costs effectively at the design stage, have the capability to adapt to new environment,
different and changing customer requirements and reduce the time to market of new and
modified products.
• Advances in manufacturing technology - In order to compete effectively, companies must
be able to manufacture high quality innovative products at a low cost, and also provide a
first-class customer service. Flexibility to cope with short product life cycles, demands for
greater variety of product, more discriminating customers and increasing international
competition has created enormous pressure on the operational activities of the business.
Some internationally reputed manufacturing companies have responded to these by
replacing traditional production systems with lean manufacturing systems that seek to
reduce waste by implementing just-in-time (JIT) production systems, focusing on quality,
simplifying processes and focusing on advanced manufacturing technologies (AMTs).
• The impact of information technology - The use of information technology (IT) to support
business activities has increased dramatically. Along with electronic business
communication technologies known as e-business, e-commerce or internet commerce have
also developed significantly. Consumers have become more discerning in their purchases as
in online transactions it is relatively easy to compare the merits of different products and
services. This have a significant impact on the work of management accountants. The role
of the management accountant as a gatherer and processor of information is lost as the
managers can directly access the management accounting system on their personal
computers to derive the information they require for decision making. Management
accountants have now become more involved in interpreting the information generated from
the accounting system and providing business support for managers
• Environmental and sustainability issues – In recent times, ESG has become the focal point
in the operations of the company. Along with this, ethical issues have also come to the
forefront as the business has to deal with customers who are more aware of this issues then
they were a decade back. Thus, there is desperate need for organisations to be run in a
suitable way. Sustainable development, where it is acknowledged that environmental
resources are limited and should be preserved for future generations, is the order of the day.
Management accounting with specific focus on environmental issues is becoming
increasingly important in organizations as environmental costs are large in many
organisations. There are three specific reasons for this:
 Environmental costs are often high in the many manufacturing organisations.
 Regulatory requirements often impose huge fines for non-compliance.
 Companies are increasingly realizing that being socially and environmentally
responsible improves their image and this has positive impact on their bottom line.

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Directorate of Studies, The Institute of Cost Accountants of India
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The above mentioned changes impacted the management of the companies and the
managers have realized that they need to develop system for measuring and reporting
environmental costs along with preparation of detailed report on the consumption of scarce
environmental resources, hazardous materials used and pollutants emitted to the
environment.
• Deregulation and privatization – Prior to the era of globalization, companies in many
industrial sectors were government owned monopolies and operated in a highly regulated,
protected and non-competitive environment. Thus the organisations, especially those
incurring losses, were not under any pressure to improve the quality and efficiency of their
operations and to improve profitability by adding or dropping particular products or services
from their array of product or service. Thus trivial attention was given to developing
management accounting systems that accurately measured the costs and profitability of
individual products or services. Globalization ushered in the privatization and deregulation
which resulted in the elimination of pricing and competitive restrictions. Thus, companies
were compelled to design an elaborate management accounting system that made them to
realize their cost base and determine the source of profitability for their products, customers
and markets.
• Focus on value creation – The scope of management accounting is enormous. Managers
who are in charge of the operations of the organisations depends on the management
accountants in realisation of the strategic goal of the organisations. With the advent of time,
the role of the management accountant has changed from merely interpreting, managing and
recording costs to creating value. Though cost reduction still remains as the basic function
of the management accountant as it has specific impact on selling price fixation which
impacts customer value. The new business environment resulted in management accounting
distinguishing between value-added and non-value-added activities.
• There is another aspect of new business paradigm which the management accountant has to
consider as they develop the company’s management accounting system. Intangibles have
increased manifold. This presents a challenge to management accountants as to how to
identify, measure and report on the value of intangibles.
• Customer orientation – In the new business environment, gaining competitive advantage
has become the singular goal of every business organisation. Companies have realized that
in order to sustain in today’s competitive environment they need to become more customer
driven and recognize that customers are crucial to their future success. This has made the
companies realize that customer satisfaction is one of the most important critical success
factor (CSF) which helps companies realize their strategic goal. Customer satisfaction is
relational to cost, quality, reliability, delivery and the choice of innovative new products.

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(b) Activity-based versus Traditional Costing

(i)
Particulars Tax Preparation Consulting Total
Amount Amount Amount
₹ ₹ ₹
Revenue 1,30,000 2,70,000 4,00,000
Less: Expenses Secretarial 48,000 32,000 80,000
support
Supplies 28,800 43,200 72,000
Computer Depreciation 25,000 15,000 40,000
Profit 28,200 1,79,800 2,08,000

Working Notes:
• ₹80,000 ÷ 120 clients = ₹666.67 per client
• ₹ 72,000 ÷ 500 transactions = ₹144 per transaction
• ₹40,000 ÷ 1,600 hours = ₹25 per computer hour
• ₹666.67 per client × 72 clients = ₹48,000
• ₹144 per hour × 200 transactions = ₹28,800
• ₹25 per computer hour × 1,000 hours = ₹ 25,000
(ii)

Particulars Tax Preparation (₹) Tax Consulting (₹) Total (₹)

Revenue 1,30,000 2,70,000 4,00,000
Expenses 62,400 1,29,600 1,92,000
Profit 67,600 1,40,400 2,08,000

Working Notes:
• ₹48 per labour hour (₹1,92,000 total expenses ÷ 4,000 labour hours )
• ₹62,400 = ₹48 per labour hour × 1,300 hours of labour
• 2,700 labour hours × ₹48 per labour hour = ₹1,29,600
(iii) Under the labour-based overhead allocation, tax preparation appears to be more profitable than it
does under ABC, and might lead the firm to concentrate more heavily on tax preparation.
(iv) ABC and traditional costing systems generally yield comparable product-line profits when
overhead is a small portion of costs, or when cost drivers are highly correlated with direct-labour hours.

In this case, labour hours were distributed 32.5% to Preparation and 67.5% to Consulting. If firm’s three
cost drivers were each also distributed 32.5% to preparation and 67.5% to Consulting, the labour-hour
and ABC allocation would be identical.

3. Aurthor company is a multidivisional company and its managers have been delegated full profit
responsibility and autonomy to accept or reject transfers from other divisions.

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Directorate of Studies, The Institute of Cost Accountants of India
 INTERMEDIATE EXAMINATION SET - 1
MODEL ANSWERS TERM – DEC 2024
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MANAGEMENT ACCOUNTING
Division X produces a sub-assembly with a ready competitive market. This sub-assembly is
currently used by Division Y for a final product that is sold outside at ₹1,200. Division X Charges
Division Y market price for the sub-assembly which is ₹700 per unit. Variable costs are ₹520 and
₹600 for Divisions X and Y respectively.

The manager of Division Y feels that Division X should transfer the subassembly, at a lower price
than market because at this price, Division Y is unable to make a profit.
Required:
(i) Calculate Division Y’s profit contribution if transfers are made at the market price and also
the total contribution to profit for the company.
(ii) Assume that Division A can sell all its production in the open market. Should Division X
transfer goods to Division Y? If so, at what price.
(iii) Assume that Division X can sell in the open market only 500 units at ₹700 per unit out of 1,000
units that it can produce every month and that a 20 per cent reduction in price is necessary to
sell at full capacity. Should transfers be made? If so, how many units should it transfer and at
what price? prepare a schedule showing comparisons of contribution margins under three
different alternatives to support your decision. [14]

Answer:
Particulars ₹ ₹
Calculation for Division Y’s contribution Margin
1. Selling Price of Final Product 1,200
Less: Division Y’s variable cost 600
Division Y’s purchase cost 700 1,300
Division Y’s loss (100)
Calculation for Company’s contribution Margin
Selling price of final product 1,200
Less: Division Y’s variable cost 600
Division X’s variable cost 520 1,120
Company’s Contribution margin 80
2. Selling price of sub-assembly 700
Less: Division X’s variable cost 520
Company’s contribution margin 180

The company contribution is ₹100 greater if the sub-assembly is sold on the intermediate market
rather than to Division B. Thus, it should be sold in the intermediate market. The market price
would be the appropriate transfer price if transfers were made:
3. Alternative 1: Transfer 1,000 units to Division Y.
Alternative 2: Sell 500 units in the intermediate market at ₹700 and transfer 500 units to
Division Y.

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Directorate of Studies, The Institute of Cost Accountants of India
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Alternative 3: Sell 1,000 units on the intermediate market at 20% reduced price.

Alternative 1: ₹
Company sales: (1000 units × ₹1200) 12,00,000
Less: Variable costs (1000 units @ ₹520 + 1,000 units @ ₹600) 11,20,000
Contribution margin 80,000

Alternative 2: ₹
Company sales: 9,50,000
(500 units @ ₹700 + 500 units @ ₹1,200)
Variable costs: (1000 units @ ₹520 + 500 units @ ₹600) 8,20,000
Contribution margin 1,30,000

Alternative 3: ₹
Company sales:
1000 units @ ₹560 (700 – 140) 5,60,000
Variable costs: (1000 units @ ₹520 ) 5,20,000
Contribution Margin 40,000

Conclusion:
Transfers should be made, 500 units should be transferred to Division Y. The transfer price should
be set at a price greater than the variable cost of Division X (₹520) and less than the marginal
revenue to Division Y (₹600). Division Y’s marginal revenue will be ₹600 (₹1,200 market price -
division Y’s own variable cost ₹600).

4. (a) Company XYZ manufactures and sells a single product. Here are the details for the current
period:-
Selling Price per Unit: ₹50
Variable Cost per Unit: ₹30
profit: ₹20,000
Current Sales Volume: 5,000 units
Calculate the following:
(i) Fixed cost
(ii) P/v ratio
(iii) Break-Even Point in Units
(iv) Margin of safety
(v) Number of Units Needed to Achieve a Desired Profit of ₹40,000 [7]
4. (b) A Co. currently operating at 80% capacity has the following profitability particulars:

Particulars Amount
₹
Sales 16,00,000

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Costs:
Direct Materials 5,80,000
Direct labour 2,40,000
Variable Overheads 60,000
Fixed Overheads 5,20,000
Profit 2,00,000

An export order has been received that would utilise 40% of the capacity of the factory. The
order has either to be taken in full and executed at 10% below the normal domestic prices,
or rejected totally. The alternatives available to the management are given below:
A. Reject order and Continue with the domestic sales only, as at present;
B. Accept the order, and turn away excess domestic demand;
C. Increase capacity so as to accept the export order and maintain the present domestic
sales by:
(i) buying an equipment that will increase capacity by 10% and fixed cost by ₹65,000and
(ii) Work overtime at one and a half the normal rate to meet balance of required capacity.
Prepare comparative statements of profitability and suggest the best.
Prepare a statement showing profits from different alternatives and suggest the best. [7]
Answer:

4 (a)

(i) Calculation of Fixed cost:-

Sales = current sales volume × selling price per unit

= 5,000 units×₹50
= ₹2,50,000
Variable cost = variable cost per unit × current sales volume
= ₹30 × 5,000 units
= ₹1,50,000
Contribution = sales – variable cost
= ₹2,50,000-1,50,000
=1,00,000
Profit =₹20,000
Fixed cost = contribution – profit
= 1,00,000-20,000
= 80,000
(ii) Calculation of P/V ratio:
P/V ratio = contribution/ sales
= 1,00,000/2,50,000
= 40%

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(iii) Calculation of Break-even point in units
Break - even sales = fixed cost ÷ p/v ratio
= 80,000/40%
= ₹200,000
Break-even point in units = break-even sales/ selling price per unit
= ₹2,00,000/₹50
= 4,000units.
(iv) Calculation of margin of safety
MOS = sales – break-even sales
= ₹2,50,000-₹2,00,000
= ₹50,000
(v) Number of units needed to achieve a desired profit of ₹40,000
Desired Profit = ₹40,000
Fixed cost = ₹80,000
Desired Contribution = fixed cost + profit
= ₹80,000 + ₹40,000
= ₹1,20,000
Desired sales = desired contribution/ p/v ratio
= ₹1,20,000/40%
= ₹3,00,000
Therefore, no. of units needed to achieve a desired profit of ₹40,000 = ₹3,00,000/₹50
= 6,000 units.

(b) Alternative (A): Continue with domestic sales and reject the export order

Serial Description Workings ₹ Lakhs

1 Capacity Given – 80%
2 Sales Given 16.00
3 Variable Costs
a. Direct Material 5.80
b. Direct Labour Given 2.40
c. Variable Overheads 0.60
d. Sub Total 8.80

4 Contribution (2-3) 7.20

5 Fixed Costs Given 5.20
6 Profit (4-5) 2.00

Alternative (B): Accept the export order and allow the domestic market to starve to the
extent of excess of demand

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This alternative envisages utilization of 40% of the capacity for the export order and 60% of
the capacity for domestic market. Further, the export order is to be executed at 10% below the
current domestic prices i.e.., (100- 10) % = 90% of the price. Accordingly:
Sales at 100% Capacity = (16 ÷ 80%) = ₹20 Lakhs
Value of the export order = (40% of Capacity × 90% of the Price) = (20 × 40% × 90%) =
₹7.20 lakhs.
Value of the domestic sales = (20 × 60%) = ₹ 12.00 lakhs.

Serial Description Workings ₹ Lakhs

1 Capacity Export40%+Domestic
60%
2 Sales 7.20+12.00 19.20
3 Variable Costs
a. Direct Material (5.80 / 80%) × 100% 7.25
b. Direct Labour (2.40 / 80%) × 100% 3.00
c. Variable Overheads (0.60 / 80%) × 100% 0.75
d. Sub Total 11.00
4 Contribution (2-3) 8.20
5 Fixed Costs Given 5.20
6 Profit (4-5) 3.00

Alternative (C): Increase capacity so as to accept the export order and maintain the
domestic demand by:
(i) Purchasing additional plant and increasing 10% capacity and thereby increasing
fixed overheads by ₹ 65,000, and
(ii) Working overtime at one and half time the normal rate to meet balance of the
required capacity
Serial Description Workings ₹Lakhs
1 Capacity Export40%+Domestic
80%
2 Sales 7.20+16.00 23.20
3 Variable Costs
a. Direct Material (5.80 / 80%) × 120% 8.70
b. Direct Labour (2.40 / 80%) × 120% 3.60
c. Variable Overheads (0.60 / 80%) × 120% 0.90
d.Overtime Premium [Balance (2.40 / 80%) × 10% × 0.15
capacity of 10%] 50%
e. Sub Total 13.35

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4 Contribution (2-3) 9.85
5 Fixed Costs (5.20+0.65) 5.85
6 Profit (4-5) 4.00

From the above computation, it was found that the profit is more at the III alternative i.e.
accepting the foreign order fully and maintaining the present domestic sales, it is the best
alternative to be suggested.

5. The budgeted output of a manufacturing company for 2023-24 was 5,000 units. The financial
results in respect of actual output of 4,800 units achieved during the year were as under:

₹ ₹
Direct Material 29,700 Fixed Overheads 39,000
Direct Wages 44,700 Profit 36,600
Variable 72,750 Sales 2,22,750
Overheads

The standard direct wages rate is ₹4.50 per hour and the standard variable overhead rate is
₹7.50 per hour.
The cost accounts recorded the following variances for the year:
Variances Favourable (₹) Adverse (₹)
Material Price - 300

Material Usage - 600

Wage rate 750 -

Labour efficiency - 2,250

Variable overhead expense 3,000 -

Variable overhead efficiency - 3,750

Fixed overhead expense - 1,500

Selling price 6,750 -

(i) Prepare a statement showing the original budget and the standard product cost sheet per unit.
(ii) Prepare a statement showing the reconciliation of originally budgeted profit and actual profit.
[14]

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Answer:

(i) Statement showing the original budget and standard cost sheet per unit

Particulars Actual cost, Adjustment of Standard Standard cost, profit

profit & variances (₹) cost, profit & sales of 5,000 units
sales of & sales of
(F) (A) Total (₹) p.u.
4,800 units 4,800 units
(₹) (₹)
Sales 2,22,750
Sales price variance 6,750 - 2,16,000 2,25,000 45.00
Direct Material 29,700
Material price variance - 300

Material usage variance - 600

Standard material cost 28,800 30,000 6.00

Direct wages 44,700

Wages rate variance 750 -

Labour efficiency - 2,250

variance
Standard Labour cost 43,200 45,000 9.00

Variable overheads 72,750

V.O. expenditure 3,000 -

variance
V.O. efficiency variance - 3,750

Standard variable 72,000 75,000 15.00

overhead
Fixed overheads 39,000
Fixed overhead exp. - 1,500
variance
Budgeted F.O. 37,500 37,500 7.50
Cost of sales 1,86,150 1,81,500 1,87,500 37.50
Profit 36,600 34,500 37,500 7.50

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(ii) Statement showing the reconciliation of original budgeted profit and actual profit

Particulars Details Amount

(₹) (₹)
Budgeted Profit 37,500
Add: Favourable cost variances
Wage Rate 750
Variable overhead expense 3,000 3,750
41,250
Add: Sales price variance 6,750
48,000
Less: Adverse cost variances
Material Price 300
Material usage 600
Labour efficiency 2,250
Variable overhead efficiency 3,750
Fixed overhead expense 1,500 8,400
39,600
Less: Sales margin volume variance 1,500
[5,000 – 4,800 = 200 units × ₹7.50 profit per unit]
38,100
Less: Fixed overhead volume variance 1,500
[200 units × ₹7.50 budgeted fixed overhead per unit]
Actual Profit 36,600

6. (a) Following information is given regarding standard composition and standard rates of a gang
workers:

Standard composition Standard hourly rate

100 Men ₹0.625
50 Women ₹0.400
50 Boys ₹0.350

According to given specifications, a week consists of 40 hours and standard output for a week
is 1,000 units.
In a particular week, gang consisted of 130 men, 40 women and 30 boys and actual wages
were paid as follows:
Men @ ₹0.6 per hour
Women @ ₹0.425
Boys @ ₹0.325 per hour

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Two hours were lost in the week due to abnormal sale time. Actual production was 960 units
in the week.
Calculate the following-
(i) Labour rate variance,
(ii) Labour mix variance,
(iii) Labour idle time variance,
(iv) Labour yield variance,
(v) Labour efficiency variance,
(vi) Labour cost variance [7]

(b) Prepare a Cash Budget for the three months ending 30th June, 2024 from the information
given below:

(i)
Month Sales (₹) Materials (₹) Wages (₹) Overheads (₹)
February 14,000 9,600 3,000 1,700
March 15,000 9,000 3,000 1,900
April 16,000 9,200 3,200 2,000
May 17,000 10,000 3,600 2,200
June 18,000 10,400 4,000 2,300

(ii) Credit terms are:

Sales/debtors: 10% sales are on cash, 50% of the credit sales are collected next month and
the balance in the following month.
Creditors: Materials 2 months
Wages 1/4 in the following month
Overheads 1/2 in the following month
(iii) Cash and bank balance on 1st April, 2022 is expected to be ₹ 6,000.
(iv) Other relevant information are:
 Plant and machinery will be installed in February 2022 at a cost of ₹96,000. The
monthly instalment of
 ₹2,000 is payable from April onwards.
 Dividend @ 5% on preference share capital of ₹2,00,000 will be paid on 1st June.
 Advance to be received for sale of vehicles ₹9,000 in June.
 Dividends from investments amounting to ₹1,000 are expected to be received in June.

[7]

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MANAGEMENT ACCOUNTING

Answer:
(a) L1 - Actual payment to workers for actual hours worked
Actual composition of gang Hrs. Actual Rate (₹) Amount
worked (₹)
130 Men × 40 × 0.600 3,120
40 Women × 40 × 0.425 680
30 Boys × 40 × 0.325 390
4,190

L2 - Payment involved, if workers had been paid at standard rate

Actual composition of gang Hrs. Standard Rate (₹) Amount
worked (₹)

130 Men × 40 × 0.625 3,250

40 Women × 40 × 0.400 640
30 Boys × 40 × 0.350 420
4,310

L3 - Payment involved, if workers had been used according to proportion of standard gang
and payment had been made at standard rate
Standard composition of gang Hrs. Standard Rate (₹) Amount
worked (₹)
100 Men × 40 × 0.625 2,500
50 Women × 40 × 0.400 800
50 Boys × 40 × 0.350 700
4,000

L4 - Standard labour cost of labour hours utilized

Standard composition of gang Hrs. utilized Standard Rate (₹) Amount (₹)
100 Men × 38 × 0.625 2,375
50 Women × 38 × 0.400 760
50 Boys × 38 × 0.350 665
3,800

L5 - Standard labour cost of output achieved

𝒔𝒕𝒂𝒏𝒅𝒂𝒓𝒅 𝒍𝒂𝒃𝒐𝒖𝒓 𝒄𝒐𝒔𝒕 𝒇𝒐𝒓 𝒔𝒕𝒂𝒏𝒅𝒂𝒓𝒅 𝒐𝒖𝒕𝒑𝒖𝒕
× actual output
𝒔𝒕𝒂𝒏𝒅𝒂𝒓𝒅 𝒐𝒖𝒕𝒑𝒖𝒕
𝟒𝟎𝟎𝟎
× 960 units
𝟏𝟎𝟎𝟎 𝒖𝒏𝒊𝒕𝒔
= ₹3840
Variances:
(i) Labour Rate Variance = L1 – L2 = ₹4190 – ₹4310 or ₹120 (F)
(ii) Labour Mix Variance = L2 – L3 = ₹4310 – ₹4000 or ₹310 (A)

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(iii) Labour Idle Time Variance = L3 – L4 = ₹4000 – ₹3800 or ₹200 (A)
(iv) Labour Yield Variance = L4 – L5 = ₹3800 – ₹3840 or ₹40 (F)
(v) Labour Efficiency Variance = L2 – L5 = ₹4310 – ₹3840 or ₹470 (A) Alternatively,
Labour Efficiency Variance = Labour Mix Variance + Labour Idle Time Variance
+ Labour Yield Variance = 310 (A) + 200 (A) + 40 (F) or ₹470 (A)
(vi) Labour Cost Variance = L1 – L5 = ₹4190 – ₹3840 or ₹350 (A)
Alternatively, Labour Cost Variance = Labour Rate Variance + Labour Mix Variance + Labour Idle
Time Variance + Labour Yield Variance = 120 (F) + 310 (A)
+ 200 (A) + 40 (F) or ₹350 (A)

(b) Cash Budget for the 3 Months Ending 30th June 2024

Particulars April(₹) May(₹) June(₹)

Opening Balance (A) 6,000 3,950 3,000
Add: Receipts : (B)
Cash Sales 1,600 1,700 1,800
Collection from debtors [see note(i)] 13,050 13,950 14,850
Advance for sale of vehicles - - 9,000
Dividends from Investments - - 1,000
Total (A+B) 20,650 19,600 29,650
Less: Payments :
Materials 9,600 9,000 9,200
Wages [see note (ii)] 3,150 3,500 3,900
Overheads 1,950 2,100 2,250
Instalment of Plant & Machinery 2,000 2,000 2,000
Preference dividend - - 10,000
Total (C) 16,700 16,600 27,350
Closing Balance (A+B-C) 3,950 3,000 2,300

Working Notes:

(i) Computation of Collection from Debtors

(Amount in ₹)

Month Total Sales Credit Sales Feb Mar Apr May June
Feb 14,000 12,600 --- 6,300 6,300 --- ---
Mar 15,000 13,500 --- --- 6,750 6,750 ---
Apr 16,000 14,400 --- --- --- 7,200 7,200
May 17,000 15,300 --- --- --- --- 7,650
13,050 13,950 14,850

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MANAGEMENT ACCOUNTING

(ii) Wages payment in each month is to be taken as three-fourths of the current month plus one-
fourth of the previous month.

7.(a) The following information is supplied by ABC Ltd. for the year 31-03-2024:

Sl. No. Particulars (₹ In Crores) (₹ In Crores)

(i) Profit after tax (PAT) 275.90
(ii) Interest 4.95
(iii) Equity Share Capital 40.00
Accumulated Surplus 750.00
Shareholders fund 790.00
Loans (Long term) 40.00
Total long term funds 830.00
(iv) Market Capitalization 2900.00
Additional information
(a) Risk free rate 12.00
(b) Long Term Market Rate (Based on BSE Sensex) 15.50 %
(c) Effective tax rate for the company 30 %
(d) Beta (β) for last few years
Year
1 0.48
2 0.52
3 0.60
4 1.10
5 0.99

You are required to calculate the Economic Value Added of ABC Ltd. as on 31st March, 2024
[7]
(b)C has designed a new type of sailing boat, for which the cost and sales price of the first boat to
be produced has been estimated as follows:

Particulars ₹
Materials 5,000
Labour (800 hrs @ ₹5 per hr) 4,000
Overhead (150% of labour cost) 6,000
15,000
Profit mark-up (20%) 3,000
Sales price 18,000

It is planned to sell all the yachts at full cost plus 20%. An 80% learning curve is expected to apply
to the production work. Only one customer has expressed interest in buying the yacht so far, but
he thinks ₹18,000 is too high a price to pay. He might want to buy two or even four of the yachts
over the next six months.

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He has asked the following questions:
(i) If he paid ₹18,000 for the first yacht, what price would he have to pay later for a second
yacht?
(ii) Could C quote the same unit price for two yachts, if the customer ordered two at the same
time?
(iii) If the customer bought two yachts now at one price, what would be the price per unit for a
third and fourth yacht, if he ordered them both together later on?
(iv) Could C quote a single unit price for the following numbers of yachts if they were all ordered
now?
 Four yachts
 Eight yachts
Assuming there are no other prospective customers for the yacht, calculate the price for different
yachts and how would the questions be answered? [7]

Answer: -

(a) Net Operating Profit after Tax (NOPAT) = Profit After Tax (PAT) + Interest (net of tax)
= 275.90 + 4.95 × (1-0.30)
= 279.365 crores
Debit Capital ₹40 crores
Equity capital = ₹790 crores
Capital employed = ₹830 crores
Debt to capital employed = ₹40 crores / ₹830 crores = 0.04819
Equity to capital employed = ₹790 crores / ₹830 crores = 0.9518
Interest cost before tax ₹4.95 crores
Less: Tax (30% of ₹4.85 crores) (₹1.485 crores)
Interest cost after tax ₹3.465 crores
Cost of debt = (₹3.465 crores / ₹40 crores) × 100
= 8.66%

According to Capital Asset Pricing Model (CAPM)

Beta for calculation of EVA should be the highest of the given beta for the last few years.
Accordingly,
Cost of equity capital = risk free rate + beta (market rate - risk free rate)
= 12% + 1.10 × (15.50% - 12%)
= 12% + 1.10 × 3.5%
= 15.85%
Weighted Average Cost of Capital (WACC) = Equity to Capital Employed (CE) x Cost of Equity capital
+Debt to CE × Cost of Debt
= 0.09518 × 15.85% + 0.04819× 8.66%
= 15.08% + 0.41%
= 15.49%
Cost of Capital Employed (COCE) = WACC × Capital Employed
= 15.49% × ₹830 crores
= ₹128.567 crores

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Economic Value Added (E.V.A.) = NOPAT – COCE

= ₹279.365 crores – ₹128.567 crores
= ₹150.798 crores

(b)
Number Cumulative Total time for all Incremental
of yachts average time per yachts to date time for
yacht (Hours) additional
(Hours) yachts
(Hours)
1 800.00 800.00
2 (×80%) 640.00 (×2) 1,280.00 (1,280.00 - 800.00) 480.00
4 (×80%) 512.00 (×4) 2,048.00 (2,048.00 - 1,280.00) 768.00
8 (×80%) 409.60 (×8) 3,276.80 (3,276.80 - 2,048.00) 1,228.80

(a) Separate price for a second yacht: ₹

Materials 5,000
Labour (480 hrs @ ₹5) 2,400
Overhead (150% of labour cost) 3,600
Total cost 11,000
Profit (20%) 2,200
Sales price 13,200
(b) A single price for the first two yachts:
Materials cost for two yachts 10,000
Labour (1,280 hrs @ ₹5) 6,400
Overhead (150% of labour cost) 9,600
Total cost for two yachts 26,000
Profit (20%) 5,200
Total sales price for two yachts 31,200
Price per yacht (÷ 2) 15,600
(c) A price for the third and fourth yachts:
Materials cost for two yachts 10,000
Labour (768 hours @ ₹5) 3,840
Overhead (150% of labour cost) 5,760
Total cost 19,600
Profit (20%) 3,920
Total sales price for two yachts 23,520
Price per yacht (÷ 2) 11,760

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(d) A price for the first four yachts together and for the first eight yachts together
Particulars First four yachts First eight yachts
₹ ₹

Materials 20,000 40,000

Labour (2,048 hrs × ₹5) 10,240 (3,276.80 hours × ₹5) 16,384
Overhead (150% of labour 15,360 (150% of labour cost) 24,576
cost)
Total cost 45,600 80,960
Profit (20%) 9,120 16,192
Total sales price 54,720 97,152
Price per yacht (÷ 4) 13,680 (÷ 8) 12,144

8.(a) LTB Ltd. has a new wonder product, the V, of which it expects great things. At the moment
the company has two courses of action open to it, to test market the product or abandon it.
If the company test markets it, the cost will be ₹1,00,000 and the market response could be
positive or negative with probabilities of 0.60 and 0.40.If the response is positive the company
could either abandon the product or market it full scale.
If it markets the V in full scale, the outcome might be low, medium or high demand, and the
respective net gains/ (losses) would be (200), 200 or 1,000 in units of ₹1,000 (the result could
range from a net loss of ₹2,00,000 to a gain of ₹10,00,000). These outcomes have probabilities
of 0.20, 0.50 and 0.30 respectively.
If the result of the test marketing is negative and the company goes ahead and markets the
product, estimated losses would be ₹6,00,000.

If, at any point, the company abandons the product, there would be a net gain of ₹50,000 from
the sale of scrap. All the financial values have been discounted to the present.
Required
(i) Draw a decision tree.
(ii) Include figures for cost, loss or profit on the appropriate branches of the tree. [7]

(b) Describe responsibility centres and explain its different types [7]

Answer:

The starting point for the tree is to establish what decision has to be made now. What are the
options?
(a) To test market
(b) To abandon
The outcome of the ‘abandon’ option is known with certainty. There are two possible outcomes of
the option to test market, positive response and negative response.

Depending on the outcome of the test marketing, another decision will then be made, to abandon
the product or to go ahead.

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Evaluating decisions by using decision trees has a number of limitations as follows:

i. The time value of money may not be taken into account.
ii. Decision trees are not very suitable for use in complex situations.
iii. The outcome with the highest EV may have the greatest risks attached to it. Managers may be
reluctant to take risks which may lead to losses.
iv. The probabilities associated with different branches of the ‘tree’ are likely to be estimates, and
possibly unreliable or inaccurate.
(b) A responsibility centre may be defined as an area of responsibility which is controlled by an
individual. A responsibility centre is an activity such as department over which a manager exercises
responsibility. Responsibility areas may be departments (drilling or maintenance department), product
lines (chemicals or fertilizers), territories (North or South) or any other type of identifiable unit or
combination of units.
It should be noted that effective planning and control systems are structured around the implicit or
explicit areas of responsibility within the organization. Further, to be held accountable for performance,
managers must have clearly defined areas of responsibility—activities they control.
When an entity is divided into segments with managers having responsibility over specific areas, the
segmented areas are known as responsibility centers. Four types of responsibility centers are commonly
identified:
(i) Cost or Expense Center,

(ii) Profit Center or Earnings Center, and

(iii) Revenue Center

(iv) Investment Center.

(i) Cost Centre

• A cost or expense centre is a segment of an organisation in which the managers are held
responsible for the cost incurred in that segment but not for revenues.
• According to CIMA, London a cost centre is “a location person or equipment , for which
costs may be ascertained and used for purposes of cost control”

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Directorate of Studies, The Institute of Cost Accountants of India
 INTERMEDIATE EXAMINATION SET - 1
MODEL ANSWERS TERM – DEC 2024
PAPER – 12 SYLLABUS 2022
MANAGEMENT ACCOUNTING
• Responsibility in a cost centre is restricted to cost.
• For planning purposes, the budget estimates are cost estimates; for control purposes,
performance evaluation is guided by a cost variance equal to the difference between the actual
and budgeted costs for a given period.
• Cost centre managers have control over some or all of the costs in their segment of business,
but not over revenues.
• In manufacturing organisations, the production and service departments are classified as cost
centre. Also, a marketing department, a sales region or a single sales representative can be
defined as a cost centre.
• Cost centre may vary in size from a small department with a few employees to an entire
manufacturing plant. In addition, cost centres may exist within other cost centres.
• E.g. accounting department, repairs & maintenance department
(ii)Revenue Centre
• It is a segment of the organisation which is primarily responsible for generating sales revenue.
• A revenue centre manager does not possess control over cost, investment in assets, but usually
has control over some of the expense of the marketing department.
• The revenue centre manager will control the selling price, promotion mix and product mix
• The performance of a revenue centre is evaluated by comparing the actual revenue with
budgeted revenue, and actual marketing expenses with budgeted marketing expenses.
• E.g. sales department
(iii)Profit Centre
• Also called business centre
• It is a segment of an organisation whose manager is responsible for both revenues and costs.
• In a profit centre, the manager has the responsibility and the authority to make decisions that
affect both costs and revenues (and thus profits) for the department or division.
• The managers are encouraged to act as if they were running their own separate business.
• The main purpose of a profit centre is to maximise profit by making decisions relating to
production volume, product mix, selling price, marketing strategy.
• Profit centre managers aim at both the production and marketing of a product.
(iv)Investment Centre
• It is responsible for both profits and investments.
• The investment centre manager has control over revenues, expenses and the amounts invested
in the centre’s assets.
• He also formulates the credit policy which has a direct influence on debt collection, and the
inventory policy which determines the investment in inventory.
• The manager of an investment centre has more authority and responsibility than the manager
of either a cost centre or a profit centre.
• Besides controlling costs and revenues, he has investment responsibility too. ‘Investment on
asset’ responsibility means the authority to buy, sell and use divisional assets.
• E.g. a new hotel being developed.

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Directorate of Studies, The Institute of Cost Accountants of India
 INTERMEDIATE EXAMINATION SET - 2
MODEL ANSWERS TERM – DECEMBER 2024
PAPER – 12 SYLLABUS 2022
MANAGEMENT ACCOUNTING

Time Allowed: 3 Hours Full Marks: 100

The figures in the margin on the right side indicate full marks.

SECTION – A (Compulsory)
1. Choose the correct option: [15 x 2 = 30]
(i) In the context of budgeting, what is a 'flexible budget'?
a) A budget that remains unchanged regardless of actual performance
b) A budget that adjusts to changes in activity levels
c) A budget that is created after the actual results are known
d) A budget that includes only fixed costs.

(ii) Which of the following methods is used to allocate overhead costs based on the
activities that consume resources?
a) Traditional Costing
b) Direct Costing
c) Activity-Based Costing (ABC)
d) Standard Costing

(iii) In budgeting, what does a 'master budget' encompass?

a) Only the sales budget
b) The comprehensive set of budgets including sales, production, and cash budgets
c) The production budget alone
d) Only the cash flow budget

(iv) Marginal costing is also known as __________.

a) Direct Costing
b) Variable Costing
c) Contribution Costing
d) All of A, B and C

(v) Fixed cost: - ₹ 2,80,000

Sales: - ₹ 1000,000
P/v ratio: - 30%
Calculate the amount of profit.
a) ₹50,000
b) ₹40,000
c) ₹45,000
d) ₹20,000

(vi) Calculate the material price variance from the following:

Actual Quantity - 3.5 kgs
Standard Price - ₹ 4 per kg
Actual Price - ₹ 8 per kg
Standard Quantity - 4 kgs

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Directorate of Studies, The Institute of Cost Accountants of India
 INTERMEDIATE EXAMINATION SET - 2
MODEL ANSWERS TERM – DECEMBER 2024
PAPER – 12 SYLLABUS 2022
MANAGEMENT ACCOUNTING

a) ₹ 3(F)
b) ₹ 14(A)
c) ₹ 12(A)
d) ₹ 6 (F)

(vii) In the context of cost accounting, what does the term 'relevant cost' refer to?
(a) Costs that have already been incurred and cannot be changed
(b) Costs that are pertinent to a specific decision and will be directly affected by that
decision
(c) Costs that are allocated equally across all products
(d) Costs that are used to determine standard pricing.

(viii) A company has a Net Profit Margin of 0.25, total asset turnover is 1.6 times and
equity multiplier is 2.5. Calculate ROE as per Du Pont analysis.
a) 0.625
b) 4
c) 1
d) 1.5

(ix) During September, 400 labour hours were worked for a total cost of ₹ 8,800. The
variable overhead expenditure variance was ₹ 800 (A). Overheads are assumed to be
related to direct labour hours of active working. What was the standard cost per
labour hour?
a) ₹ 20
b) ₹ 16.50
c) ₹ 17.50
d) ₹ 18

(x) Responsibility accounting primarily measures which two aspects of responsibility

centers?
a) Costs and expenses
b) Budgets and actual results
c) Revenues and sales
d) Employee performance and satisfaction.

(xi) A strategy that yields an expected monetary payoff of zero is called a:

a) Risk-neutral strategy
b) Fair game
c) Zero-sum game
d) Certainty equivalent.

(xii) According to Kaplan & Norton, which of the balanced scorecard perspectives serves
as the focus of the other perspectives?
a) Financial
b) Customer
c) Internal business processes
d) Learning & growth.

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Directorate of Studies, The Institute of Cost Accountants of India
 INTERMEDIATE EXAMINATION SET - 2
MODEL ANSWERS TERM – DECEMBER 2024
PAPER – 12 SYLLABUS 2022
MANAGEMENT ACCOUNTING

(xiii) Which of the following would be considered an operating asset in return on

investment computations?
a) Land being held for plant expansion
b) Treasury stock
c) Accounts receivable
d) Common stock.

(xiv) What is a primary function of Key Performance Indicators (KPIs) in the role of a
Management Accountant?
a) Monitoring compliance
b) Assessing organizational performance
c) Implementing cost reduction strategies
d) Conducting variance analysis

(xv) In a decentralized organization, what role does responsibility accounting play?

a) It helps organization to focus on human resources.
b) It acts as the key management control tool.
c) It limits the authority of lower-level managers.
d) It focuses only on the company’s profit margins.
Answer:
(i) (ii) (iii) (iv) (v) (vi) (vii) (viii) (ix) (x) (xi) (xii) (xiii) (xiv) (xv)
b c b d d b b c a b b a c c b

SECTION – B
(Answer any five questions out of seven questions given. Each question carries 14 marks.)
[5 x 14 = 70]
2. (a) How do you classify the functions of the management accountant? [7]
(b) ABC Company manufactures four products, A, B, C and D, using the same
manufacturing process. The following data are available relating to a production period:
Product Volume Material Direct Labour Machine Time Labour Cost
Cost per unit (₹) per unit per unit per unit (₹)
A 700 10 0.75 hour ¼ hour 5
B 5,800 15 0.75 hour ¼ hour 7
C 800 18 2 hours 1 hour 12
D 7,500 25 2.25 hours 1.75 hours 11
Total Production Overheads are as under
Particulars ₹
Machine related Costs 37,800
Set-up Costs 4,500
Ordering Costs 2,020
Material Handling Costs 8,400
Spare parts Administration Costs 5,950
58,670

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Directorate of Studies, The Institute of Cost Accountants of India
 INTERMEDIATE EXAMINATION SET - 2
MODEL ANSWERS TERM – DECEMBER 2024
PAPER – 12 SYLLABUS 2022
MANAGEMENT ACCOUNTING

The Company absorbs factory overheads to the products by machine hour rate
method and the hourly rate per machine hour is ₹4.80. The overheads cost of the
products are as under:
Product ₹
A 1.2
B 1.2
C 4.8
D 7.2
The production overheads activities for the period reveal the following:
Products No. of Set-ups No. of Materials No. of times Number of
Orders Materials Spare parts
handled
A 2 2 2 2
B 6 3 9 6
C 3 2 5 2
D 7 3 12 4
Prepare a Statement of Overhead Cost for all the Products, by using Activity Based
Costing and compare the results with Traditional Costing. [7]

Answer:
(a) The functions of a management accountant can be categorized as below:
 Planning and Accounting - Management accountants prepare an accounting system
covering costs, sales forecasts, profit planning, production planning, and allocation of
resources. It should also include capital budgeting, short-term and long-term financial
planning. They also prepare the procedures necessary to implement the plan effectively.
 Controlling - Management accountants assist in the control of an organisation’s performance
through the use of standard costing, budget control, accounting ratios, funds flow statements,
cost-cutting initiatives, and assessing capital expenditure proposals and returns on
investment.
 Reporting - Management accountants assist the top management in finding out the root
cause of an unfavourable operation or event by identifying the real reasons for the adverse
events as well as the responsible parties and comprehensively reporting them.
 Coordinating - Management accountants improve an organisation’s efficiency and profits by
providing various coordination tools such as budgeting, financial reporting, financial analysis
and interpretation, and so on. These tools aid management by comparing cost and financial
records, preparing financial budgets and establishing standard costs, and analyzing cost
deviations to enable management by exception.
 Communication- Management accountants create a wide range of reports to communicate
results to the superiors. Through published financial statements and returns, they also
inform the outside world about their company’s success.
 Financial evaluation and Interpretation - Management accountants analyze the data and
present it to the management in a non-technical approach, together with their comments
and ideas, so that the shareholders and senior management can understand it and make
informed decisions.

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Directorate of Studies, The Institute of Cost Accountants of India
 INTERMEDIATE EXAMINATION SET - 2
MODEL ANSWERS TERM – DECEMBER 2024
PAPER – 12 SYLLABUS 2022
MANAGEMENT ACCOUNTING

 Tax Administration- Management accountants are in charge of tax policies and processes.
They make the reports that are required by various authorities. Further, they ensure that
quarterly tax payments are made in advance, as required by the relevant Act, to prevent
the payment of penal interest on late tax payments.
 Evaluation of external effects - There may be changes in government policy and existing laws.
These amendments and policy changes can affect business goals. Management accountants
assess the extent of any impact of these external factors on the business and report it to the
stakeholders to take necessary precautionary measures.
 Economic appraisal - When the government makes regular announcements about the
country’s economic situation, management accountants are entrusted with making the
economic study and determining the influence of current economic conditions on the
company’s operations. They compile a report containing their observations and present it
to high management.
 Asset Protection - Management accountants separate fixed asset registers for each type
and provide internal checks and controls to protect the company’s assets. They also create
the rules and regulations for each type of fixed asset and get insurance coverage for all
types of fixed assets.

(b) No. of Activities:

Set-ups = (2+6+3+7) = 18
Ordering = (2+3+2+3) =10
Handling = (2+ 9+ 5 +12) = 28
Spare parts= (2+ 6+ 2 + 4) = 14
Machine Hours = (175 + 1450 + 800 + 13,125) = 15,550

ABC Cost Pool

Overhead Costs Amount (₹) Cost Driver Activity Nos. Cost Driver Rate
(₹)
Machine related 37,800 Machine Hours 15,550 2.4308
Set-up Costs 4,500 No. of Set-ups 18 250
Ordering Costs 2,020 No. of Orders 10 202
Material 8,400 No. of times 28 300
Handling
Spare parts 5,950 No. of Spares 14 425

Statement of Overhead Costs (₹)

Product A B C D
No of Units 700 5,800 800 7,500
Overhead Costs: 500 1,500 750 1,750
Set-up Costs @ ₹250
Material Ordering@ ₹202 404 606 404 606
Material Handling@ ₹300 600 2,700 1,500 3,600
Spare parts @ ₹425 850 2,550 850 1,700

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Directorate of Studies, The Institute of Cost Accountants of India
 INTERMEDIATE EXAMINATION SET - 2
MODEL ANSWERS TERM – DECEMBER 2024
PAPER – 12 SYLLABUS 2022
MANAGEMENT ACCOUNTING

Machine related@ ₹2.4308 425 3,525 1,945 31,905

(Balance)
Total Overheads 2,779 10,881 5,449 39,561
Overheads Cost /unit (ABC) 3.97 1.87 6.81 5.27
Overheads Cost /unit (Traditional) 1.20 1.20 4.80 7.20
Difference 2.77 0.67 2.01 (1.93)

3. Division A is a profit centre, which produces four products P, Q, R and S. Each product
is sold in the external market also. Data for the period is as follows:
P Q R S
Market Price per unit (₹) 350 345 280 230
Variable Cost of Production per unit (₹) 330 310 180 185
Labour hours required per unit 3 4 2 3
Product S can be transferred to Division B but the maximum quantity that might be
required for transfer is 2,000 units of S.
The maximum sales in the external market are:
P - 3,000 units
Q - 3,500 units
R - 2,800 units
S - 1,800 units
Division B can purchase the same product at a slightly cheaper price of ₹ 225 per unit
instead of receiving transfers of products S from Division A.
Calculate the transfer price for each unit for 2,000 units of S, if the total labour hours
available in Division A are:
(i) 24,000 hours?
(ii) 32,000 hours? [14]

Answer:
Statement Showing Contribution per unit and per labour hour
Particulars P Q R S
Selling Price per unit (₹) 350 345 280 230
Variable Cost per unit (₹) 330 310 180 185
Contribution per unit (₹) 20 35 100 45
Labour Hours per unit 3 4 2 3
Contribution per labour hour (₹) 6.67 8.75 50 15
Ranking IV III I II

Statement Showing Production Plan

Total Hours Products Hours/unit Allocation of Hours
24,000 P 3 -
Q 4 13,000
R 2 5,600

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Directorate of Studies, The Institute of Cost Accountants of India
 INTERMEDIATE EXAMINATION SET - 2
MODEL ANSWERS TERM – DECEMBER 2024
PAPER – 12 SYLLABUS 2022
MANAGEMENT ACCOUNTING

S 3 5,400
24,000

Statement Showing Transfer Price per unit of the product S

Total labour hours required for S (2000 units × 3 hours per unit) 6,000
Hours diverted from Product Q (1,500 units × 4 hours per unit) 6,000
Variable Manufacturing cost for Product ‘S’ (2000 × ₹ 185) = ₹ 3,70,000
Contribution foregone/ Opportunity Cost of Product Q (1500 × ₹35) ₹ 52,500
₹ 4,22,500
(i) Hence, Transfer Price per unit (₹4,22,500 ÷ 2,000 units) = ₹211.25

Statement Showing Production Plan

Total Hours Products Hours/unit Allocation of Hours
32,000 P 3 7,000
Q 4 14,000
R 2 5,600
S 3 5,400
32,000

Statement Showing Transfer Price per unit of the product S

Total labour hours required for Product S (2000 × 3 hours per unit) 6,000
Hours diverted from Product P (2,000 × 3 hours per unit) 6,000
Variable Manufacturing cost for Product S (2000 × ₹ 185) = ₹ 3,70,000
Contribution foregone /Opposition cost for Product P (2000 × ₹20) = ₹ 40,000
₹ 4,10,000
(ii) Hence, Transfer Price per unit (₹4,10,000 ÷ 2,000 units) = ₹205.00

4. (a) Fashionable Clothing’s revenues and cost data for 2023 are as follows:

Particulars ₹ ₹
Revenues 9,00,000
Cost of goods sold 4,00,000
Gross margin 5,00,000
Operating costs:
Salaries (fixed) 2,70,000
Sales commissions (10% of sales) 90,000
Depreciation of equipment and fixtures 40,000

Store rent (4,500 per month) 54,000

Other operating costs 70,000 5,24,000
Operating income (loss) (24,000)

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Directorate of Studies, The Institute of Cost Accountants of India
 INTERMEDIATE EXAMINATION SET - 2
MODEL ANSWERS TERM – DECEMBER 2024
PAPER – 12 SYLLABUS 2022
MANAGEMENT ACCOUNTING

Ms. Alpana, the owner of the store, is unhappy with the operating results. An analysis
of other operating costs reveals that it includes ₹ 65,000 variable costs, which vary with
sales volume, and ₹ 5,000 (fixed) costs.
i. Calculate the contribution margin of Fashionable Clothing.
ii. Calculate the contribution margin percentage.
iii. Ms. Alpana estimates that she can increase revenues by 20% by incurring
additional advertising costs of ₹ 38,000. Calculate the impact of the additional
advertising costs on operating income. [7]

(b) The Management Accountant of XYZ ltd., has prepared the following estimates of
working results for the year ending 31st December, 2022 for the purpose of preparing
the budgets for the year ending 31st December, 2023.
Year ending 31/12/2022
Direct material ₹/unit 16.00
Direct wages ₹/unit 40.00
Variable overheads ₹/unit 12.00
Selling price ₹/unit 125.00
Fixed expenses ₹ 6,75,000 p.a.
Sales ₹ 25,00,000 p.a.
During the year 2023, it is expected that the material prices and variable overheads
will go up by 10% and 5% respectively. As a result of re-organisation of production
methods the overall direct labour efficiency will increase by 12% but the wage rate
will go up by 5%. The fixed overheads are also expected to increase by ₹1,25,000. The
technical director states that the same level of output as obtained in 2022 should be
maintained in 2023 also and efforts should be made to maintain the same level of
profit by suitably increasing the selling price. The marketing director states that the
market will not absorb any increase in the selling price. On the other hand he proposes
that publicity involving advertisement expenses in the proportions will increase the
quantity of sales as under:
Advertisement expenses (₹) 80,000 1,94,000 3,20,000 4,60,000
Additional units of sales 2,000 4,000 6,000 8,000
(i) Prepare an income statement for the year 2023.
(ii) Calculate the revised price and the percentage of increase in the price for 2023 if
the Technical Directors’ views are accepted.
(iii) Evaluate the four alternative proposals put forth by the Marketing Director,
determine the best output level to be budgeted and prepare an overall income
statement for 2023 at that level of output. [7]

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Directorate of Studies, The Institute of Cost Accountants of India
 INTERMEDIATE EXAMINATION SET - 2
MODEL ANSWERS TERM – DECEMBER 2024
PAPER – 12 SYLLABUS 2022
MANAGEMENT ACCOUNTING

Answer:
(a)
Particulars ₹ ₹
Revenues 9,00,000
Deduct variable costs:
Cost of goods sold 4,00,000
Sales commissions 90,000
Other operating costs 65,000 5,55,000
Contribution margin 3,45,000
Contribution margin percentage = 3,45,000/9,00,000 = 0.38

Particulars Details ₹
Incremental revenue (20% × 900,000) = 1,80,000
Incremental contribution margin (38% × 1,80,000) = 68,400
Incremental fixed costs (advertising) 38,000
Incremental operating income 30,400

If Ms. Alpana spends ₹38,000 more on advertising, the operating income will increase
by ₹30,400.

(b)
(i) Statement of profit at budget
Particulars Amount (₹)
(i) Selling price 125
(ii) Variable cost
A. direct material 16
B. direct wages 40
C. variable overheads 12
68
(iii) Contribution (i-ii) 57
(iv) No. of units (25,00,000/125) 20,000
(v) Total contribution 11,40,000
(vi) Less: Fixed cost 6,75,000
(vii) Profit (v-vi) 4,65,000

(ii) Computation of selling price, if the technical director views are implemented
Variable cost Workings Amount (₹)
Direct material (16 × 110%) 17.60
Direct wages [(40 × 105%) × (100/112)] 37.50
Variable overheads (12 × 105%) 12.60
67.70

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Directorate of Studies, The Institute of Cost Accountants of India
 INTERMEDIATE EXAMINATION SET - 2
MODEL ANSWERS TERM – DECEMBER 2024
PAPER – 12 SYLLABUS 2022
MANAGEMENT ACCOUNTING

In order to get the same profit contribution to be recovered is as follows:

Particulars Amount (₹)

Existing fixed overheads 6,75,000
Add :Expected increase 1,25,000
8,00,000
Add : desired profit 4,65,000
Desired contribution 12,65,000

Therefore contribution per unit (12,65,000/20,000) ₹ 63.25

Required selling price = variable cost + contribution = 67.7+63.25 ₹ 130.95
% increase in sale price = [{(130.95-125)/125}×100] 4.76%

(iii) Computation of additional profit at four alternatives proposed by marketing director:

Additional Units 2,000 4,000 6,000 8,000

Amount (₹)
a. contribution per unit (125-67.7) 57.30 57.30 57.30 57.30
b. Total contribution 1,14,600 2,29,200 3,43,800 4,58,400
c. additional fixed cost 80,000 1,94,000 3,20,000 4,60,000
d. Profit/(loss) 34,600 35,200 23,800 (1,600)
Statement showing overall income for the year 2023
a. No. of units 24,000
Amount (₹)
b. Contribution per unit 57.30
c. Total contribution 13,75,200
d. Fixed cost (8,00,000+1,94,000) 9,94,000
e. Profit 3,81,200

5. The standard material cost for 100 kg of chemical D is made up:

Chemical A 30 kg. @ ₹ 4 per kg
Chemical B 40 kg. @ ₹ 5 per kg
Chemical C 80 kg. @ ₹ 6 per kg
In a batch 500 kg.of chemical D were produced from a mix of
Chemical A 140 kg. @ ₹588
Chemical B 220 kg. @ ₹1,056
Chemical C 440 kg. @ ₹2,860
Calculate the different variance in the actual cost per 100 kg. of chemical D over the
standard cost. [14]

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Directorate of Studies, The Institute of Cost Accountants of India
 INTERMEDIATE EXAMINATION SET - 2
MODEL ANSWERS TERM – DECEMBER 2024
PAPER – 12 SYLLABUS 2022
MANAGEMENT ACCOUNTING

Answer:
Analysis of Given Data
Chemical Standard Data Actual Data
Quantity Price (₹) Value (₹) Quantity Price (₹) Value (₹)
A 30 4 120 28 4.2 117.60
B 40 5 200 44 4.8 211.20
C 80 6 480 88 6.5 572.00
150 800 160 900.80
Less: Loss 50 - 60 -
100 800 100 900.80

Computation of Required Values

Chemical (1) SQSP (₹) (2) RSQSP (₹) (3) AQSP (₹) (4) AQAP (₹)
A 30 × 4 =120 32.00 x 4 = 128.00 28 x 4 = 112.00 117.60
B 40 × 5 =200 42.67 x 5= 213.35 44 x 5 = 220.00 211.20
C 80 × 6= 480 85.33 x 6= 512.00 88 x 6 = 528.00 572.20
800.00 853.35 860.00 900.80

Computation of RSQ:
𝑆𝑄 𝑓𝑜𝑟 𝑡ℎ𝑎𝑡 𝑝𝑟𝑜𝑑𝑢𝑐𝑡
RSQ = × AQ for all products
𝑆𝑄 𝑓𝑜𝑟 𝑎𝑙𝑙 𝑝𝑟𝑜𝑑𝑢𝑐𝑡𝑠

30
For A = 150 × 160 = 32.00 units
40
For B = 150 × 160 = 42.67 units
80
For C = 150 × 160 = 85.33 units

Where (1) SQSP = Standard cost for Standard material = ₹800

(2) RSQSP = Revised standard cost of material = ₹853.35
(3) AQSP = Standard cost of actual material = ₹860.00
(4) AQAP = Actual cost of material = ₹900.80

Computation of Required Variances:

(A) Material yield variance = (1) – (2) = ₹53.35 (A) [₹800 – ₹853.35]
(B) Material Mix variance = (2) – (3) = ₹6.65 (A) [₹853.35 – ₹860]
(C) Material usage variance = (1) – (3) = ₹60 (A) [₹800 – ₹860]
(D) Material price variance = (3) – (4) = ₹40.80 (A) [₹860 – ₹900.80]
(E) Material cost variance = (1) – (4) = ₹100.80 (A) [₹800 – ₹900.80]

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Directorate of Studies, The Institute of Cost Accountants of India
 INTERMEDIATE EXAMINATION SET - 2
MODEL ANSWERS TERM – DECEMBER 2024
PAPER – 12 SYLLABUS 2022
MANAGEMENT ACCOUNTING

6. a) Budgeted and actual sales for the month of March, 2024 of two products A and B of
M/s. XY Ltd. were as follows:
Budgeted Actual
Product Budgeted Units Sales Price/Unit (₹) Actual Units Sales Price / Unit (₹)
A 8,000 ₹8 7,500 8.00
1,000 7.75
B 14,000 ₹4 10,500 4.00
1,750 3.50
Budgeted costs for Products A and B were ₹7.00 and ₹3.50 per unit respectively.
Calculate the following variances from the above data:
Sales Volume Variance, Sales Value Variance, Sales Price Variance, Sales Sub Volume
Variance, Sales Mix Variance. [7]

b) The following data on production, materials required for products X and Y, and
inventory pertain to the budget of LMN Company:

Particulars Product X Product Y

Production (Units) 2000 3000
Material (Units)
A 3.0 1.0
B 4.0 6.5

Particulars Beginning Desired Price/unit

Ending
Material inventory:
A 2000 3000 ₹2
B 6000 6000 ₹ 1.2

i. Analyse the number of material units needed to produce products X and Y

ii. Calculate the cost of materials used for production.
iii. Analyse the number of materials units to be purchased.
iv. Calculate the cost of materials to be purchased. [7]

Answer:
a)
(1) (2) (3) (4)
Product
AQAP (₹) AQSP (₹) RSQSP (₹) SQSP (₹)
A 7,500 × 8.00 8,500 × 8 7,545.45 × 8 8,000 × 8
1,000 × 7.75
B 10,500 × 4.00
1,750 × 3.50 12,250 × 4 13,204.54×4 14,000 × 4

A 60,000 68,000 60,363.6 64,000

7,750

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Directorate of Studies, The Institute of Cost Accountants of India
 INTERMEDIATE EXAMINATION SET - 2
MODEL ANSWERS TERM – DECEMBER 2024
PAPER – 12 SYLLABUS 2022
MANAGEMENT ACCOUNTING

B 42,000
6,125 49,000 52,818.16 56,000
Total ₹1,15,875 ₹1,17,000 ₹1,13,182 ₹1,20,000
Revised Standard Quantity for
A = 8,000/22,000 × 20,750 = 7,545.45 units
B = 14,000/22,000 × 20,750 = 13,204.54 units
AQAP = Actual Sales = ₹1,15,875
AQSP= Actual Quantity of Sales at Standard Price = ₹1,17,000
RSQSP = Revised Budgeted or Standard Sales = ₹1,13,182
SQSP = Standard or Budgeted Sales = ₹1,20,000
a) Sales Sub Volume or Quantity Variance = 3 – 4 = ₹6,818 (A)
b) Sales Mix Variance = 2 – 3 = ₹3,818 (F)
c) Sales Volume Variance = 2 – 4 = ₹3,000 (A)
d) Sales Price Variance = 1 – 2 = ₹1,125 (A)
e) Sales Value Variance = 1 – 4 = ₹4,125 (A)

b) Number of material units needed to produce products X and Y

Particulars Material Material
A B
Number of product X to be produced 2,000 2,000
Number of material units needed per product X 3.0 4.0
Material required ( a × b) 6,000 8,000

Particulars Material A Material B

Number of product Y to be produced 3,000 3,000

Number of material units needed per product Y 1.0 6.5
Material required ( a × b) 3,000 19,500

Particulars Material A Material B

Total number of material units needed for production

of Product X and Product Y
(6000+3000) 9,000
(8000+19500) 27,500

Cost of materials used for production

Particulars Material A Material B

Total number of material units 9,000 27,500

Unit Price ₹ 2 ₹ 1.20
Cost of material used for production ₹ 18,000 ₹ 33,000

13
Directorate of Studies, The Institute of Cost Accountants of India
 INTERMEDIATE EXAMINATION SET - 2
MODEL ANSWERS TERM – DECEMBER 2024
PAPER – 12 SYLLABUS 2022
MANAGEMENT ACCOUNTING

Number of materials units to be purchased.

Particulars Material A Material B

Total number of material units required for production 9,000 27,500

Add: Desired ending inventory 3,000 6,000

12,000 33,500
Less: Beginning inventory 2,000 6,000

Material to be purchased 10,000 27,500

Cost of materials to be purchased

Particulars Material A Material B
Material to be purchased 10,000 27,500
Unit price ₹2 ₹1.2
Cost of materials to be purchased ₹20,000 ₹33,000

7. a) XYZ Corporation has three divisions whose income statements and balance sheets are
summarized below:

Division X Division Y Division Z

Sales ₹5,00,000 (d) (g)
Operating income ₹25,000 ₹30,000 (h)
Operating assets ₹1,00,000 (e) ₹2,50,000
Asset Turnover (a) (f) 0.4
Margin (b) 0.4% 5%
Return on investment (ROI) (c) 2% (i)
(i) Calculate the missing data in the table above and summarize the results.
(ii) Comment on the relative performance of each division. What questions can be
raised as a result of theirperformance? [7]

b) The usual learning curve model is y = axb where, ‘y’ is the average time per unit for x units;
‘a’ is the time for first unit; x is the cumulative number of units; b is the learning coefficient
and is equal to log 0.8 ÷ log 2 = – 0.322 for a learning rate of 80%. Given that a = 10 hours
and learning rate 80%, you are required to calculate:
(i) The average time for 20 units.
(ii) The total time for 30 units.
(iii) The time for units 31 to 40.
Given that log 2 = 0.301, Antilog of 0.5811 = 3.812; log 3 = 0.4771, Antilog of 0.5244 =
3.345, log 4 = 0.6021, Antilog of 0.4841 = 3.049. [7]

14
Directorate of Studies, The Institute of Cost Accountants of India
 INTERMEDIATE EXAMINATION SET - 2
MODEL ANSWERS TERM – DECEMBER 2024
PAPER – 12 SYLLABUS 2022
MANAGEMENT ACCOUNTING

Answer:
a) Return on investment (ROI) = Operating income ÷ Operating assets
= (Operating income ÷ Sales) × (Sales ÷ Operating assets)
= Margin × Asset Turnover
(a) Asset Turnover = ₹5,00,000 ÷ ₹1,00,000 =5 times
(b) Margin = (₹ 25,000 ÷ ₹ 5,00,000) × 100 = 5%
(c) ROI = Asset Turnover × Margin = 5 times × 5% = 25%
(d) Margin = 0.4% = 0.004 = Operating income ÷ Sales (d);
d = ₹30,000 ÷ 0.004 = ₹ 75,00,000
(e) ROI = 2% = Operating income ÷ Operating assets (e) = 30,000 ÷ Operating assets
or, e = ₹30,000 ÷ 0.02 = ₹15,00,000
(f) Asset Turnover = d ÷ e = ₹ 75,00,000 ÷ ₹15,00,000 = 5 times
(g) Asset Turnover = 0.4 = Sales (g) ÷ ₹ 2,50,000 or, g = 0.4 × ₹ 2,50,000 = ₹ 1,00,000
(h) Margin = 5% = Operating income (h) ÷ Sales (g) = (h) ÷ ₹ 1,00,000, h = ₹ 1,00,000 × 5%
= ₹ 5,000
(i) ROI = 0.4 times × 5% = 2% or = 5,000 ÷ ₹ 2,50,000 = 2%
(ii) Division X performed best. It appears that Divisions Y and Z are in trouble. Division Y
turns over its assets as often as Division X, but Y’s margin on sales is much lower. Thus,
Division Y must work on improving its margin. The following questions are raised about
Division Y Is the low margin due to inefficiency? Is it due to excessive material, labour,
and/or overhead costs? Division Z, on the other hand, does just as well as Division X in
terms of profit margin- both divisions earn 5 percent on sales.
But Division 2 has a much lower turnover of capital than Division X. Therefore, Division
Z should take a close look at its investment. Is too much tied up in inventories and
receivables? Are there unused fixed assets? Is there idle cash sitting around?

b)
(i) y = axb or, y = 10(20) -0.322
Taking log on both sides
Log y = log 10 + log 20(-0.322)
Log y = log 10 – (0.322) log 20
= 1 – (0.322) log 20
= 1- (0.322) × log (2×10)
= 1- (0.322) × (log2 + log10)
= 1- (0.322) × (1.3010) = 1- 0.41892 = 0.5811
Log y = 0.5811
y = Anti log (0.5811) = 3.812 hrs (average time)
Total Time = 3.812 × 20 = 76.24 hours

(ii) Log y = log 10 + log 30(-0.322)

Log y = 1- (0.322) × (1.4771)
= 1 - (0.4756) = 0.5244
y = anti log (0.5244) = 3.345 hrs (average time)
Total time = 3.345 × 30 = 100.35 hrs

15
Directorate of Studies, The Institute of Cost Accountants of India
 INTERMEDIATE EXAMINATION SET - 2
MODEL ANSWERS TERM – DECEMBER 2024
PAPER – 12 SYLLABUS 2022
MANAGEMENT ACCOUNTING

(iii) Log y = log 10 + log 40 (-0.322)

= 1- (0.322) × (1.6021)
Log y = 0.4841
y = anti log (0.4841) = 3.049 hrs
Total time = 40 × 3.049 = 121.96 hrs
Time from 31 to 40 units = 121.96 – 100.35 = 21.61 hrs

8. a) Describe decision making under certainty with examples. [7]

b) Explain the characteristics of responsibility accounting. [7]

Answer:
a) Decision making is about selecting the best alternative from among an array of alternatives. The
‘best’ alternative refers to that particular alternative which helps a firm to maximise its profit or
minimise its cost. In decision theory, the alternatives are referred to as acts and the possible
events are referred to as states of nature (outcomes of a random process).
The condition of certainty implies that the future is known and thus the probability of happening/
not happening of an event is one.

If the decision maker is certain as regards to the probability of happening/ not happening of an
outcome, he is said to operate under a condition of certainty. On the contrary, if the decision
maker has imperfect information or no information about the happening/ or not happening of an
event he is said to operate under conditions of uncertainty or risk. Thus it may be stated that in
the realm of decision making, under the condition of certainty, each action will lead invariably
to a specific outcome. In this situation, only one state of nature exists and its probability is one.

Example:
Mr. Pratap is considering setting up his stall in the playground on the evening of a particular day,
say 20th April 2024. He has the option of selling ice creams or coffee. He has the option of
buying Ice creams from a whole seller @ ₹56 each and selling them for @ ₹60 each. Thus he
would make a profit of ₹4 on each Ice cream cone. On a sunny day he sales 200 cones, but if it
is a rainy day then sales fall and thus he can sell only 80 cones. On the contrary, he can sell
coffee whereby he can make a profit of ₹6 per cup. On a sunny day he sales 100 cones, but if it
is a rainy day then sales increase and thus he can sell 160 cups.
This can be represented in the following pay off matrix:

Particulars States of Nature

Acts Sunny Day Rainy Day
Sale Ice Cream ₹ 800 ₹ 320
Sale Coffee ₹ 600 ₹ 960
Now, on the morning of 20th August 2024 he wakes up and find that it has been raining from the

16
Directorate of Studies, The Institute of Cost Accountants of India
 INTERMEDIATE EXAMINATION SET - 2
MODEL ANSWERS TERM – DECEMBER 2024
PAPER – 12 SYLLABUS 2022
MANAGEMENT ACCOUNTING

previous day night and for clarification he calls the met office and they confirm that it would rain
for the whole day. Thus he faces a situation of certainty as there is only one state of nature and
that is it being a rainy day. Thus his decision whether he would sell Ice cream or Coffee is based
on one certain information and thus the above payoff matrix may be reduced to one with a single
state of nature (Rainy Day).

Particulars States of Nature

Acts Rainy Day
Sale Ice Cream ₹ 320
Sale Coffee ₹ 960
Thus Mr. Pratap is better off if he sales Coffee on 20th April 2024, at the playground as the payoff
(₹960) from selling coffee is higher than the payoff from selling ice cream. This is particularly
because of the fact that it is known with certainty that the 20th April 2024 would be a rainy day.

b) Characteristics of responsibility reporting are: -

 Reports should fit the organization chart, that is, the report should be addressed to the
individual responsible for the items covered by it, who, in turn, will be able to control those
costs under his jurisdiction. Managers must be educated to use the results of the reporting
system.
 Report should be prompt and timely. Prompt issuance of a report requires that cost records
be organized so that information is available when it is needed.
 Reports should be issued with regularity. Promptness and regularity are closely tied up with
mechanical aids used to assemble and issue reports.
 Reports should be easy to understand. Often they contain accounting terminology that
managers with little or no accounting training find difficult to understand, and vital
information may be incorrectly communicated. Therefore, accounting terms should be
explained or modified to fit the user. Top management should have some knowledge of the
kind of items chargeable to an account as well as the methods used to compute overhead
rates, make cost allocations and analyze variances.
 Reports should convey sufficient but not excessive details. The amount and nature of the
details depend largely on the management level receiving the report. Management reports
should neither be flooded with immaterial facts nor so condensed that management lacks
vital information essential to carrying out its responsibilities.
 Reports should give comparative figures, i.e., a comparison of actual with budgeted figures
or of predetermined standards with actual results and the isolation of variances.
 Reports should be analytical. Analysis of underlying papers, such as time tickets, scraps
tickets, work orders, and materials requisitions, provide reasons for poor performance
which might have been due to power failure, machine breakdown, an inefficient operator,
poor quality of materials, or many other similar factors.
 Reports for operating management should, if possible, be stated in physical units as well as

17
Directorate of Studies, The Institute of Cost Accountants of India
 INTERMEDIATE EXAMINATION SET - 2
MODEL ANSWERS TERM – DECEMBER 2024
PAPER – 12 SYLLABUS 2022
MANAGEMENT ACCOUNTING

in terms of money since monetary information may give a foreman not trained in the
language of the accountant a certain amount of difficulty.
 Reports may tend to highlight departmental efficiencies and inefficiencies, results achieved
future goals or targets.

18
Directorate of Studies, The Institute of Cost Accountants of India
 SUGGESTED ANSWERS TO QUESTIONS
SECTION – A
1 (a)
(i) (C)
(ii) (A)
(iii) (D)
(iv) (C)
(v) (D)
(vi) (A)
(vii) (D)
(viii) (A)
(ix) (B)
(x) (B)
(xi) (B)
(xii) (D)

1 (b)
(i) False
(ii) False
(iii) False
(iv) False
(v) False
(vi) True
(vii) True

1 (c)
(i) Standard
(ii) Cost-volume-profit (CVP) / Break even
(iii) Angle of Incidence
(iv) Cost driver
(v) Margin of safety
(vi) Learning curve

1
 SECTION – B

2 (a):
Cost Accounting Management Accounting
Cost accounting revolves around cost Management accounting helps management
computation, cost control, and cost make effective decisions about operations of
reduction. the business.
Cost accounting prevents a business from Management accounting offers a big picture of
incurring costs beyond budget. how management should strategize.
The scope is much narrower. The scope is much broader.
Quantitative. Quantitative and qualitative.
Cost accounting is one of the many sub-
Management accounting is the universal set.
sets of management accounting.
The task of decision making very less.
Historic and predictive information is the basis
Even if there is some, it is based on
of decision-making.
historic information
Statutory audit of cost accounting is a The audit of management accounting has no
requirement in some specified industries. statutory requirement
Cost accounting isn't dependent on Management accounting is dependent on both
management accounting to be successfully cost & financial accounting for successful
implemented. implementation.
Management, shareholders, and vendors. Only for management.

2 (b):
(a) Operating Income and Operating Income as a percentage of revenues for each
product line.
(When support costs are allocated to product lines based on costs of goods sold of each
product)

Drug S (₹) Drug T (₹) Drug Z (₹) TOTAL (₹)

Operating income: 16,47,700 16,31,550 17,35,750 50,15,000

Operating income as a % of revenues: 22.12% 14.60% 9.32% 13.46%

(b) Operating Income and Operating Income as a percentage of revenues for each
product line.
(When support costs are allocated to product lines using an activity-based costing system)
Drug S (₹) Drug T (₹) Drug Z (₹) TOTAL (₹)
Operating Income 6,56,400 14,20,300 29,38,300 50,15,000
Operating income as a % of
8.81% 12.71% 15.78% 13.46%
Revenues

3 (a):
i. Present Break-even Sales (quantity) = 1,00,000 units
ii. Revised Break-even Sales (quantity) = 1,42,858 units

2
3 (b):
(i) The differences between Absorption Costing & Marginal Costing are:
Absorption Costing Marginal Costing
Both fixed and variable costs are considered for Only variable costs are considered for product
product costing and inventory valuation. costing and inventory valuation.
Fixed costs are charged to the cost of production.
Fixed costs are regarded as period costs. The
Each product bears a reasonable share of fixed cost
profitability of different products is judged by
and thus the profitability of a product is influenced
their P/V ratio.
by the apportionment of fixed costs.

Cost data are presented in conventional pattern. Net

Cost data are presented to highlight the total
profit of each product is determined after
contribution of each product.
subtracting fixed cost along with their variable cost.

The difference in the magnitude of opening stock The difference in the magnitude of opening stock
and closing stock affects the unit cost of production and closing stock does not affect the unit cost of
due to the impact of related fixed cost. production.

In case of absorption costing the cost per unit

In case of marginal costing the cost per unit
reduces, as the production increases as it is fixed
remains the same, irrespective of the production
cost which reduces, whereas, the variable cost
as it is valued at variable cost.
remains the same per unit.

(ii)
A. Number of units of products- sold in 2022-23
1'' PVC Pipe 10,000 units
1/2'' PVC Pipe 5,000 units
B. Total expected profit of the company from the two products in 2023-24 = ` 3,15,500

4 (a)
(i) Transfer price where total labour hours available is 70000 hours = ` 295
(ii) Transfer price where total labour hours available is 80000 hours = ` 286

4 (b)
(i) Net profit or loss of purchasing (rather than manufacturing) the lenses required for CCTV
Camera. = ` - 20,00,000
(ii) Indifference point = 6363.64 Units

If the future volume level is predicted to decrease, the option where Fixed cost is lower is
preferable, i.e., Purchase from outside market.
(iii) Net Profit if the lenses are purchased rather than manufacturing in-house = ` 5,00,000
Therefore, the company should buy the lenses from outside market rather than making
them in-house.

3
5 (a)
(i) Here, Division M is more successful since its return (ROI) is Rs. 0.25 for each
rupee invested in operating assets which is more than that of Division N i.e. 20%.
(ii) The residual income (RI) at 15% for each division is

Division M (₹) Division N (₹)

Residual Income 6,00,000 6,25,000

(iii) Division N is more successful since its RI is greater than Division N.

5 (b)

(i) Economic Value Added (EVA) = ` 70,00,000

(ii) Learning Curve:
A learning curve is a function that measures how labour hours per unit reduces as units of
production increases, because workers are learning and becoming expert at their jobs. The
management uses this technique to predict how labour hours and labour cost will decreases as
more units are produced.
Application of Learning Curve:
The areas in which the application of learning curve can help an organization are as follows:
1. Improvement of productivity: As the experience is gained, the performance of workers
improves, time taken per unit of production is reduces and thus productivity increases.
2. Cost Prediction: Learning Curve provides better cost predictions to enable organization to
quote competitive price for potential orders.
3. Work scheduling: Learning curve enables organizations to predict the inputs required
more effectively and helps in the preparation of accurate delivery schedule.
4. Standards setting: Organizations prepare budgets & standards considering learning curve
to avoid significance variances.

6 (a)

(i) Production Budget for the period of April to July

Month Budgeted Production (units)

X Y
April 1,100 2,800
May 1,400 2,600
June 1,800 2,200
July 2,200 1,800
Total 6,500 9,400

4
 (ii) Production cost budget for the period April to July:

Total Cost for X & Y

Details
(Rs)

Direct Material 2,59,850

Direct Labour 95,050
Factory Overhead 57,100

Total 4,12,000

6 (b)
Master Budget for the year ended March 31, 2024
(₹) (₹)
Total Sales 80,00,000
Less: Works Cost
Prime Cost 51,60,000
Fixed Factory Overhead 2,64,000
Variable Factory Overhead 3,16,000
57,40,000
Gross Profit 22,60,000
Less: Adm., Selling and distribution expenses 3,60,000
Net Profit 19,00,000

7 (a)
(i) Fixed Overheads Volume Variance = ₹ 25,000 (Adv.)
(ii) Fixed Overheads Efficiency Variance = ₹ 75,000 (Adv.)
(iii) Fixed Overheads Cost Variance = ₹ 5,000 (Fav.)

7 (b)
(i)
 Material Price variance = ₹2,000 (Adv)
 Material Usage variance = ₹10,000 (Fav)
 Direct wage rate variance = ₹20,000 (Adv)
 Wage Efficiency variance = ₹32,000 (Fav)
 Variable Overhead expenditure variance = ₹ 20,000 (Adv)
 Variable overhead efficiency variance = ₹16,000 (Fav)
 Fixed overhead expenditure variance = ₹2,000 (Fav)
 Fixed overhead capacity variance = ₹16,667(Adv)
 Fixed overhead efficiency variance = ₹6,667 (Fav)
 Sales margin price variance = ₹40,000 (Adv)
 Sales margin volume variance = ₹8,000 (Adv)
5
 (ii) Reconciliation of Profit

₹
Budgeted Profit 80,000
Favorable Variances: 1,46,667
Adverse variances: (1,06,667)
Actual Profit (for the period): 40,000

8 (a)
(i)

(ii) The best strategy is to accept A first, and then to accept B, if A is successful.

8 (b)
(i) Maximin Criterion: S 3 Strategy is to be selected.
(ii) Maximax Criterion: S 1 Strategy is to be selected.
(iii) Laplace Criterion: S 1 Strategy is Selected.
(iv) Hurwicz Criterion   0.4 : S Strategy is Selected.
1

6
 PAPER-12 : MANAGEMENT ACCOUNTING

SUGGESTED ANSWERS

SECTION – A

1.

(i) (A)
(ii) (C)
(iii) (C)
(iv) (A)
(v) (D)
(vi) (C)
(vii) (C)
(viii) (C)
(ix) (D)
(x) (B)
(xi) (A)
(xii) (C)
(xiii) (B)
(xiv) (B)
(xv) (C)

SECTION – B

2. (a)

Some of the broad areas considered to be part of 'management accounting' is summarized in the
following lines:
 Budgeting, planning and forecasting
 Measuring organisational, divisional and departmental performance
 Comparing results and performance within and between organisations
 Assisting in the process of increasing effectiveness and efficiency
 Assessing the performance of past and future capital investments
 Advising on decisions about product mix, markets to be served and selling prices
 Advising on decisions on whether to outsource products, components, activities and services
 Advising on decisions involving the investment of scarce funds between a range of possible
alternatives
 Assisting in the making of a wide range of strategic decisions
The above mentioned are some of the relatively precarious activities of the higher-level management.

1
The fundamental activities of management accounting would include:
 calculating the profitability of products, services and operations,
 allocating costs to products,
 setting inter-divisional transfer prices.
There are also some functions of the management accountant which are focused on delivering critical
information to the top-level management for initiating the process of increasing effectiveness and efficiency.
Techniques such as activity-based cost management and theory of constraints are examples of such
specialized activities.
Some authors also prefer to include capital budgeting decision within the scope of management accounting
especially when there is a strategic aspect to it.

2. (b)

Total cost and Operating Income using ABC

Cake Pizza Soft Drinks Total
(₹) (₹) (₹) (₹)
Total cost: 27,60,000 52,20,000 17,70,000 97,50,000
Operating income 2,64,750 31,500 2,13,750 5,10,000

3.
Incremental Gain ₹ 50000

Decision: M/s Bishalgarh Limited should invest in Product Promotion Campaign as the same will increase
overall profit of the Company by D 50000.

4. (a)
600 Units to be sold in 2023-24 to earn same amount of profit per unit of the last year (2022-23).

4. (b)

Products M(D) N(D)

Total Variable Cost of producing in-house 125 175
Extra cost of buying in each component 60 84
Extra cost of buying per machine hour 30 28

Priority should be given to the In-house production of component M in order to minimize the extra cost of
buying-in.

2
5.
Cash Budget for the three months period January 2024 to March 2024 (₹)
Particulars Jan, 24 Feb,24 Mar,24
Receipts:
Opening balance 135000 380000 619410
Sales 538000 533910 591140
Total Receipts (A) 673000 913910 1210550
Payments:
Creditors for direct material
75000 65000 90000
Lag in payment - 1 month
Direct Labour 35000 30000 45000
Direct Expenses 17000 14000 25000
Factory Overhead 35000 42500 37500
Admin Overhead 56000 68000 53000
Gratuity & Benevolent fund payment of Mr. R. Rajendran - - 800000
EMI for Vehicle loan 75000 75000 75000
Total Payments (B) 293000 294500 1125500
Closing balance of Cash (A-B) 380000 619410 85050

6. (a)

(i) Efficiency Variance = ₹ 3600 (A)

(ii) Capacity Variance = D 5100 (F)
(iii) Idle Time variance = D 4500 (F)
(iv) Volume Variance = D 6000 (F)
(v) Budget / Expenditure Variance = ₹ 5000 (A)
(vi) Fixed Overhead Cost Variance = ₹ 1000 (F)

6. (b)
(a) Production Budget
Particulars AB+ CD+
Production 55 210

(b) Material Requirement Budget

Particulars A B C D
Product AB+ 44 11 -- --
Product CD+ -- -- 105 105

(c) Purchase Budget

Particulars A B C D
Purchases (By weight in Tons) 49 41 205 55
Cost per ton 500 400 100 200
Purchases (₹) 24,500 16,400 20,500 11,000

Total Purchases = ₹ 72400

3
7. (a)

Economic Value Added (EVA) = D 131094

Comment:
The Positive EVA of ₹131094 indicates that M/s Srilok Polymer Limited has surpassed the expectation of its
Shareholders.

7. (b)

(i) Labour time to do logo engraving in the 64 pcs of MS End Fittings is 104.64 minutes.
Labour cost for 64 units = ₹ 174.40
(ii) labour time required to execute repeat order is 63.04 Minutes
Labour cost for repeat order of 64 units = ₹ 105.07

8. (a)

Table showing Probabilistic Budget & Expected Value

Expected Profit
Profit after tax (PAT)
Sales Volume Joint Probability (JP) (₹)
(₹)
PAT x JP
110080 0.06 6604.80
180000
295840 0.18 53251.20
P = 0.3
357760 0.06 21465.60

151360 0.10 15136.00

200000
357760 0.30 107328.00
P = 0.5
426560 0.10 42656.00

233920 0.04 9356.80

240000
481600 0.12 57792.00
P = 0.2
564160 0.04 22566.40

Expected Value (EV) 336156.80

Comment: It can be observed that an expected profit estimate will be ₹ 336,156.80.

8. (b)
Meaning of Cost Centre
A Cost Centre is defined as a function or department within an Organization which is not directly generating
revenues and profits to the company but is still incurring expenses to the company for its operations. The
contributions made by the cost centres in terms of profits is indirect. For example, a Company’s human
resource and Accounts departments could be considered as Cost Centres because these units do not generate
revenues or charge for services, but they do incur cost.

4
Cost Centre vs. Profit Centre
A Cost Centre is different from Profit Centre in the following way
Cost Centre Profit Centre
A Profit Centre is an organizational unit whose
manager is responsible for generating revenues
A Cost Centre is an organizational unit whose
and managing expenses related to current
manager has the authority only to incur costs and
activity. Thus, Profit Centre should be
is specifically evaluated on the basis of how cost
independent organizational unit whose
are controlled.
managers have the ability to obtain resources at
the most economical prices.
The objective of Cost Centre is the control over The objective of Profit Centre is to maximise
the incurrence of expenses. the Centre's profit.

The Area of Operation of Cost Centre is The Area of Operation of Profit Centre is
comparatively narrow. comparatively wide.
Cost Centres managers are responsible for cost Profit Centres managers are responsible for both
only, costs and revenues.

____________________________

5
 PAPER-12 : MANAGEMENT ACCOUNTING
SUGGESTED ANSWERS
SECTION – A
1.
(i) (B)
(ii) (D)
(iii) (A)
(iv) (C)
(v) (C)
(vi) (B)
(vii) (A)
(viii) (B)
(ix) (C)
(x) (C)
(xi) (C)
(xii) (A)
(xiii) (C)
(xiv) (A)
(xv) (B)

SECTION - B
2. (a)

Basis for
Financial Accounting Management Accounting
Comparison
Financial Accounting classifies, analyses, Management accounting helps
records, and summarizes the financial management make effective decisions
Purpose
transactions of a particular period of the about the business.
company.
Financial accounting is to reflect true and Management accounting helps
Application fair picture of financial affairs. management to take meaningful steps
and Strategies.
The Scope is pervasive, but not as much as The Scope is much broader.
Scope
the management accounting.
Information Type Quantitative Quantitative and qualitative.
It is not dependent on management Management accounting is basically
accounting decision-making accounting and
Inter Dependence depends on information created by
Financial Accounting as well as Cost
Accounting.
It is legally mandatory to prepare financial Management accounting has no
accounts of all companies. (For example, in statutory requirement.
Statutory
the Indian Context Companies Act 2013,
Requirement
relevant rules. of accounting standards
furnishes the statutory requirements)
Financial accounting has specific formats There’s no set format for presenting
Format for presenting and recording information. information in management accounting.
Mainly for potential investors as well as all Only for Management.
Users
stakeholders.
The information presented is verifiable. The information presented is predictive
Verifiable and not immediately verifiable.

1
2. (b)
(i)
Cost Driver Rates : (₹)
Material procurement 527
Material Handling 368
Maintenance 115
Set up 798
Quality Control 196
Machinery 30

(ii) Cost of batch of Components AXL 6 using ABC = ₹ 11,08,228

3.
(i)
Quantity of each product to be manufactures / purchased
Particulars Machine Hours Qty.
Manufacturing Bonbon 5000 10000
Manufacturing Zimzam 1000 666/667
Purchase of Zimzam from M/s SB Ltd. - 3000

(ii) Total Profit of M/s Posco Ltd.under (i) above = D 25,26,500

4. (a)
(i) BEP = 16,000 units
Margin Of Safety (MOS) = ₹ 1,60,000
(ii) MOS = D 1,28,000 or 3,200 units
(iii) Profit = ₹ 80,000
BEP = 20,000 units
MOS = ₹1,80,000
Thus, MOS is also increased by D 20,000 in case of reduction in selling price.

4. (b)
KAUTILYA LTD
Statement of comparative profitability
Alternatives: Alternatives - I Alternatives - II Alternatives - III
Sales domestic 48,00,000 30,00,000 48,00,000
Sales Export ---------- 27,00,000 27,00,000
Total Sales 48,00,000 57,00,000 75,00,000
Direct Materials 15,00,000 18,75,000 24,37,500
Direct Labour 6,00,000 7,50,000 10,50,000
Variable overhead 3,00,000 3,75,000 4,87,500
Total variable cost 24,00,000 27,00,000 35,25,000
Contribution 24,00,000 27,00,000 35,25,000
Fixed overheads 19,00,000 19,00,000 20,50,000
Profit 5,00,000 8,00,000 14,75,000

2
Suggestion:
It reveals from the comparative analysis that Altemative-III i.e. 80% capacity for domestic sales & 50%
capacity for Export Sales is the best as it would give highest profits (₹ 14.75 lakhs)

5.
Cash Budget for the three months period - April to June, 2024 (₹)
Particulars April, 24 May, 24 June, 24
Receipts:
Opening balance 2,70,000 1,46,823 13,063
Sales 10,74,014 7,67,793 15,96,992
Total Receipts 13,44,014 9,14,616 16,10,055
Payments:
Direct Material 4,87,566 3,02,524 2,70,666
Direct Labour 2,43,783 1,51,262 1,35,333
Factory Overhead 65,842 47,767 58,737
Fixed Cost 4,00,000 4,00,000 4,00,000
Factoring Commission - - 19,296
Total Payments 11,97,191 9,01,553 8,84,032
Closing balance of Cash 1,46,823 13,063 7,26,023

6. (a)
(i) Standard Variable Overhead Rate per hour = ₹ 3
Standard Fixed Overhead Rate per hour = ₹ 1

(ii) Variable Overhead Efficiency Variance = ₹ 11,400 (F)

Variable Overhead Expenditure Variance = ₹ 10,500 (A)

(iii) Fixed Overhead Efficiency Variance = ₹ 3,800 (F)

Fixed Overheads Capacity Variance = ₹ 14,000 (F)

6. (b)
(i) Production Budget (in units)
Particulars January February Mach April
Gadgets to be produced 5,300 6,250 7,125 7,625

(ii) Purchase budget for batteries

Particulars January February March
No. of units required for Production 14,350 16,775 18,825
No. of units to be purchased 11,100 13,025 14,550

3
7. (a)
Computation of Economic Value Added (EVA)

Particulars Amount (₹.)

Profit after tax (PAT) 25,41,000

Add: Interest on 12% debt net of taxes 84,000

Total Return to providers of fund 26,25,000

Less: Cost of Capital Employed 8,00,000

Economic Value Added (EVA) 18,25,000

7. (b)
(i) Total Cost per unit of the first order of 30 units = D 369.83 i.e. ₹ 370
(ii) Price to be quoted to yield 20% on Selling Price= ₹ 380

8. (a)

EMV of chance node C = ₹ 5,70,000

EMV of node B = ₹ 5,70,000
EMV of node A = ₹ 1,62,000
EMV of decision node 2 = New plant: ₹ 1,62,000
Overtime: = ₹ 4,70,000
EMV of decision node 1 = Enter Market = ₹ 4,70,000 (Max.) and pay overtime
Do not enter market = ₹ 00

Suggestion :
Since EMV of Decision Node – 1 (₹ 4,70,000) is maximum the company should enter the market and pay
overtime wage.
4
8. (b)
Responsibility Centre:
A Responsibility Centre may be defined as an area of responsibility which is controlled by an individual. A
responsibility centre is an activity such as department over which a manager exercises responsibility.
Responsibility Centre may be departments, product lines, territories or any other type of identifiable unit or
combination of units. All costs relating to the centre are collected and the manager responsible for such a cost
centre judged by reference to the activity levels achieved in relation to costs. Even an individual machine may
be treated as responsibility centre for cost control and cost reduction.

There are four types of Responsibility Centre are commonly identified. These are:
1. Cost or Expense Centre: The most elementary form of Responsibility Centre is the cost Centre, which
itemizes all of the expenses incurred to run a specified function, but ignores the cost of capital involved
in it, as well as any associated returns. A Cost Centre is an organizational unit whose manager has the
authority only to incur costs and is specifically evaluated on the basis of how cost are controlled. The
objective of Cost Centre is the control over the incurrence of expenses. Cost Centres managers are
responsible for cost only.

2. Profit Centre: A Profit Centre is an organizational unit whose manager is responsible for generating
revenues and managing expenses related to current activity. Thus, Profit Centre should be independent
organizational unit whose managers have the ability to obtain resources at the most economical prices.
The objective of Profit Centre is to maximise the Centre's profit. Profit Centres managers are
responsible for both costs and revenues.

3. Revenue Centre: A Revenue Centre is strictly defined as an organizational unit that is responsible for
generation of revenues and has no control over selling price or budgeting cost. It is a distinct operating
unit of a business that is responsible for generating sales and is judged solely on its ability to generate
sales; it is not judged on the amount of costs incurred. Revenue centers are employed in heavily sales-
focused organizations.

4. Investment Centre: An investment Centre is an organizational unit whose manager is responsible for
managing revenues and current expenses. An investment center is a center that is responsible for its own
revenues, expenses, and assets and manages its own financial statements which are typically a balance
sheet and an income statement.

________________________________

5
 PAPER – 12 : MANAGEMENT ACCOUNTING
SUGGETSED ANSWER
SECTION – A
1.
(i) (C)
(ii) (C)
(iii) (B)
(iv) (B)
(v) (D)
(vi) (D)
(vii) (C)
(viii) (C)
(ix) (D)
(x) (C)
(xi) (D)
(xii) (D)
(xiii) (B)
(xiv) (D)
(xv) (A)
SECTION - B
2. (a)
The basis of
Cost Accounting Management Accounting
comparison
Meaning Cost accounting revolves around Management accounting helps
cost computation, cost control, and management make effective
cost reduction. decisions about operations of the
business.
Application Cost accounting prevents a Management accounting offers a big
business from incurring costs picture of how management
beyond budget. should strategize.
Scope The scope is much narrower. The scope is much broader.
Measuring grid Quantitative. Quantitative and qualitative.
Sub-set Cost accounting is one of the many Management accounting is the
sub-sets of management universal set.
accounting.
Basis of decision making The task of decision making very Historic and predictive information
less. Even if there is some, it is is the basis of decision-making.
based on historic information.
Statutory requirement Statutory audit of cost accounting The audit of management accounting
is a requirement in some has no statutory requirement.
Specified industries.
Dependence Cost accounting isn't dependent Management accounting is
on management accounting to be dependent on both cost & financial
successfully implemented. accounting for successful
implementation.
Used for Management, shareholders Only for management
and vendors

1 of 9
2. (b)
(i)
Cost (₹) Cost driver Cost Driver Rate (₹)
Cost Pool
[A] [B] [C] = [A] /[B]
Machine Department Expenses 1848000 Machine hours 14.00
(132000 hrs.)
Assembly Department Expenses 672000 Assembly hours 16.00
(42000 hours)
Setup Cost 90000 No. of Production Runs (450) 200.00
Stores Receiving Cost 120000 No. of Requisitions Raised on 1000.00
the Stores (120)
Order Processing and Dispatch 180000 No. of Customers Orders 48.00
Executed (3750)
Inspection and Quality Control Cost 36000 No. of Production Runs (450) 80.00
Total (D) 2946000

Number of Production Run is = (150 + 120 + 180) = 450

(ii) Statement Showing Overhead Costs Allocation of Product P, Q and R.

Particulars of Cost Cost Driver PRODUCTS
P Q R Total
(D) (D) (D) (D)
Machine Department Expenses Machine Hours 420000 672000 756000 1848000
Assembly Department Expenses Assembly Hours 240000 -- 432000 672000
Setup Cost No. of Production Runs 30000 24000 36000 90000
No. of Requisitions 40000 30000 50000 120000
Stores Receiving Cost
Raised on the Stores
Order Processing and Dispatch No. of Customers 60000 48000 72000 180000
Orders Executed
Inspection and Quality Control Cost No. of Production Runs 12000 9600 14400 36000
Overhead 802000 783600 1360400 2946000

3.
Contribution per Room-day:
Particulars 2023-24 2024-25
No. of Room days 8000 8000
Room tariff per day ₹ 5000 ₹ 5500
Less: Variable Cost ₹ 2000 ₹ 2200
Contribution Per Room-day ₹ 3000 ₹ 3300

Total Fixed Cost:

2023-24 2024-25
Particulars
(₹) (₹)
Fixed Cost - Standard Rooms 6000000 6600000
Apportioned cost of Hotels Administrative Charges 10000000 11100000
Total Fixed Cost 16000000 17700000

Cost of Housekeeping staff

2023-24 2024-25
Particulars
(D) (D)
Cost of Housekeeping staff per year 720000 756000

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 (i) Profitability of Garlic Hotels
2023-24 2024-25
Particulars
(D) (D)
Total Contribution 24000000 26400000
Less: Fixed Cost - Standard Rooms 6000000 6600000
Less: Apportioned cost of Hotels Administrative Charges 10000000 11100000
Less: Salary of Housekeeping staff 10800000 11340000
Total Profit (-)2800000 (-)2640000

(ii) Break-Even Room Days:

Break Even Point (BEP) when Room days are less than 7500
BEP = (1,77,00,000 + 7,56,000 X 10) / 3300
7655 Room days
As 7654 room days falls in second slab (7500 to 9500 room days), therefore, 7655 room days is not the Break
Even Point as evident from above profitability statement.
Break Even Point (BEP) when Room days are between 7500 to 9500
BEP = (1,77,00,000 + 7,56,000 X 15) / 3300
8800 Room days
As 8800 room days falls within 7500 to 9500 room days, therefore, 8800 room days is the Break-Even Point.

(iii) Minimum Selling Price to continue Standard Room segment at existing occupancy of Rooms:
Standard Room segment at existing occupancy of Rooms = (Avoidable Fixed Cost + Housekeeping staff Salary) /
Contribution per unit
8000 = (66,00,000 + 7,56,000 x 15) / (Selling Price Per Unit – Variable Cost Per Unit)
Or 8000 = 1,79,40,000 / (Selling Price Per Unit – 2200)
Or 8000 SPPU – 1,76,00,000 = 1,79,40,000
Or Selling Price Per Unit = ₹ 4,442.50 OR ₹4443
Present tariff of standard room is ₹ 5000.
Therefore, no increase in selling price is required.

4. (a)
(i) Profit per Unit in 2024-25.
Particulars Per unit (₹) Total (₹)
Selling Price Per Unit 200 4,00,000
Less: Raw Material Cost Per Unit 100 2,00,000
Less: Direct Labour Per Unit 30 60,000
Less: Variable & Fixed Overhead Cost 1,00,000
Total Profit 40,000
Therefore, Profit Per Unit 20

(ii) Fixed Overheads and Variable Overheads in both the year:

Particulars 2024-25 (D) 2025-26 (D)
Units Sold 2000 3000
Variable & Fixed Overhead Cost (₹) 100000 120000

Therefore, Variable Cost Per Unit = Change in Total Cost / Change in Quantity
= 20000 / 1000= ₹ 20/-
Therefore, Fixed Overheads = 100000 – 2000 x 20 = ₹ 60000
Particulars 2024-25 (D) 2025-26 (D)
Variable Overheads Per Unit (₹) 20 20
Fixed Overhead (₹) 60000 54000
at 2025-26 price level

3 of 9
 Contribution Per Unit in 2025-26
Particulars Amount (₹)
Selling Price Per Unit 200
Less: Raw Material Cost Per Unit 100
Less: Direct Labour Per Unit 36
Less: Variable Overheads Per Unit 20
Contribution Per Unit 44

Target Profit Per Unit in 2025-26 is ₹ 20

Now, let’s assume that X Units to be sold in 2025-26 in order to make same amount of Profit Per Unit.
Therefore,
X = (54000 + 20X) / 44
Or 44X = 54000 + 20X
Or 24X = 54000
Or X = 2250

Therefore, 2250 units to be sold in 2025-26 in order to make same amount of profit per unit.

4. (b)
Statement showing cost reduction program envisaged (Reduction in fixed expenses product-wise)
Particulars XB (D) YB (D)
(a) Sale (₹) 4000000 4800000
(b) Selling Price per unit (Revised) (₹) 8000 9000
(c) Sales unit (a/b) 500 533.33
(d) Previous fixed cost (given) (₹) 1000000 1500000
(e) New P/V Ratio (same as old) (Given) 25% 30%
(f) Break even sales 3200000 3600000
(g) Revised fixed cost (e x f) (₹) 800000 1080000
(h) Reduction in fixed cost (d - g) (₹) 200000 420000

So, cost reduction program is required to be envisaged in previous level by ₹ 200000 in Mobile - XB and ₹ 420000 in
Mobile - YB

5.
(i) Standard Cost Card (per unit)
Particulars (₹)
Direct Material 200
Direct Labour 66
Overheads 180
Total Standard Cost 446

Overhead rate = 900000/60000 = ₹ 15 per hour

4 of 9
 (ii) Material Costs Variances:
Standard quantity for actual output = 4800 x 20 = 96000

Statement showing the basic calculation for the computation of Material Cost Variances
SQ x SP AQ x AP AQ x SP
SQ for AQ SP AQ AP
(₹) (₹) (₹)
96000 10 960000 100000 10.5 1050000 1000000

Material Cost Variances = 960000 - 1050000 = ₹ 90000 (A)

Material Usage Variances = 960000 - 1000000 = ₹ 40000 (A)
Material Price Variances = 1000000 - 1050000 = ₹ 50000 (A)

Labour Cost Variances:

Standard hour for actual output = 4800x12 = 57600

Statement showing the basic calculation for the Computation for Labour Cost Variances:
SH x SR AH AR AH x AR AH x SR
SHforAQ SR
(₹) (₹) (₹)
57600 5.5 316800 62000 5 310000 341000

Labour Cost Variance = 316800 - 310000 = ₹ 6800 (F)

Labour Efficiency Variances = 316800 - 341000 = ₹ 24200 (A)
Labour Rate Variances = 341000- 310000 = ₹ 31000 (F)

Overhead Cost Variances:

Budgeted Hours = ₹ 900000 / ₹ 15 = 60000
Note: All overheads are fixed.
Statement showing the basic Calculation for the computation of Overhead Cost Variances:
SH x SR AH x AR AH x SR BH x SR
SH for AQ SR AH AR BH
(₹) (₹) (₹) (₹)
57600 15 864000 60000 15.43 926000 900000 60000 900000

Fixed Overhead Efficiency Variance = 864000 - 900000 = ₹ 36000 (A)

Fixed Overhead Capacity Variance = 900000 - 900000 = ₹ 00
Fixed Overhead Expenditure Variance = 900000 - 926000 = ₹26,000 (A)
Total Fixed Overhead Cost Variance = 36000 + 00 + 26000 = ₹ 62000 (A)

6. (a)
Basic Calculation
Material Standard for 640 kg. Output Actual for 680 kg. Output
Qty. Kg. Rate (₹) Amt. (₹) Qty. Kg. Rate (₹) Amt. (₹)
A 480 50 24000 540 60 32400
B 320 60 19200 260 50 13000
Total 800 43200 800 45400
Less: Loss 160 -- -- 120 -- --
640 43200 680 45400
Standard Cost of actual output = ₹ 43200 x 680/640 = ₹ 45900
5 of 9
 (i) Material Cost Variance = (45900 - 45400) = ₹ 500 (F)

(ii) Material Price Variance (MPV):

Material A = (50 - 60) x 540 = ₹ 5400 (A)
Material B = (60 - 50) x 260 = ₹ 2600 (F)
MPV ₹ 2800 (A)

(iii) Material Mix Variance (MMV):

A = 50 x (480 Kg. - 540 Kg.) = ₹ 3000 (A)
B = 60 x (320 Kg. - 260 Kg.) = ₹ 3600 (F)
MMV ₹ 600 (F)

(iv) Material Yield Variance = (680 - 640) x 43200/640 = ₹ 2700 (F)

OR
Material A = (510 - 480) x 50 = ₹ 1500 (F)
Material B = (340 - 320) x 60 = ₹ 1200 (F)
₹ 2700 (F)

6. (b)
(i) Production Budget (in units) for the year ended 31st March 2025
Particulars Product M (D) Product N (D)
Budgeted sales (units) 28,000 13,000
Add: Increase in closing stock 320 160
No. good units to be produced 28,320 13,160
Post production rejection rate 4% 6%
No. of units to be produced 29,500 14,000

(ii) Purchase budget (in kgs and value) for Material Z

Particulars Product M Product N
No. of units to be produced D 29,500 D 14,000
Usage of Material Z per unit of production 5 kg. 6 kg.
Material needed for production 1,47,500 kg. 84,000 kg.
Materials to be purchased 1,63,889 kg. 88,421 kg.
Total quantity to be purchased 2,52,310 kg.
Rate per kg. of Material Z ₹ 72
Total purchase price ₹ 1,81,66,320

7. (a)
Earnings After Tax (EAT):
Particulars Amount (₹)
Total Cost per unit 20
Selling price per unit 23
Profit 3
EBIT 1500000
Less: Interest on 12% Bond 120000
EBT 1380000
Less: Tax @ 30% on 1380000 414000
EAT 966000

Note: Profit on sale of Asset is not from operation of the Company. Hence, the same is not considered in calculation
NOPAT. So, it has been excluded here also.

6 of 9
Cost of 12% Bond (Post Tax):
Rate of interest = 12%
Less: Tax Rate 30% (12% x 30%) = 3.6%
Effective cost of Bond = 8.4%

Alternative:
Interest on 12% Bond ₹ 120000
Less: Tax savings (120000 x 30%) ₹ 36000
Interest Cost after tax savings ₹ 84000 (120000 – 36000)
Therefore, Cost of 12% Bond post tax = (84000 / 1000000) x 100 = 8.40%

Cost of Equity:
Cost of Equity = Risk free rate of return + β x (Market rate of return – Risk free rate of return)
Therefore, Cost of Equity = 10 + 0.90 x (15 – 10) = 10 + 4.50= 14.50%

Weighted Average Cost of Capital (WACC):

WACC = {(1000000 / 1800000) x 8.40% + (800000 / 1800000) x 14.50%}
= 4.67 + 6.44 = 11.11%

Cost of Capital Employed:

12% Bond = 1000000
Equity Share Capital = 700000
Reserve & Surplus = 100000
Capital Employed = 1800000

Therefore, Cost of Capital Employed = Capital Employed x Weighted Average Cost of Capital (WACC) = 1800000 x
11.11% = D 199980
Economic Value Added (EVA):
Particulars Amount (₹)
EAT 966000
Add: Interest on 12% Bond net of tax savings 84000
NOPAT 1050000
Less: Cost of Capital Employed 199980
Economic Value Added (EVA) 850020

Comment:
Positive EVA of D 850020 indicates that M/s Aptamil Limited surpassed the expectation of its shareholders. It creates
wealth for its shareholders.

7. (b)
(i) Total time taken to produce 16 Units
Y = 20 (16)-0.322 x 16 = 20 x 0.4095 x 16 = 131.04 hours
Total Sales Value of 16 units of Pen (D)
Direct Material 320.00
Direct Labour 786.24
Variable overheads 65.52
Fixed overhead Apportioned 655.20
Total cost 1826.96
Profit Mark - up (20 % on Cost) 365.39
Total Sale Value 2192.35
Sale Price per Unit of Pen 137.02

7 of 9
 (ii) Total time taken to produce 36 units:
Y = 20 (36)-0.322 x 36 = 20 x 0.3154 x 36 = 227.09 Direct Labour hours
Total time taken for produce next 20 units = 227.09 - 131.04 = 96.05 hours

Total estimated sale value for 20 units ₹

Direct Material 400.00
Direct Labour 576.30
Variable overheads 48.03
Fixed overhead apportioned 480.25
Total cost 1504.58
Profit Mark-up (20% on Cost) 300.92
Total Estimated Sale 1805.50
Minimum quoted Sales Price per unit: 90.27

8. (a)
Decision Tree analysis

Decision at the Point D2

(3) X (4)
(1) (2) (4)
(3) Probability Expected Cash
Decision Event Cash out flow (D)
outflow (₹)
(i) Drill up to 250 feet (a) Water 0.2 12500 2500
(b) No Water 0.8 27500 22000
E M V = (Out flows) 24500
(ii) Do not Drill E M V = (Out flows) 25000

Decision at the Point D1

(3) X (4)
(1) (2) (4)
(3) Probability Expected Cash
Decision Event Cash out flow (D)
outflow (₹)
(i) Drill up to 200feet (a) Water 0.7 10000 7000
(b) No Water 0.3 24500 7350
E M V = (Out flows) 14350
(ii) Do not Drill E M V = (Out flows) 15000

The decision at D1 is drill upto 200 feet.

Comment: The optimum strategy of the farm owner will be to:

(i) Drill the tube well up to 200 feet and if water is not struck, then
(ii) To drill up to 250 feet if necessary.

8 of 9
8. (b)
A responsibility accounting system helps organizational unit managers to conduct the five basic control functions. These
basic Control Functions are as follows:

(i) Preparing a plan (e.g., using budgets and standards) and use it to communicate output expectations and delegate
authority.

(ii) Gathering actual data classified in accordance with the activities and categories specified in the plan. The
responsibility accounting system can be used to record and summarize data for each organizational unit.

(iii) Monitoring the differences between planned and actual data at scheduled intervals. Responsibility reports for
subordinate managers and their immediate supervisors normally include comparisons of actual results with
flexible budget figures. In contrast, responsibility reports can provide comparisons of actual performance to the
master budget.

(iv) Exerting managerial influence in response to significant differences. Because of day-to-day contact with
operations, unit managers should be aware of any significant variances before they are reported, identify the
variance causes, and attempt to correct them. Top management, on the other hand, might not know about
operational variances until it receives responsibility reports. By the time top management receives the reports, the
problems causing the variances should have been corrected, or subordinate managers should have explanations as
to why the problems were not or could not be resolved.

(v) Continuing comparing data and responding; then, at the appropriate time, the process will begin again.
Responsibility reports reflect the upward flow of information from operational units to company top management
and illustrate the broadening scope of responsibility. Managers receive detailed information on the performance
of their immediate areas of control and summary information on all organizational units for which they are
responsible. Upper-level managers desiring more detail than is provided in summary reports can obtain it by
reviewing the responsibility reports prepared by their subordinates.

_____________________________

9 of 9
 THE INSTITUTE OF COST ACCOUNTANTS OF INDIA
MANAGEMENT ACCOUNTING (PAPER - 12)
MCQ BANK

SL NO QUESTIONS OPTION 1 OPTION 2 OPTION 3 OPTION 4

1 Management Accounting __________________. Accumulates, Is primarily Makes Corporate All of the above
summarizes and concerned with the Planning and Strategy
analyses the available requirements of the effective.
data. management.
2 Management accounting can be viewed as________________. Marketing-oriented Management- Accounting-oriented Manager-oriented
Accounting oriented Accounting Management Accounting
3 The main objective of management accounting is To maintain the To know the amount To ascertain analyse To record all the
___________________. accounting records due from customers and interpret the business transactions
and suppliers results of business
operations
4 is the study of managerial aspects of financial accounting Cost accounting Financial accounting Management Business accounting
_________________. accounting
5 The purpose of management accounting is to help make decisions Managers Investors Marketers Banks

6 Management accounting assists the management in Planning Directing Controlling All of the above

7 ‘Period of lost relevance’ is the of the evolution of management 1st stage 2nd stage 3rd stage 4th stage
accounting.
8 __________________ criteria are a set of standards for a JIT AMT ESG ABC
company’s behaviour used by socially conscious investors to screen
potential investments.
9 Management accounting information helps managers formulate Who are the most What is most critical How can we leverage All of the above
strategy by answering which of the following questions? important customers, capability of the it for new strategic
and how can the company which may initiatives?
company deliver value be technology,
to the customers? production, or
marketing?
10 Management accounting with specific focus on environmental Environmental costs Regulatory Both 1 and 2 Companies are
issues is becoming increasingly important in organizations as are often high in the requirements often increasingly
environmental costs are large in many organisations. There are many manufacturing impose huge fines realizing that being
three specific reasons for this, which are___________________. organisations for non-compliance socially and
environmentally
responsible declines
their image and this
has positive impact
on their bottom line.
11 Management accounting is concerned with data collection from internal sources external sources internal and external nternal or external
_____________. sources sources
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12 Management Accounting is concerned with accounting Robert N. Antho Brown and Howard CIMA The Institute of
information, which is useful to the management — This definition Chartered
is given by ______________. Accountants of
England and Wales
13 The primary objective of Management Accounting is to maximize profits minimize losses maximize profits or All of the above
_______________. minimize losses
14 Which of the following is a correct definition of activity-based An approach to the The identification A method of A system of
management? costing and and evaluation of budgeting based on management which
monitoring of the activity drivers an activity framework uses activity-based
activities which used to trace the cost and utilizing cost cost information for
involves tracing of activities to cost driver data in the a variety of purposes
resource consumption objects. It may also budget- setting and including cost
and costing final involve selecting variance feedback reduction, cost
outputs. Resources are activity drivers with processes. modeling and
assigned to activities potential to customer
and activities to cost contribute to the cost profitability analysis
objects based on management
consumption function with
estimates. The latter particular reference
utilize cost drivers to to cost reduction
attach activity costs to
outputs.

15 Which of the following characteristics would be an indicator that a Only one homogenous The existing cost Overhead costs are The costs of
company would benefit from switching to activity based costing? product is produced system is reliable high and increasing implementing ABC
on a continuous basis and has produced and no one seems to out-weigh the
excellent results know why benefits
16 According to the Chartered Institute of Management Accountants Absorption costing Marginal costing Activity-based Job costing
(CIMA), cost attribution to cost units on the basis of benefits costing
received from indirect activities e.g. ordering, setting up, and
assuring quality is known as:
17 In an ABC system, which of the following is likely to be classified Machine set-up Product design Inspection of every Production
as a batch level activity? item produced manager’s work
18 Activity based costing Uses a plant wide Is not expensive to Typically applies Uses multiple
overhead rate to implement overhead costs using activity rates
assign overhead direct labour hours
19 Which of the following activities is not a batch level activity? Processing purchase Designing products Receive raw materials Setting up
orders from suppliers equipment

20 Which of the following is not included in batch level activities? Material ordering cost Machine set-up cost Inspection cost Designing the
product
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21 Assigning overhead using ABC often: Shifts overhead costs Shifts overhead Provides the same Requires one
from high-volume costs from low- results as traditional predetermined
products to low- volume products to costing overhead rate
volume products high-volume
products
22 In Activity Based Costing Non-manufacturing Some manufacturing Allocation bases are Similar to traditional
costs may not be costs may be the same as those costing, ABC only
assigned to products excluded from used in traditional uses one overhead
product costs costing methods cost pool
23 In an ABC system, the allocation bases that are used for applying Cost Pool Cost Driver Cost Absorption Cost Object
costs to services or procedures are called:
24 Which of the following would not be deducted from sales in a Direct materials Direct labour Variable selling and Shipping costs
management report prepared using ABC? administration costs
25 an item for which cost measurement is required e.g. product, job or Cost Pool Cost Driver Cost Absorption Cost Object
a customer
26 Which of the following is different in ABC when compared to Traditional costing In an ABC costing In ABC, batch-level Under traditional
traditional costing? and ABC costing system, costs are costs are applied to costing, batch-level
usually yield very only assigned to products using unit- costs are shifted
similar product costs products that level bases from high-volume
actually required products to low-
work that gave rise volume
to a particular cost products

27 Process of Cost allocation under Activity Based Costing is Cost of Cost Driver — Cost Activities— Cost of Activities—Cost
Activities—Activities of Activities— Cost Activities—Cost Driver – Cost
—Cost Driver – Cost allocated to cost Driver – Cost allocated to cost
allocated to cost objects – Activities allocated to cost objects — Cost of
objects objects Activities
28 Cost of maintaining a building is: Unit Level Cost Batch Level Cost Product Level Cost Facility Level Cost
29 should be subtracted from net product revenues instead of an Facility Level Cost Product Level Cost Organizational Level High Level Cost
arbitrary and illogical apportionment. Cost
30 The basis of apportionment of overheads which takes into account FIFO basis LIFO basis Ability to pay basis Activity basis
the profitability of various departments is called:
31 Which of the following is the main cost driver of customer order Flow of the product Order value Number of problem Number of machine
processing activity? from the assembly suppliers charges
line
32 Painting the product would be an example of which activity level Facility-level activity Product-level Unit-level activity Batch-level activity
groups activity
33 Which of the following tasks is not normally associated with an Calculation of cost Identification of Preparation of Identification of cost
activity-based costing system? application rates cost pools allocation matrices drivers
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34 All of the following are examples of batch level activities except: Purchase order Setting up The clerical activity Worker recreational
processing equipment associated with facilities
processing purchase
orders to pro-duce an
order for a standard
product
35 A cost driver - is a force behind the is an allocation base is a transaction that is is all of the above
overhaed cost a significant
determinant of cost
36 Which of these is NOT a cost driver For the Activity Design of Number of Products Number of Parts per Number of employee Number of
products, services & Processes ? in design product Training Programmes engineering Hours

37 Which of these in NOT a Cost driver for Marketing and sales Number of Number of researche Number of Sales sales Revenue
Function ? advertisements/Inserti projects personnel
ons
38 Which of these in NOT a Cost driver for Customer Service Activity Number of service Number of Products Hours spent on sales Revenue
? calls serviced servicing products
39 Plant depreciation is an example of which activity-level group? Unit-level activity Facility-level Batch-level activity Product-level activity
activity
40 Under activity-based costing, ‘material ordering’ is considered as Unit-level activity Facility-level Batch-level activity Product-level activity
— activity
41 Samsung an appliance manufacturer is developing a new line of Unit Level Activity Competitive Level Facility Level Product Sustaining
ovens that uses controlled-laser technology. Research and testing Activity Activity Activity
costs associated with the new ovens is said to arise from a:
42 A homogeneous cost pool is one that: Does not change over Needs many activity Can be explained Has only one type of
time drivers to be with a single activity material assigned to
allocated to a cost driver it
object
43 An Activity-Based Costing, an inspection of the product is a level Unit Batch Product Facility
activity:
44 A company uses traditional standard costing system. The inspection ₹ 160 ₹ 200 ₹ 180 ₹ 220
and set-up costs are actually ₹1,760 against a budget of ₹2,000.
ABC system is being implemented and accordingly the number of
batches is identified as the cost driver for inspection and set up.
The budgeted production is 10,000 units in batches of 1,000 units
whereas actually 9,000 units were produced in 11 batches. The cost
per batch under ABC system will be
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45 X Company uses activity-based costing for Product B and Product ₹ 2,75,000 ₹ 3,00,000 ₹ 3,30,000 ₹ 3,45,000
D. The total estimated overhead cost for the parts administration
activity pool was ₹5,50,000 and the expected activity was 2000
part types. If Product D requires 1200 part types, the amount of
overhead allocated to product D for parts administration would be:

46 Fast Ltd. manufactures three types of products A, B, and C ₹ 15,000 ₹ 40,000 ₹ 18,000 ₹ 24,000
following ABC System. During a period, the company incurred
₹73,000 as inspection cost and it was worked for 10, 20 and 9
production runs respectively for producing products A, B, and C.
The inspection costs for product B under the ABC system was
47 A company operates an activity based costing (ABC) system to ₹ 2,000 ₹ 3,000 ₹ 1,500 ₹ 1,000
attribute its overhead costs to cost objects. In its budget for the year-
ending 31st August, 2022. The company expected to place a total
of 2000 purchase orders at a total cost of ₹1,00,000. This activity
and its related costs were budgeted to occur at a constant rate
throughout the budget year which is divided into 13 four week
periods.
During the four-week period ended 30th June 2021, a total of 200
purchase orders were placed at a cost of ₹ 9,000. The over recovery
of these costs for the four-week period was
48 A company manufactures 500 units of product AX the material ₹ 554 ₹ 4,22,000 ₹ 1,57,000 ₹ 1,084
cost to manufacture is ₹ 1,50,000, Labour cost ₹2,65,000. Material
reordering cost is ₹4,500, Material handling cost is ₹2,500 Material
order – 35, Material movement – 20.
Total Material cost under Activity based costing is.

49 To obtain the break-even point in rupee sales value, total fixed Variable cost per unit; Contribution margin Fixed cost per unit; Profit/volume ratio.
costs are divided by: per unit;
50 The break-even point is the point at which: There is no profit, no Contribution margin Total revenue is equal All of the above.
loss; is equal to total to total cost;
fixed cost;
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51 The primary difference between a fixed budget and a variable includes only fixed is concerned with cannot be changed
is a plan for a single
(flexible) budget is that a fixed budget: costs, while a variable only further after the period
level of sales (or
budget includes only acquisitions of fixed begins, while aother measure of
variable costs. costs, while a variable budget can
activity), while a
variable budget is be changed after the
variable budget
concerned with period consists of several
expenses which vary begins. plans, one for each
with sales. of several levels of
sales (or other
measures of
activity).
52 Margin of safety is referred to as: Excess of actual sales Excess of actual Excess of actual Excess of budgeted
over fixed expenses; sales over variable sales over break-even sales over fixed
expenses; sales; costs.
53 Contribution margin is known as Marginal income Gross profit Net income Net profit
54 Fixed cost per unit decrease when Production volume Production volume Variable costs per Prime costs per unit
increases decreases unit decreases decreases
55 Within a relevant range, the amount of variable costs per unit Differs at each Remains constant at Increases as Decreases as
production level each production production increases production increases
level
56 Margin of safety is referred to as Excess of budgeted or Excess of budgeted Excess of actual sales Excess of sales
actual sales over the or actual sales over budgeted sales. revenue over the
variable expenses and revenue over the variable expenses
fixed expense, at fixed expenses.
break-even.
57 Under marginal costing system, the contribution margin discloses Revenue over fixed Projected revenues Revenues over Variable costs over
the excess of costs over the break-even variable costs fixed costs
point
58 A decrease in sales price does not affect the lowers the fixed Increases the break- lowers the break-
break-even point cost even point even point
59 Determine Margin of safety if Profit is ₹15,000 and P/V ratio is ₹ 37,500 ₹ 33,000 ₹ 38,000 None of the above
40%.
60 What is Margin of Safety if Sales is 20,000 units and B.E.P is 15000 units 5000 units 10000 units 20000 units
15,000 units?
61 Determine sales in rupees for desired profit if fixed cost is ₹10,000, ₹ 73,500 . ₹75,000 ₹ 5,000 ₹ 37,500
Variable cost is ₹30,000, Sales is ₹50,000 and desired profit is
₹5,000.
62 What will be sales in rupees for desired profit if fixed cost is ₹ 1,50,000 ₹ 1,00,000 ₹ 2,00,000 None of the above
₹30,000, desired profit is ₹15,000 and P/V ratio is 30%?
63 Calculate sales in rupees for desired profit if fixed cost is ₹10,000, ₹ 20,000 ₹ 50,000 ₹ 70,000 ₹ 10,000
selling price is ₹20 per unit, Variable cost is ₹15 per unit and
desired profit is ₹1 per unit
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64 Determine sales in units for desired profit if Fixed cost is ₹15,000, ₹5,000 units ₹ 5,000 ₹ 10,000 ₹10,000 units
desired profit is ₹5,000 Selling price per unit is ₹20 and Variable
cost per unit is ₹16.
65 What will be sales in units if fixed cost is ₹50,000 Contribution per ₹6,000 units ₹ 1,000 ₹1,000 units ₹ 6,000
unit is ₹60 and desired profit per unit is ₹10.
66 9. Determine B.E.P in units and amount if Units produced if ₹40 per unit, ₹50 per unit, ₹20 per unit, None of the above
₹10,000, Fixed cost is ₹40,000, Selling price is ₹50 per unit and ₹2,00,000 ₹10,00,000 ₹1,00,000
Variable cost us ₹30 per unit.

67 Determine B.E.P if Sales is ₹1,00,000, Variable cost is ₹50,000 ₹ 60,000 ₹ 40,000 ₹ 80,000 None of the above
and Profit is ₹20,000.
68 Pv ratio will increase if there is - a decrease in fixed an increase in fixed a decrease in selling a decrease in
cost cost price per unit variable cost per unit

69 Under marginal costing ,the cost of product for inventory valuation prime costs and prime cost only prime costs and Fixed prime costs and all
includes variable factory factory overheads factory overheads
overheads
70 period costs are : variable cost fixed cost prime cost overheads cost
71 Marginal costs is taken as equal to Prime Cost plus all Prime Cost minus Variable overheads None of the above
variable overheads all variable
overheads
72 Contribution margin is equal to Sales - Fixed Cost - Profit + Variable Fixed Cost - Loss None of the above
Profit Cost
73 It is pallned sell 1,00,000 units of product A at ₹12 per unit. Fixed ₹ 4,80,000 ₹ 7,20,000 ₹ 9,00,000 ₹ 9,20,000
Costs are ₹2,80,000 .To achive a profit of ₹2,00,000 what would
the variable costs be ?
74 Factors which can change the break even point change in total fixed change in variable change in the selling All of the above.
costs costs per unit price per unit
75 net profit ratio is 12% and bep is 40 % of total sales compute pv 60% 52% 28% 20%
ratio
76 If the total cost of 1000 units is ₹ 60,000 and that of 1001 units is Prime cost All variable Marginal cost None of the above
₹60,400, then the increase of ₹400 in the total cost is: overheads
77 Which of the following statements are true about marginal costing? In marginal costing, Marginal costing is The elements of cost Both b and c
fixed costs are treated not an independent in marginal costing
as product costs system of costing are divided into fixed
and variable
components
78 The costing method where fixed factory overheads are added to Activity-based costing Absorption costing Marginal costing All of the above
inventory is called:
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79 While computing profit in marginal costing: The fixed cost gets The total marginal The total marginal None of the above
added to the cost gets deducted cost gets added to
contribution from total sales total sales revenue
revenue
80 Which of the following assumptions are made while calculating Total fixed cost is Total variable costAll elements of cost All of the above
marginal cost constant at all levels varies according tocan be divided into
of output the volume of output
fixed and variable
components
81 Contribution margin in marginal costing is also known as: Net income Gross profit Marginal income None of the above
82 What is the opportunity cost of making a component part in a The variable The total The total variable cost Zero
factory given no alternative use of the capacity? manufacturing cost of manufacturing cost of the component
the component of the component
83 The difference in total cost that results from two alternative courses Relevant Cost Opportunity Cost Differential Cost Marginal Cost
of action is called:
84 Relevant costs are: unavoidable, future avoidable, future avoidable, future and unavoidable, future
and measured by cash and measured by measured by profit and measured by
cash profit
85 The profit at which total revenue is equal to the total cost is known Margin of safety Break-even point Both a and b are Both a and b are
as: incorrect correct
86 Which of the following costs would not be accounted for in a an unexpired cost an expired cost a product cost an opportunity cost
company’s recordkeeping system?
87 PQR Ltd. manufactures a single product which it sells for ₹ 40 per 3500 3700 3750 4000
unit. Fixed cost is ₹ 60,000 per year. The contribution to sales ratio
is 40%. PQR Ltd.’s Break Even Point in units is

88 The break-even point of a manufacturing company is ₹1,60,000. 20% 40% 30% 25%
Fixed cost is ₹48,000. Variable cost is ₹12 per unit. The PV ratio
will be:
89 Product A generates a contribution to sales ratio of 40%. Fixed cost ₹ 2,00,000 ₹ 1,85,000 ₹ 1,87,500 ₹ 2,10,000
directly attributable to Product A amounted to ₹60,000. The sales
revenue required to achieve a profit of ₹15,000 is

90 XYZ Ltd. makes a special gadget for the car it manufactures. The ₹40 Lakhs ₹65 Lakhs ₹25 Lakhs ₹15 Lakhs
machine for the gadget works to full capacity and incur ₹15 Lakhs
and ₹40 Lakhs respectively as Variable and Fixed Costs. If all the
gadgets were purchased from an outside supplier, the machine
could be used to produce other items, which would earn a total
contribution of ₹ 25 Lakhs. What is the maximum price that XYZ
Ltd. should be willing to pay to the outside supplier for the gadgets,
assuming there is no change in Fixed Costs?
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91 X Ltd. has 1000 units of an obsolete item which are carried in ₹ 16,000 ₹ 6,000 ₹ 30,000 ₹ 20,000
inventory at the original price of ₹ 50,000. If these items are
reworked for ₹ 20,000, they can be sold for ₹ 36,000. Alternatively,
they can be sold as a scrap for ₹6,000 in the market. In a decision
model used to analyze the reworking proposal, the opportunity cost
should be taken as
92 The sales and profit of a firm for the year 2021 are ₹1,50,000 and 15% 20% 25% 30%
₹20,000 and for the year 2022 are ₹1,70,000 and ₹ 25,000
respectively. The P/V Ratio of the firm is
93 Which one of the following is not considered as a method of Negotiated Transfer Market Price Based Fixed Cost Based Opportunity Cost
Transfer Pricing Pricing Transfer Pricing Transfer Pricing Based Transfer
Pricing
94 Method of pricing, when two separate pricing methods are used to Dual pricing Functional pricing Congruent pricing Optimal pricing
price transfer of products from one subunit to another, is called:

95 The Eastern division sells goods internally to the Western division Negotiated transfer Cost plus 20% Cost-based transfer Market-based
of the same company. The quoted external price in industry pricing. transfer pricing. pricing. transfer pricing.
publications from a supplier near Eastern is ₹200 per ton plus
transportation. It costs ₹20 per ton to transport the goods to
Western. Eastern’s actual market cost per ton to buy the direct
materials to make the transferred product is ₹100. Actual per ton
direct labour is ₹50. Other actual costs of storage and handling are
₹40. The company president selects a ₹220 transfer price. This is
an example of:
96 Division P transfers its output to Division Q at variable cost. Once Dual pricing Negotiated transfer Opportunity cost Two-part tariff
a year P charges a fixed fee to Q, representing an allowance for P’s pricing based transfer pricing transfer pricing
fixed costs. This type of transfer pricing system is commonly
known as:
97 In which of the following circumstances is there a strong argument When the transferred When the supplying If the transferred item If there is no similar
that profit centre accounting is a waste of time? item is also sold on an division is based in is a major product of product sold on an
external market a different country the supplying division external market and
to head office the transferred item
is a major product of
the supplying
division

98 Which one of the following is not considered as a method of Negotiated Transfer Market Price Based Fixed Cost Based Opportunity Cost
Transfer Pricing? Pricing Transfer Pricing Transfer Pricing Based Transfer
Pricing
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99 Method of pricing, when two separate pricing methods are used to dual pricing functional pricing congruent pricing optimal pricing
price transfer of products from one subunit to another, is called:

100 M Group has two divisions, Division P and Division Q. Division P ₹ 145 ₹ 125 ₹ 120 ₹ 135
manufactures an item that is transferred to Division Q. The item
has no external market and 6,000 units produced are transferred
internally each year. The costs of each division are as follows?
Variable Cost Division P
₹100 per unit Division Q ₹120 per unit
Fixed cost each year ₹1,20,000 ₹90,000 Head Office management
decided that a transfer price should be set that provides a profit of
₹30,000 to Division P. What should be the transfer price per unit?

101 Minimax Ltd. fixes inter - divisional transfer prices for its products ₹ 13.05 ₹ 10.70 ₹ 8.70 ₹ 14.70
on the basis of cost plus a return on investment in the division. The
budget for division X for 2022 – 23 appears as under -Fixed Assets
₹8,00,000
Current Assets ₹5,00,000
Debtors ₹2,00,000
Annual fixed cost of the division ₹8,00,000
Variable cost per unit of the product 10
Budgeted volume ₹4,00,000 units per year Desired ROI 28%.
Transfer price for division X is ________________
102 BC Company fixes the inter-divisional transfer prices for its 12.7 17.2 27.1 11.7
products on the basis of cost, plus a return on investment
in the division. The Budget for Division for Alpha for the year
2021-22 appears as under:
Fixed Assets ₹5,00,000
Current assets ₹3,00,000
Debtors ₹2,00,000
Annual Fixed Cost of the Division ₹8,00,000
Variable Cost per unit of Product ₹10
Budgeted Volume 4,00,000 units per year
Desired ROI 28% on ₹10,00,000
Determine the transfer Price for Alpha.

103 The _____ method of transfer pricing was introduced in order to dual price Two-Part Transfer Negotiated Transfer none of them
overcome the problems caused by using marginal cost Pricing Pricing
104 Transfer pricing methods may be classfied under 3 pricing under 4 pricing under 5 pricing under 7 pricing
method method method method
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105 Which of the following is true of standards? Standards represent a Standards relate to Standards relate to All of the above
benchmark or a norm input quantity input cost
106 Standards that can be attained only under the best circumstances Attainable standards Budget standards Ideal standards Practical standards
are referred to as:
107 Who is most likely to be held responsible for a material price Line workers Production Purchasing managers Production
variance? supervisors schedulers
108 Cost variance is the difference between The standard cost and The standards cost The standards cost None of these
marginal cost and budgeted cost and the actual cost
109 Standard costing is a tool, which replaces the bottleneck of the ___ Present Future Historical None of the above
costing.
110 If standard cost ˃ actual, then it is: Not favourable Favourable Neither favourable None of the above
nor not favourable
111 From cost control point of view the standard most commonly used Expected standard Theoretical standard Normal standard Basic standard
is:
112 When more than one material is used in the manufacture of a Material yield Material mix Material price Material usage
product, which of the following variances arises: variance variance variance variance
113 Which of the following equations can be used to calculate a (AQ × AP) - (AQ × (AP × SP) - (AQ × (AQ × SP) - (SQ × (AQ × SP) - (AQ ×
material quantity variance? SP) SP) SP) AP)
114 Which of the following equations can be used to calculate a (AQ × AP) - (AQ × (AP × SP) - (AQ × (AQ × SP) - (SQ × (AQ × SP) - (AQ ×
material price variance? SP) SP) SP) AP)
115 Which of the following is not likely to be a reason of unfavourable Increase in direct Frequent break Lack of proper Use of old, outdated
direct labour efficiency variance? materials prices downs during supervision or faulty equipment
production process
116 Which of the following is a purpose of standard costing? To determine profit at To determine break- To control costs To allocate cost with
different levels even point more accuracy
117 Which of the following activities is the Standard Costing System It is a basis for It helps to ascertain It helps to establish None of the above
used for? implementing cost the cost-volume the breakeven point
control and fixing the relationship between for the products
price of products products manufactured by the
through variance manufactured by the company
analysis business
118 Which of the following activities is true under the Standard Costing The overhead volume The idle time To calculate the The overhead
System? variance is always variance is never overall costs, a efficiency variance
beneficial favourable company can either plus overhead
use budgetary control expense variance is
or standard costing equal to the overhead
but not both of those budget variance for
techniques variable overheads

119 A standard cost is a carefully ____________ unit cost which is Pre-determined Absorbed Apportioned None
prepared for each cost unit.
120 Setting of standard involves effective utilization of ___. Men Material Machines All of the above
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121 The standard cost card contains quantities and costs for Direct material only Direct labour only Direct material and Direct material,
direct labour only direct labour, and
overhead
122 Standards differ from budgets in that: Budgets but not Budgets but not Budgets are a total Only budgets
standards may be used standards may be amount and standards contribute to
in valuing inventories journalized and are a unit amount management
posted planning and control
123 Standard Costs: Are imposed by Are predetermined Can be used by All of the above
governmental unit costs which manufacturing
agencies companies use as companies but not by
measures of service or not-for-
performance profit companies
124 The advantages of standard costs include all of the following Management by Management They may simplify Management must
except: exception may be planning is the costing of use a static budget
used facilitated inventories
125 Normal standards: Allow for rest periods, Represent levels of Are rarely used Are more likely than
machine breakdowns, performance under because managers ideal standards to
and setup time perfect operating believe they lower result in unethical
conditions workforce morale practices
126 The setting of standards is: A managerial A management A worker decision Preferably set at the
accounting decision decision ideal level of
performance
127 Which of the following is correct about the total overhead Budgeted overhead Total actual Standard hours Standard hours
variance? and budgeted overhead is actually worked are allowed for the work
overhead applied are composed of used in computing the done is the measure
the same variable overhead, variance used in computing
fixed overhead, and the variance
period costs.
128 What is the name given to a budget that has been prepared by re- Incremental budget Rolling budget Zero based budget Flexible budget
evaluating activities and comparing the incremental costs of those
activities with their incremental benefits?
129 A budget is an instrument of management used as an aid in the Planning Programming Control of business All of the above
_____________. activity
130 Following may be regarded as a summary budget Production budget Master budget Cash budget Sales budget
131 Purchases budget is prepared using the information from: Capital expenditure Materials budget Both (1) and (2) None of the above
budget
132 Following budget may be compiled on departmental basis: Production budget Purchase budget Materials budget All of the above
133 Production budget is based upon: Sales budget Factory capacity Availability of raw All of the above
material and labour
134 Budget includes: Income Expenditure Employment of All of the above
capital
135 A budget should be: Rigid Flexible Both (1) and (2) None of the above
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136 The object of budgetary control is __________ Planning Forecasting Organizing Directing
137 The budget which is dynamic is ___________. Flexible budget Sales budget Cash budget Purchase budget
138 The process of budgeting helps in the control of: Cost of production Liquidity Capital Expenditure All of the above
139 Plant utilization budget and Manufacturing overhead budgets are Production budget Sales budget Cost budget None of the above
types of:
140 R&D budget and Capital expenditure budget are examples of: Short-term budget Current budget Long-term budget None of the above
141 The scare factors is also known as: Key factor Abnormal factor Linking factor None of the above
142 What is the name given to a budget that has been prepared by re- Incremental budget Rolling budget Zero based budget Flexible budget
evaluating activities and comparing the incremental costs of those
activities with their incremental benefits?
143 A budget is an instrument of management used as an aid in the Planning Programming Control of business All of the above
_____________. activity
144 Following may be regarded as a summary budget Production budget Master budget Cash budget Sales budget
145 Purchases budget is prepared using the information from: Capital expenditure Materials budget Both (1) and (2) None of the above
budget
146 Following budget may be compiled on departmental basis: Production budget Purchase budget Materials budget All of the above
147 Production budget is based upon: Sales budget Factory capacity Availability of raw All of the above
material and labour
148 A budget should be: Rigid Flexible Both (1) and (2) None of the above
149 The object of budgetary control is __________ Planning Forecasting Organizing Directing
150 The budget which is dynamic is ___________. Flexible budget Sales budget Cash budget Purchase budget
151 The process of budgeting helps in the control of: Cost of production Liquidity Capital Expenditure All of the above
152 Plant utilization budget and Manufacturing overhead budgets are Production budget Sales budget Cost budget None of the above
types of:
153 R&D budget and Capital expenditure budget are examples of: Short-term budget Current budget Long-term budget None of the above
154 The scare factors is also known as: Key factor Abnormal factor Linking factor None of the above
155 A company usually determines the appropriate degree of Managers’ personal Nature of decisions Types of All of these
decentralization based on a combination of the characteristics required for organizational
______________________________. organizational activities in which the
growth company is engaged

156 Major disadvantages of Decentralization are _________________. Can result in a lack of Requires more Helps top Both 1 and 2
goal congruence or effective management
sub optimization by communication recognizes and
sub-unit managers abilities because develop managerial
decision making is talent
removed from the
home office
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157 Which of the following is/are not benefit/s of Decentralization ? Greater awareness of Allows managerial Creates personnel Develops skill level
local problems performance to be difficulties upon of junior managers
comparatively introduction,
evaluated especially if managers
are unwilling to
delegate effectively

158 Return on Equity = Net Profit Margin × Gross Profit Margin Net Profit Margin × Net Profit Margin ×
Asset Turnover Ratio × Asset Turnover Inventory Turnover Asset Turnover
× Financial Leverage Ratio × Financial Ratio × Financial Ratio × Operating
Leverage Leverage Leverage
159 According to DuPont methodology, three main financial (1) Employee (1) Operating (1) Operating (1) Operating
parameters that drive Return on Equity (ROE) are performance, performance, performance, performance,
______________________________. (2) Asset usage (2) Asset usage (2) Inventory usage (2) Asset usage
performance, and performance, and performance, and performance, and
(3) Financial leverage. (3) Financial (3) Financial (3) Operating
leverage. leverage. leverage.

160 Asset usage performance means ___________________ a very basic Total Asset the use of debt to None of these
profitability ratio
Turnover (Turnover acquire additional
÷ Total Assets) assets or fund
projects
161 Financial leverage means ________________________________. a very basic Total Asset the use of debt to None of these
profitability ratio Turnover (Turnover acquire additional
÷ Total Assets) assets or fund
projects
162 According to Du Pont Analysis a company can increase its Return Generates a high Net Effectively uses its Has a high Financial All of these
on Equity if it __________________________. Profit Margin assets so as to Leverage
generate more sales
163 Du Pont ROE = Margin on Sales × Margin of Safety × Margin on Sales × Margin on Sales ×
Asset Turnover × Asset Turnover × Inventory Turnover × Asset Turnover ×
Equity Multiplier Equity Multiplier Equity Multiplier Debt Multiplier
164 ____________ expresses divisional profit as a percentage of the ROI EPS ROCE EBITDA
assets employed in the division.
165 Return on investment (ROI) is (Profit before tax ÷ (Profit before (ROE ÷ Operations (Profit before
Operations interest and tax ÷ management capital interest and tax ÷
management capital Total capital employed) × 100 Operations
employed) × 100 employed) × 100 management capital
employed) × 100
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166 RI (Residual Income) = Divisional profit — Divisional profit — Divisional profit — Total profit —
(Percentage of change (Percent capital (Percent capital (Percent capital
in Sales × Divisional charge × Total charge × Divisional charge × Divisional
investment) investment) investment) investment)

167 The main advantages of RI is/are _____________________. It avoids suboptimal It maximizes growth The cost of capital All of these
decisions as of the company and charge on divisional
investments are not increases investments ensures
rejected merely shareholders’ wealth that divisional
because they lower by accepting managers are aware
the divisional opportunities which of the
manger’s ROI. earn a rate of return opportunity cost of
in excess of the cost funds.
of capital.

168 Acme, a division of Ace Manufacturing, has assets of ₹2,25,000 24.44% 23% 25% 50%
and an operating income of ₹55,000. What is the division’s ROI?

169 An investment centre has net assets of ₹8,00,000, and made profits ₹ 1,60,000 ₹ 96,000 ₹ 64,000 ₹ 2,56,000
before interest and tax of ₹1,60,000. The notional cost of capital is
12%.Calculate and comment on the RI (Residual Income) for the
period.
170 A person made a Capital Investment of ₹2,00,000 in a company. 20,000 ₹ 2,800 ₹ 8,000 ₹ 17,200
Operating profit, after taxes, is ₹28,000. The opportunity cost of
that investment is 10%. Calculate EVA.
171 For EVA there 3 responsibility centres, which are Cost centre Profit centre Investment centre All of these
_____________________.
172 The theory of learning curves will only hold if which of the The task must be Production must be There is inconsistency Both 1 and 2
following conditions apply? repetitive at an early stage so in the workforce
that there is room
for improvement
173 __________________________ can be used: Learning curve theory Return on Du Pont ROE Economic Value
a. To calculate the incremental cost of making extra units of a investment Added
particular products,
b. To set standards for labour,
c. To prepare realistic production budgets and to report labour cost
variances, and
d. To quote contact price.
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174 The four Perspectives of the Balanced Scorecard are 1. Operational 1. Financial 1. Financial 1. Financial
_____________________. Perspective,2. Perspective, 2. Perspective,2. Perspective,2.
Customers Sellers Perspective, Customers Customers
Perspective, 3. 3. Internal business Perspective, 3. Perspective, 3.
Internal business process Perspective Internal business External process
process Perspective and 4. Learning & process Perspective Perspective and 4.
and 4. Learning & Growth and 4. Learning & Learning & Growth
Growth Perspectives. Perspectives. Growth Perspectives. Perspectives.

175 MI Ltd. has earned a net profit of ₹15 lakhs after Tax at 30%. ₹ 15 lakhs ₹ 21.43 lakhs ₹ 10 lakhs ₹ 31.43 lakhs
Interest cost charged by the financial institutions was ₹10 Lakhs.
The Invested capital is ₹ 95 Lakhs of which 55% is debt. The
company maintains a weighted average cost of capital of
13%.Compute the Operating Income.

176 According to Kaplan & Norton, which of the balanced scorecard Financial. Customer. Internal business Learning & growth.
perspectives serves as the focus of the other perspectives? processes.

177 4. Which of the following would be considered an operating asset Land being held for Treasury stock. Accounts receivable. Common stock.
in return on investment computations? plant expansion.

178 A company that is seeking to increase ROI should attempt to Sales. Turnover. Margin. Average operating
decrease: assets.

179 The performance of investment centre is based on Cost of the centre Profit of the centre Profit and investment Revenue of the
______________________. of the centre centre

180 Both costs and revenues are measured in _______________. Cost Profit Revenue All of these
centers

181 A cost centre is a segment of the organization where the manager is Costs Inputs A or B None of these
responsible for _____________________.

182 The performance of investment centre is based on Cost of the centre Profit of the centre Profit and investment Revenue of the
________________________. of the centre centre

183 Responsibility accounting is used for _______________. cost control planning decision making pricing
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184 Responsibility Accounting is also known as ______________. Profitability Activity accounting Both A and B None of the above
accounting

185 Which of the following characteristics is not associated with Assumes optimization Assumes Places emphasis on Attempts to control
traditional responsibility accounting? of the parts will independence of the the performance of processes.
optimize the whole. parts. individuals.

186 In responsibility accounting, responsibilities of various groups or Work Revenue Cost All of the above
individuals are identified in terms
of ________________.

187 The area of focus on responsibility center Quantum of sales Quantum of Optimum utilization All of the above
is___________________. production of resources

188 In profit center revenue represents a monetary measure of output The revenue is The output is sold or Both A and B None of the above
emanating from a profit center in a given period irrespective realized or not not
whether ________________.

189 In a control report of Department X, it is mentioned as indirect ₹ 3,200 ₹ 2,200 ₹1,200 None of the above
materials are ₹1,000, indirect labour
₹900, Overtime Charges ₹100, Depreciation on equipment ₹500,
Allocated factory overhead (38% of factory space) ₹4,300,
Allocated overhead of repair shop is ₹1,200. Determine total costs
treating department X as a responsibility center.

190 Which of the following criterion is not used for decision-making Maximin Maximax Minimax Minimize expected
under uncertainty? loss

191 Decision theory is concerned with Methods of arriving Selecting optimal Analysis of All of these
___________________________. at an optimal decision decision in a information that is
sequential manner available

192 Which of the following criterion is not applicable to decision- Maximize expected Maximize return Minimize expect Knowledge of
making under risk? return regret likelihood
occurrence of each
state of nature
193 The minimum expected opportunity loss (EOL) is Equal to EVPI Minimum regret Equal to EMV Both (A) and (B)
_______________.
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194 The expected value of perfect information (EVPI) is Equal to expected The utility of Maximum expected None of the above
regret of the optimal additional opportunity loss
decision under risk information

195 The value of the coefficient of optimism (a) is needed while using Equally likely Maximin Realism Minimax
the criterion of ___________.

196 The decision-maker’s knowledge and experience may influence the Maximax Maximax regret Realism Maximin
decision-making process wi.en
using the criterion of ____________

197 The difference between the expected profit under conditions of risk The expected value of Expected marginal None of the above Any one of the
and the expected profit with perfect information is called perfect information loss above
____________
198 A situation in which a decision maker knows all of the possible Certainty. Risk. Uncertainty. Strategy.
outcomes of a decision and also knows the probability associated
with each outcome is referred to as ____________
199 Which of the following methods of selecting a strategy is consistent If two strategies have If two strategies Select the strategy All of the above are
with risk averting behaviour? the same expected have the same with the larger correct.
profit, select the one standard deviation, coefficient of
with the smaller select the one with variation.
standard deviation. the smaller expected
profit.
200 Which one of the following does not measure risk? Coefficient of Standard deviation LPP All of the above are
variation measures of risk.

201 The sequence of possible managerial decisions and their expected The minimax regret A decision tree. A payoff matrix. Simulation.
outcome under each set of circumstances can be represented and criterion.
analysed by using ___________________.
202 We are comparing two investment projects. Both have expected A B Both A and B Bnone of these
returns of 20%, but the standard deviation of Project A’s returns is
15%, while the standard deviation of Project B’s returns is 9%.
Which one is relatively riskier?
203 Two investments have different expected returns. Project A’s 0.20 0.75 0.90 0.10
expected return is 20% and the standard deviation of its returns is
15%. Project B’s expected return is only 10%, while the standard
deviation of its returns remains at 9%. Compute Coefficient of
Varience of Project A.
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1 Management Accounting __________________. All of the above 4
2 Management accounting can be viewed Management-oriented Accounting
2
as________________.
3 The main objective of management accounting is To ascertain analyse and interpret the results
___________________. of business operations 3

4 is the study of managerial aspects of financial Management accounting

3
accounting _________________.
5 The purpose of management accounting is to help make Managers
decisions 1

6 Management accounting assists the management in All of the above 4

7 ‘Period of lost relevance’ is the of the evolution of 3rd stage
3
management accounting.
8 __________________ criteria are a set of standards for ESG
a company’s behaviour used by socially conscious 3
investors to screen potential investments.
9 Management accounting information helps managers All of the above
formulate strategy by answering which of the following 4
questions?
10 Management accounting with specific focus on Both 1 and 2
environmental issues is becoming increasingly important
in organizations as environmental costs are large in 3
many organisations. There are three specific reasons for
this, which are___________________.
11 Management accounting is concerned with data internal and external sources
3
collection from _____________.
12 Management Accounting is concerned with accounting Robert N. Antho
information, which is useful to the management — This
1
definition is given by ______________.

13 The primary objective of Management Accounting is to All of the above

4
_______________.
14 Which of the following is a correct definition of activity- A system of management which uses activity-
based management? based cost information for a variety of
purposes including cost reduction, cost 4
modeling and customer profitability analysis

15 Which of the following characteristics would be an Overhead costs are high and increasing and
indicator that a company would benefit from switching no one seems to know why 3
to activity based costing?
16 According to the Chartered Institute of Management Activity-based costing
Accountants (CIMA), cost attribution to cost units on the
basis of benefits received from indirect activities e.g. 3
ordering, setting up, and assuring quality is known as:

17 In an ABC system, which of the following is likely to be Machine set-up

1
classified as a batch level activity?
18 Activity based costing Uses multiple activity rates 4
19 Which of the following activities is not a batch level Designing products
2
activity?
20 Which of the following is not included in batch level Designing the product
4
activities?
21 Assigning overhead using ABC often: Shifts overhead costs from high-volume
1
products to low-volume products
22 In Activity Based Costing Some manufacturing costs may be excluded
2
from product costs
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23 In an ABC system, the allocation bases that are used for Cost Driver
applying costs to services or procedures are called: 2

24 Which of the following would not be deducted from Shipping costs

4
sales in a management report prepared using ABC?
25 an item for which cost measurement is required e.g. Cost Object
4
product, job or a customer
26 Which of the following is different in ABC when In an ABC costing system, costs are only
compared to traditional costing? assigned to products that actually required
work that gave rise 2
to a particular cost

27 Process of Cost allocation under Activity Based Costing Activities— Cost of Activities—Cost Driver
3
is – Cost allocated to cost objects
28 Cost of maintaining a building is: Facility Level Cost 4
29 should be subtracted from net product revenues instead Organizational Level Cost
3
of an arbitrary and illogical apportionment.
30 The basis of apportionment of overheads which takes Activity basis
into account the profitability of various departments is 4
called:
31 Which of the following is the main cost driver of Order value
2
customer order processing activity?
32 Painting the product would be an example of which Unit-level activity
3
activity level groups
33 Which of the following tasks is not normally associated Preparation of allocation matrices
3
with an activity-based costing system?
34 All of the following are examples of batch level Worker recreational facilities
4
activities except:
35 A cost driver - is all of the above 4
36 Which of these is NOT a cost driver For the Activity Number of employee Training Programmes
3
Design of products, services & Processes ?
37 Which of these in NOT a Cost driver for Marketing and Number of researche projects
2
sales Function ?
38 Which of these in NOT a Cost driver for Customer sales Revenue
4
Service Activity ?
39 Plant depreciation is an example of which activity-level Facility-level activity
2
group?
40 Under activity-based costing, ‘material ordering’ is Batch-level activity
3
considered as —
41 Samsung an appliance manufacturer is developing a new Product Sustaining Activity
line of ovens that uses controlled-laser technology.
4
Research and testing costs associated with the new ovens
is said to arise from a:
42 A homogeneous cost pool is one that: Can be explained with a single activity driver
3
43 An Activity-Based Costing, an inspection of the product Batch
2
is a level activity:
44 A company uses traditional standard costing system. The ₹ 200
inspection and set-up costs are actually ₹1,760 against a
budget of ₹2,000. ABC system is being implemented and
accordingly the number of batches is identified as the
cost driver for inspection and set up. The budgeted 2
production is 10,000 units in batches of 1,000 units
whereas actually 9,000 units were produced in 11
batches. The cost per batch under ABC system will be
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45 X Company uses activity-based costing for Product B ₹ 3,30,000
and Product D. The total estimated overhead cost for the
parts administration activity pool was ₹5,50,000 and the
expected activity was 2000 part types. If Product D 3
requires 1200 part types, the amount of overhead
allocated to product D for parts administration would be:

46 Fast Ltd. manufactures three types of products A, B, ₹ 40,000

and C following ABC System. During a period, the
company incurred ₹73,000 as inspection cost and it was
worked for 10, 20 and 9 production runs respectively for 2
producing products A, B, and C. The inspection costs for
product B under the ABC system was

47 A company operates an activity based costing (ABC) ₹ 1,000

system to attribute its overhead costs to cost objects. In
its budget for the year-ending 31st August, 2022. The
company expected to place a total of 2000 purchase
orders at a total cost of ₹1,00,000. This activity and its
related costs were budgeted to occur at a constant rate
4
throughout the budget year which is divided into 13 four
week periods.
During the four-week period ended 30th June 2021, a
total of 200 purchase orders were placed at a cost of ₹
9,000. The over recovery of these costs for the four-week
period was
48 A company manufactures 500 units of product AX the ₹ 1,57,000
material cost to manufacture is ₹ 1,50,000, Labour cost
₹2,65,000. Material reordering cost is ₹4,500, Material
handling cost is ₹2,500 Material order – 35, Material 3
movement – 20.
Total Material cost under Activity based costing is.

49 To obtain the break-even point in rupee sales value, total Profit/volume ratio.
4
fixed costs are divided by:
50 The break-even point is the point at which: All of the above. 4
51 The primary difference between a fixed budget and a is a plan for a single level of sales (or other
variable (flexible) budget is that a fixed budget: measure of activity), while a variable budget
consists of several plans, one for each of 4
several levels of sales (or other measures of
activity).
52 Margin of safety is referred to as: Excess of actual sales over break-even sales;
3
53 Contribution margin is known as Marginal income 1
54 Fixed cost per unit decrease when Production volume increases 1
55 Within a relevant range, the amount of variable costs per Remains constant at each production level
2
unit
56 Margin of safety is referred to as Excess of actual sales over budgeted sales. 3
57 Under marginal costing system, the contribution margin Revenues over variable costs
3
discloses the excess of
58 A decrease in sales price Increases the break-even point 3
59 Determine Margin of safety if Profit is ₹15,000 and P/V ₹ 37,500
1
ratio is 40%.
60 What is Margin of Safety if Sales is 20,000 units and 5000 units
2
B.E.P is 15,000 units?
61 Determine sales in rupees for desired profit if fixed cost ₹ 37,500
is ₹10,000, Variable cost is ₹30,000, Sales is ₹50,000 4
and desired profit is ₹5,000.
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62 What will be sales in rupees for desired profit if fixed ₹ 1,50,000
cost is ₹30,000, desired profit is ₹15,000 and P/V ratio is 1
30%?
63 Calculate sales in rupees for desired profit if fixed cost ₹ 50,000
is ₹10,000, selling price is ₹20 per unit, Variable cost is 2
₹15 per unit and desired profit is ₹1 per unit
64 Determine sales in units for desired profit if Fixed cost is ₹5,000 units
₹15,000, desired profit is ₹5,000 Selling price per unit is 1
₹20 and Variable cost per unit is ₹16.
65 What will be sales in units if fixed cost is ₹50,000 ₹1,000 units
Contribution per unit is ₹60 and desired profit per unit is 3
₹10.
66 9. Determine B.E.P in units and amount if Units ₹20 per unit, ₹1,00,000
produced if ₹10,000, Fixed cost is ₹40,000, Selling price
3
is ₹50 per unit and Variable cost us ₹30 per unit.

67 Determine B.E.P if Sales is ₹1,00,000, Variable cost is ₹ 60,000

1
₹50,000 and Profit is ₹20,000.
68 Pv ratio will increase if there is - a decrease in variable cost per unit 4
69 Under marginal costing ,the cost of product for inventory prime costs and variable factory overheads
1
valuation includes
70 period costs are : fixed cost
71 Marginal costs is taken as equal to Prime Cost plus all variable overheads 1
72 Contribution margin is equal to Fixed Cost - Loss 3
73 It is pallned sell 1,00,000 units of product A at ₹12 per ₹ 7,20,000
unit. Fixed Costs are ₹2,80,000 .To achive a profit of 2
₹2,00,000 what would the variable costs be ?
74 Factors which can change the break even point All of the above. 4
75 net profit ratio is 12% and bep is 40 % of total sales 20%
4
compute pv ratio
76 If the total cost of 1000 units is ₹ 60,000 and that of Marginal cost
1001 units is ₹60,400, then the increase of ₹400 in the 3
total cost is:
77 Which of the following statements are true about Both b and c
4
marginal costing?
78 The costing method where fixed factory overheads are Absorption costing
2
added to inventory is called:
79 While computing profit in marginal costing: The total marginal cost gets deducted from
2
total sales revenue
80 Which of the following assumptions are made while All of the above
4
calculating marginal cost
81 Contribution margin in marginal costing is also known Marginal income
3
as:
82 What is the opportunity cost of making a component part Zero
in a factory given no alternative use of the capacity? 4

83 The difference in total cost that results from two Differential Cost
3
alternative courses of action is called:
84 Relevant costs are: avoidable, future and measured by profit 3
85 The profit at which total revenue is equal to the total cost Break-even point
2
is known as:
86 Which of the following costs would not be accounted for an opportunity cost
4
in a company’s recordkeeping system?
87 PQR Ltd. manufactures a single product which it sells 3750
for ₹ 40 per unit. Fixed cost is ₹ 60,000 per year. The
contribution to sales ratio is 40%. PQR Ltd.’s Break 3
Even Point in units is
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88 The break-even point of a manufacturing company is 30%
₹1,60,000. Fixed cost is ₹48,000. Variable cost is ₹12 3
per unit. The PV ratio will be:
89 Product A generates a contribution to sales ratio of 40%. ₹ 1,87,500
Fixed cost directly attributable to Product A amounted to
₹60,000. The sales revenue required to achieve a profit 3
of ₹15,000 is

90 XYZ Ltd. makes a special gadget for the car it ₹40 Lakhs
manufactures. The machine for the gadget works to full
capacity and incur ₹15 Lakhs and ₹40 Lakhs
respectively as Variable and Fixed Costs. If all the
gadgets were purchased from an outside supplier, the
1
machine could be used to produce other items, which
would earn a total contribution of ₹ 25 Lakhs. What is
the maximum price that XYZ Ltd. should be willing to
pay to the outside supplier for the gadgets, assuming
there is no change in Fixed Costs?
91 X Ltd. has 1000 units of an obsolete item which are ₹ 6,000
carried in inventory at the original price of ₹ 50,000. If
these items are reworked for ₹ 20,000, they can be sold
for ₹ 36,000. Alternatively, they can be sold as a scrap 2
for ₹6,000 in the market. In a decision model used to
analyze the reworking proposal, the opportunity cost
should be taken as
92 The sales and profit of a firm for the year 2021 are 25%
₹1,50,000 and ₹20,000 and for the year 2022 are
3
₹1,70,000 and ₹ 25,000 respectively. The P/V Ratio of
the firm is
93 Which one of the following is not considered as a Fixed Cost Based Transfer Pricing
3
method of Transfer Pricing
94 Method of pricing, when two separate pricing methods Functional pricing
are used to price transfer of products from one subunit to
2
another, is called:

95 The Eastern division sells goods internally to the Market-based transfer pricing.
Western division of the same company. The quoted
external price in industry publications from a supplier
near Eastern is ₹200 per ton plus transportation. It costs
₹20 per ton to transport the goods to Western. Eastern’s
actual market cost per ton to buy the direct materials to 4
make the transferred product is ₹100. Actual per ton
direct labour is ₹50. Other actual costs of storage and
handling are ₹40. The company president selects a ₹220
transfer price. This is an example of:

96 Division P transfers its output to Division Q at variable Two-part tariff transfer pricing
cost. Once a year P charges a fixed fee to Q, representing
4
an allowance for P’s fixed costs. This type of transfer
pricing system is commonly known as:
97 In which of the following circumstances is there a strong If there is no similar product sold on an
argument that profit centre accounting is a waste of external market and the transferred item is a 4
time? major product of the supplying division
98 Which one of the following is not considered as a Fixed Cost Based Transfer Pricing
2
method of Transfer Pricing?
99 Method of pricing, when two separate pricing methods dual pricing
are used to price transfer of products from one subunit to 1
another, is called:
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100 M Group has two divisions, Division P and Division Q. ₹ 125
Division P manufactures an item that is transferred to
Division Q. The item has no external market and 6,000
units produced are transferred internally each year. The
costs of each division are as follows?
Variable Cost Division P
2
₹100 per unit Division Q ₹120 per unit
Fixed cost each year ₹1,20,000 ₹90,000 Head Office
management decided that a transfer price should be set
that provides a profit of ₹30,000 to Division P. What
should be the transfer price per unit?

101 Minimax Ltd. fixes inter - divisional transfer prices for ₹ 13.05
its products on the basis of cost plus a return on
investment in the division. The budget for division X for
2022 – 23 appears as under -Fixed Assets ₹8,00,000
Current Assets ₹5,00,000
Debtors ₹2,00,000
1
Annual fixed cost of the division ₹8,00,000
Variable cost per unit of the product 10
Budgeted volume ₹4,00,000 units per year Desired ROI
28%. Transfer price for division X is
________________

102 BC Company fixes the inter-divisional transfer prices for 12.7

its products on the basis of cost, plus a return on
investment
in the division. The Budget for Division for Alpha for
the year 2021-22 appears as under:
`

Fixed Assets ₹5,00,000

1
Current assets ₹3,00,000
Debtors ₹2,00,000
Annual Fixed Cost of the Division ₹8,00,000
Variable Cost per unit of Product ₹10
Budgeted Volume 4,00,000 units per year
Desired ROI 28% on ₹10,00,000
Determine the transfer Price for Alpha.

103 The _____ method of transfer pricing was introduced in dual price
order to overcome the problems caused by using 1
marginal cost
104 Transfer pricing methods may be classfied under 3 pricing method 1
105 Which of the following is true of standards? All of the above 4
106 Standards that can be attained only under the best Ideal standards
3
circumstances are referred to as:
107 Who is most likely to be held responsible for a material Purchasing managers
3
price variance?
108 Cost variance is the difference between The standards cost and the actual cost 3
109 Standard costing is a tool, which replaces the bottleneck Historical
3
of the ___ costing.
110 If standard cost ˃ actual, then it is: Favourable 2
111 From cost control point of view the standard most Expected standard
1
commonly used is:
112 When more than one material is used in the manufacture Material mix variance
of a product, which of the following variances arises: 2
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113 Which of the following equations can be used to (AQ × SP) - (SQ × SP)
3
calculate a material quantity variance?
114 Which of the following equations can be used to (AQ × AP) - (AQ × SP)
1
calculate a material price variance?
115 Which of the following is not likely to be a reason of Increase in direct materials prices
1
unfavourable direct labour efficiency variance?
116 Which of the following is a purpose of standard costing? To control costs
3
117 Which of the following activities is the Standard Costing It is a basis for implementing cost control
System used for? and fixing the price of products through 1
variance analysis
118 Which of the following activities is true under the The idle time variance is never favourable
2
Standard Costing System?
119 A standard cost is a carefully ____________ unit cost Pre-determined
1
which is prepared for each cost unit.
120 Setting of standard involves effective utilization of ___. All of the above
4
121 The standard cost card contains quantities and costs for Direct material, direct labour, and overhead
4
122 Standards differ from budgets in that: Budgets are a total amount and standards are
3
a unit amount
123 Standard Costs: Are predetermined unit costs which
2
companies use as measures of performance
124 The advantages of standard costs include all of the Management must use a static budget
4
following except:
125 Normal standards: Allow for rest periods, machine breakdowns,
1
and setup time
126 The setting of standards is: A management decision 2
127 Which of the following is correct about the total Standard hours allowed for the work done is
overhead variance? the measure used in computing the variance

128 What is the name given to a budget that has been Zero based budget
prepared by re-evaluating activities and comparing the
3
incremental costs of those activities with their
incremental benefits?
129 A budget is an instrument of management used as an aid All of the above
4
in the _____________.
130 Following may be regarded as a summary budget Master budget 2
131 Purchases budget is prepared using the information Materials budget
2
from:
132 Following budget may be compiled on departmental Production budget
1
basis:
133 Production budget is based upon: All of the above 4
134 Budget includes: All of the above 4
135 A budget should be: Flexible 2
136 The object of budgetary control is __________ Planning 1
137 The budget which is dynamic is ___________. Sales budget 2
138 The process of budgeting helps in the control of: All of the above 4
139 Plant utilization budget and Manufacturing overhead Cost budget
3
budgets are types of:
140 R&D budget and Capital expenditure budget are Long-term budget
3
examples of:
141 The scare factors is also known as: Key factor 1
142 What is the name given to a budget that has been Zero based budget
prepared by re-evaluating activities and comparing the
3
incremental costs of those activities with their
incremental benefits?
143 A budget is an instrument of management used as an aid All of the above
4
in the _____________.
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144 Following may be regarded as a summary budget Master budget 2
145 Purchases budget is prepared using the information Materials budget
2
from:
146 Following budget may be compiled on departmental Production budget
1
basis:
147 Production budget is based upon: All of the above 4
148 A budget should be: Flexible 2
149 The object of budgetary control is __________ Planning 1
150 The budget which is dynamic is ___________. Sales budget 2
151 The process of budgeting helps in the control of: All of the above 4
152 Plant utilization budget and Manufacturing overhead Cost budget
3
budgets are types of:
153 R&D budget and Capital expenditure budget are Long-term budget
3
examples of:
154 The scare factors is also known as: Key factor 1
155 A company usually determines the appropriate degree of All of these
decentralization based on a combination of the
4
______________________________.

156 Major disadvantages of Decentralization are Both 1 and 2

4
_________________.
157 Which of the following is/are not benefit/s of Creates personnel difficulties upon
Decentralization ? introduction, especially if managers are 3
unwilling to delegate effectively
158 Return on Equity = Net Profit Margin × Asset Turnover Ratio ×
1
Financial Leverage
159 According to DuPont methodology, three main financial (1) Operating performance,
parameters that drive Return on Equity (ROE) are (2) Asset usage performance, and
2
______________________________. (3) Financial leverage.

160 Asset usage performance means ___________________ Total Asset Turnover (Turnover ÷ Total
2
Assets)
161 Financial leverage means the use of debt to acquire additional assets or
3
________________________________. fund projects
162 According to Du Pont Analysis a company can increase All of these
its Return on Equity if it 4
__________________________.
163 Du Pont ROE = Margin on Sales × Asset Turnover × Equity
1
Multiplier
164 ____________ expresses divisional profit as a ROI
1
percentage of the assets employed in the division.
165 Return on investment (ROI) is (Profit before interest and tax ÷ Operations
4
management capital employed) × 100
166 RI (Residual Income) = Divisional profit — (Percent capital charge ×
3
Divisional investment)
167 The main advantages of RI is/are All of these
4
_____________________.
168 Acme, a division of Ace Manufacturing, has assets of 24.44%
₹2,25,000 and an operating income of ₹55,000. What is
1
the division’s ROI?

169 An investment centre has net assets of ₹8,00,000, and ₹ 64,000

made profits before interest and tax of ₹1,60,000. The
3
notional cost of capital is 12%.Calculate and comment
on the RI (Residual Income) for the period.
170 A person made a Capital Investment of ₹2,00,000 in a ₹ 8,000
company. Operating profit, after taxes, is ₹28,000. The
3
opportunity cost of that investment is 10%. Calculate
EVA.
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171 For EVA there 3 responsibility centres, which are All of these
4
_____________________.
172 The theory of learning curves will only hold if which of Both 1 and 2
4
the following conditions apply?
173 __________________________ can be used: a. Learning curve theory
To calculate the incremental cost of making extra units
of a particular products,
b. To set standards for labour,
1
c. To prepare realistic production budgets and to report
labour cost variances, and
d. To quote contact price.

174 The four Perspectives of the Balanced Scorecard are 1. Financial Perspective,2. Customers
_____________________. Perspective, 3. Internal business process
3
Perspective and 4. Learning & Growth
Perspectives.
175 MI Ltd. has earned a net profit of ₹15 lakhs after Tax at ₹31.43 lakhs
30%. Interest cost charged by the financial institutions
was ₹10 Lakhs. The Invested capital is ₹ 95 Lakhs of
which 55% is debt. The company maintains a weighted 4
average cost of capital of 13%.Compute the Operating
Income.

176 According to Kaplan & Norton, which of the balanced Financial.

scorecard perspectives serves as the focus of the other
1
perspectives?

177 4. Which of the following would be considered an Accounts receivable.

3
operating asset in return on investment computations?
178 A company that is seeking to increase ROI should Average operating assets.
4
attempt to decrease:
179 The performance of investment centre is based on Profit and investment of the centre
3
______________________.
180 Both costs and revenues are measured in Profit
2
_______________. centers
181 A cost centre is a segment of the organization where the A or B
manager is responsible for _____________________. 3

182 The performance of investment centre is based on Profit and investment of the centre
3
________________________.
183 Responsibility accounting is used for _______________. cost control
1
184 Responsibility Accounting is also known as Both A and B
3
______________.
185 Which of the following characteristics is not associated Attempts to control processes.
4
with traditional responsibility accounting?
186 In responsibility accounting, responsibilities of various All of the above
groups or individuals are identified in terms
4
of ________________.

187 The area of focus on responsibility center Optimum utilization of resources

3
is___________________.
188 In profit center revenue represents a monetary measure Both A and B
of output emanating from a profit center in a given
3
period irrespective whether ________________.
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189 In a control report of Department X, it is mentioned as A. ₹ 3,200
indirect materials are ₹1,000, indirect labour
₹900, Overtime Charges ₹100, Depreciation on
equipment ₹500, Allocated factory overhead (38% of
1
factory space) ₹4,300, Allocated overhead of repair shop
is ₹1,200. Determine total costs treating department X as
a responsibility center.

190 Which of the following criterion is not used for decision- Minimize expected loss
4
making under uncertainty?
191 Decision theory is concerned with All of these
4
___________________________.
192 Which of the following criterion is not applicable to Maximize return
2
decision-making under risk?
193 The minimum expected opportunity loss (EOL) is Both (A) and (B)
4
_______________.
194 The expected value of perfect information (EVPI) is Equal to expected regret of the optimal
1
decision under risk
195 The value of the coefficient of optimism (a) is needed Realism
3
while using the criterion of ___________.
196 The decision-maker’s knowledge and experience may Realism
influence the decision-making process wi.en
3
using the criterion of ____________

197 The difference between the expected profit under The expected value of perfect information
conditions of risk and the expected profit with perfect
information is called ____________ 1

198 A situation in which a decision maker knows all of the Risk.

possible outcomes of a decision and also knows the
2
probability associated with each outcome is referred to
as ____________
199 Which of the following methods of selecting a strategy is If two strategies have the same expected
consistent with risk averting behaviour? profit, select the one with the smaller
1
standard deviation.

200 Which one of the following does not measure risk? LPP
2
201 The sequence of possible managerial decisions and their A decision tree.
expected outcome under each set of circumstances can
2
be represented and analysed by using
___________________.
202 We are comparing two investment projects. Both have A
expected returns of 20%, but the standard deviation of
Project A’s returns is 15%, while the standard deviation 1
of Project B’s returns is 9%. Which one is relatively
riskier?
203 Two investments have different expected returns. Project 0.75
A’s expected return is 20% and the standard deviation of
its returns is 15%. Project B’s expected return is only
2
10%, while the standard deviation of its returns remains
at 9%. Compute Coefficient of Varience of Project A.