Test 1: Introduction to Cost and Management Accounting: answer key

Question 1 · 2 marks · Chapter 1: Introduction to Cost and Management Accounting · medium

Scenario. Vikram Precision Components Ltd manufactures two automotive components—spacers and bushings—at its Pune plant. The plant has three production cost centres (Machining, Finishing and Packing) and two service cost centres (Maintenance and Quality Control). Annual costs and activity data for the year ended 31 March 2026 are given below. Cost centre | Annual cost (₹) | Activity base | Total activity Machining | 16,80,000 | Machine hours | 45,000 Finishing | 9,60,000 | Direct labour hours | 24,000 Packing | 4,80,000 | Packing hours | 12,000 Maintenance | 2,40,000 | Maintenance hours | 6,000 Quality Control | 2,40,000 | Inspections | 1,200 Total manufacturing overhead is ₹36,00,000. Output was 12,000 spacers and 8,000 bushings. A spacer weighs 0.50 kg and a bushing 1.50 kg. The company uses a composite cost unit of 100 kg of finished components for comparing product-line costs. Spacers consume 30,000 machine hours, 9,000 direct labour hours, 300 inspections and 200 maintenance hours; bushings consume 15,000 machine hours, 15,000 direct labour hours, 500 inspections and 400 maintenance hours. Packing hours are in proportion to the number of components. Machine setup for each production run costs ₹18,000; product-line design costs are ₹6,00,000 per annum; plant insurance is ₹4,80,000 per annum. The sales manager has received a special export enquiry for 400 spacers, which would be a separate cost object. Management is reviewing cost centre responsibility and cost hierarchy before finalising the annual budget. The annual budget is prepared on a functional basis. There is no opening or closing work-in-process, and all output is sold in the year. The production manager controls machining and packing costs, while the maintenance supervisor controls maintenance expenditure within an annual budget. The quality control budget is set annually by the quality committee and is not directly proportional to output. The special export enquiry would require separate tooling and inspection.

Using 100 kg of finished components as the composite cost unit, what is the total manufacturing overhead cost per composite cost unit?

1. ₹18,000
2. ₹21,600
3. ₹20,000 (correct answer)
4. ₹24,000

Answer: C — ₹20,000

Explanation. Total weight = (12,000 × 0.50 kg) + (8,000 × 1.50 kg) = 6,000 + 12,000 = 18,000 kg. Composite cost units = 18,000 ÷ 100 = 180. Total overhead = 16,80,000 + 9,60,000 + 4,80,000 + 2,40,000 + 2,40,000 = ₹36,00,000. Cost per composite cost unit = 36,00,000 ÷ 180 = ₹20,000. Option (a) ignores bushing weight; option (b) divides by 100 instead of 180; option (d) uses total component count.

Where it goes wrong. Students often forget to convert total weight into 100 kg composite units and divide by total number of components.

Authority. ICAI SM: Cost and Management Accounting, Chapter 1 (Introduction to Cost and Management Accounting)

Question 2 · 2 marks · Chapter 1: Introduction to Cost and Management Accounting · hard

Which statement correctly classifies the cost centres of Vikram Precision Components Ltd?

1. Machining and Finishing are service cost centres; Packing is a production cost centre.
2. Maintenance and Quality Control are service cost centres; Packing is a production cost centre. (correct answer)
3. Maintenance is a production cost centre; Quality Control is a service cost centre.
4. All five cost centres are production cost centres.

Answer: B — Maintenance and Quality Control are service cost centres; Packing is a production cost centre.

Explanation. Maintenance and Quality Control do not directly produce the saleable components; they support production, so they are service cost centres. Packing directly changes the product for despatch and is a production cost centre. Machining and Finishing are also production cost centres. Thus only option (b) correctly pairs the service centres with Packing as a production cost centre.

Where it goes wrong. Students often classify every department inside the factory as a production cost centre.

Authority. ICAI SM: Cost and Management Accounting, Chapter 1 (Introduction to Cost and Management Accounting)

Question 3 · 2 marks · Chapter 1: Introduction to Cost and Management Accounting · medium

Which of the following costs is classified as a batch-level cost in the cost hierarchy?

1. Product-line design cost of ₹6,00,000 per annum
2. Plant insurance of ₹4,80,000 per annum
3. Direct material cost of spacers
4. Machine setup cost of ₹18,000 per production run (correct answer)

Answer: D — Machine setup cost of ₹18,000 per production run

Explanation. Machine setup is performed for each production run, so its cost varies with the number of batches or runs and is batch-level. Product-line design is product-level; plant insurance is facility-level; direct material is unit-level. The ₹18,000 setup cost per run is therefore classified as batch-level, not product-level or facility-level.

Where it goes wrong. Students often confuse batch-level setup costs with product-level design costs because both support production.

Authority. ICAI SM: Cost and Management Accounting, Chapter 1 (Introduction to Cost and Management Accounting)

Question 4 · 2 marks · Chapter 1: Introduction to Cost and Management Accounting · hard

For the special export enquiry for 400 spacers, what is the most appropriate cost object?

1. The export order for 400 spacers (correct answer)
2. The Pune plant
3. The spacer product line
4. The machining cost centre

Answer: A — The export order for 400 spacers

Explanation. A cost object is anything for which a separate cost measurement is desired. For the special export enquiry, the relevant cost object is the export order itself because costs such as separate tooling, inspection and packing are incurred specifically for that order. The Pune plant and spacer product line are broader cost objects; machining is a cost centre, not the order-level object.

Where it goes wrong. Students often select the product line or plant instead of the specific order for which dedicated costs are incurred.

Authority. ICAI SM: Cost and Management Accounting, Chapter 1 (Introduction to Cost and Management Accounting)

Question 5 · 2 marks · Chapter 1: Introduction to Cost and Management Accounting · medium

Scenario. NovaMove Logistics Ltd operates freight services and three depots. The depots are treated as responsibility centres; depot managers are evaluated on operating profit and on return on capital employed of depot assets. Annual data for the year ended 31 March 2026 are: Depot | Revenue (₹) | Operating cost (₹) | Operating assets (₹) Pune | 80,00,000 | 64,00,000 | 40,00,000 Nagpur | 60,00,000 | 48,00,000 | 30,00,000 Nashik | 45,00,000 | 39,00,000 | 20,00,000 NovaMove also runs a dedicated route between two cities 120 km apart. It deploys 8 trucks, each with a capacity of 10 tonnes. On average, trucks carry 80% of capacity. Each truck makes 2 round trips per day and operates 25 days in a month. Monthly operating cost of the route is ₹15,36,000. The fleet maintenance workshop provides services to all depots but does not earn external revenue. The company is considering a new customer contract that would be a separate cost object. Management wants to review cost units, responsibility centres and performance measures before pricing the contract. The route is a point-to-point service with no intermediate stops. All trips are assumed to be loaded to the average load factor in both directions. The company uses tonne-kilometre as its composite cost unit for freight. Depreciation and insurance are included in operating cost and operating assets. The new contract would require dedicated handling at the Nagpur depot and would be priced after allocating depot costs. The finance director has asked whether the depot should be classified as a profit centre or an investment centre, and how the route cost per tonne-kilometre should be computed.

What is the total tonne-kilometre run by all trucks on the dedicated route for one month?

1. 6,14,400 tonne-km
2. 7,68,000 tonne-km (correct answer)
3. 9,60,000 tonne-km
4. 7,20,000 tonne-km

Answer: B — 7,68,000 tonne-km

Explanation. Effective load per truck = 10 tonnes × 80% = 8 tonnes. One round trip = 2 × 120 km = 240 km. Tonne-km per round trip = 8 × 240 = 1,920. Two round trips per day = 3,840 tonne-km per truck. For 8 trucks and 25 days: 3,840 × 8 × 25 = 7,68,000 tonne-km. Option (a) ignores two round trips; option (d) uses full load instead of 80%.

Where it goes wrong. Students often use one-way distance or forget the load factor while computing tonne-kilometres.

Authority. ICAI SM: Cost and Management Accounting, Chapter 1 (Introduction to Cost and Management Accounting)

Question 6 · 2 marks · Chapter 1: Introduction to Cost and Management Accounting · hard

What is the operating cost per tonne-kilometre for the dedicated route for one month?

1. ₹1.60
2. ₹2.40
3. ₹2.00 (correct answer)
4. ₹2.50

Answer: C — ₹2.00

Explanation. Cost per tonne-km = Monthly route operating cost ÷ Monthly tonne-km = ₹15,36,000 ÷ 7,68,000 = ₹2.00 per tonne-km. Options using one-way distance, ignoring the load factor, or omitting the return trip produce higher or lower rates. The tonne-kilometre is the appropriate composite cost unit because it combines weight carried and distance travelled.

Where it goes wrong. Students often divide by total kilometres run rather than tonne-kilometres, ignoring the load factor.

Authority. ICAI SM: Cost and Management Accounting, Chapter 1 (Introduction to Cost and Management Accounting)

Question 7 · 2 marks · Chapter 1: Introduction to Cost and Management Accounting · medium

What is the return on investment (ROI) of the Nagpur depot for the year ended 31 March 2026?

1. 20%
2. 30%
3. 25%
4. 40% (correct answer)

Answer: D — 40%

Explanation. Operating profit for Nagpur = Revenue ₹60,00,000 − Operating cost ₹48,00,000 = ₹12,00,000. ROI = Operating profit ÷ Operating assets = ₹12,00,000 ÷ ₹30,00,000 = 40%. Option (b) 30% is Nashik's ROI; option (a) may arise from using cost instead of profit. The depot is evaluated on profit and assets, so ROI is an appropriate performance measure.

Where it goes wrong. Students often divide profit by revenue instead of operating assets when computing ROI.

Authority. ICAI SM: Cost and Management Accounting, Chapter 1 (Introduction to Cost and Management Accounting)

Question 8 · 2 marks · Chapter 1: Introduction to Cost and Management Accounting · hard

Since the Nagpur depot manager is evaluated on operating profit and on return on capital employed of depot assets, the Nagpur depot is most suitable classified as a:

1. Investment centre (correct answer)
2. Revenue centre
3. Standard cost centre
4. Profit centre

Answer: A — Investment centre

Explanation. An investment centre manager is responsible for revenue, costs and the capital employed or assets. Since the Nagpur depot is evaluated on operating profit and ROCE of depot assets, it is an investment centre. A profit centre ignores assets; a revenue centre controls revenue only; a standard cost centre controls costs against standards.

Where it goes wrong. Students often stop at 'profit centre' because profit is measured, ignoring the additional responsibility for assets.

Authority. ICAI SM: Cost and Management Accounting, Chapter 1 (Introduction to Cost and Management Accounting)

Question 9 · 2 marks · Chapter 1: Introduction to Cost and Management Accounting · medium

Scenario. At 12,000 machine hours, electricity cost is ₹1,86,000; at 18,000 machine hours, electricity cost is ₹2,34,000. Using the high-low method, what is the fixed component of electricity cost?

At 12,000 machine hours, electricity cost is ₹1,86,000; at 18,000 machine hours, electricity cost is ₹2,34,000. Using the high-low method, what is the fixed component of electricity cost?

1. ₹96,000
2. ₹90,000 (correct answer)
3. ₹1,20,000
4. ₹84,000

Answer: B — ₹90,000

Explanation. Variable cost per machine hour = (₹2,34,000 − ₹1,86,000) ÷ (18,000 − 12,000) = ₹48,000 ÷ 6,000 = ₹8. Fixed cost = ₹1,86,000 − (12,000 × ₹8) = ₹1,86,000 − ₹96,000 = ₹90,000. Option (a) is the variable cost at 12,000 hours; option (c) incorrectly treats the higher activity total as fixed cost.

Where it goes wrong. Students often use the higher activity total as fixed cost or forget to multiply the variable rate by the activity level.

Authority. ICAI SM: Cost and Management Accounting, Chapter 1 (Introduction to Cost and Management Accounting)

Question 10 · 2 marks · Chapter 1: Introduction to Cost and Management Accounting · hard

Scenario. A factory provides: direct materials ₹4,80,000; direct wages ₹2,40,000; factory overheads ₹1,80,000; administrative overheads ₹90,000. What is the conversion cost?

A factory provides: direct materials ₹4,80,000; direct wages ₹2,40,000; factory overheads ₹1,80,000; administrative overheads ₹90,000. What is the conversion cost?

1. ₹5,10,000
2. ₹6,60,000
3. ₹4,20,000 (correct answer)
4. ₹7,20,000

Answer: C — ₹4,20,000

Explanation. Conversion cost = direct labour + factory overheads = ₹2,40,000 + ₹1,80,000 = ₹4,20,000. Direct material is a prime cost item but not a conversion cost. Administrative overhead is a non-production overhead and is excluded. Option (a) adds administrative overhead; option (b) adds direct material and factory overhead; option (d) adds all costs.

Where it goes wrong. Students often include direct material or administrative overhead in conversion cost.

Authority. ICAI SM: Cost and Management Accounting, Chapter 1 (Introduction to Cost and Management Accounting)

Question 11 · 2 marks · Chapter 1: Introduction to Cost and Management Accounting · medium

Scenario. Which of the following is a composite cost unit?

Which of the following is a composite cost unit?

1. Tonne of steel
2. Kilowatt-hour of electricity
3. Litre of paint
4. Passenger-kilometre in transport (correct answer)

Answer: D — Passenger-kilometre in transport

Explanation. A composite cost unit combines two measures, such as passenger-kilometre (passengers × kilometres) or tonne-kilometre. Tonne of steel, kilowatt-hour and litre of paint are single cost units. Passenger-kilometre is therefore the composite cost unit used in transport services because it captures both passenger volume and distance travelled.

Where it goes wrong. Students often treat kilometre or passenger separately as the cost unit instead of combining both measures.

Authority. ICAI SM: Cost and Management Accounting, Chapter 1 (Introduction to Cost and Management Accounting)

Question 12 · 2 marks · Chapter 1: Introduction to Cost and Management Accounting · hard

Scenario. A tool room provides supporting services to production departments but does not directly create the saleable product. The tool room is most suitable classified as a:

A tool room provides supporting services to production departments but does not directly create the saleable product. The tool room is most suitable classified as a:

1. Service cost centre (correct answer)
2. Production cost centre
3. Revenue centre
4. Investment centre

Answer: A — Service cost centre

Explanation. A tool room provides supporting services to production departments and does not directly create the saleable product. It is therefore a service cost centre. It is not a production cost centre, revenue centre or investment centre because it has no direct output sold and no responsibility for revenue or capital employed.

Where it goes wrong. Students often classify every cost centre inside the factory as a production cost centre.

Authority. ICAI SM: Cost and Management Accounting, Chapter 1 (Introduction to Cost and Management Accounting)

Question 13 · 2 marks · Chapter 1: Introduction to Cost and Management Accounting · medium

Scenario. An engineering change order cost incurred for an entire product line is classified in the cost hierarchy as a:

An engineering change order cost incurred for an entire product line is classified in the cost hierarchy as a:

1. Unit-level cost
2. Product-level cost (correct answer)
3. Batch-level cost
4. Facility-level cost

Answer: B — Product-level cost

Explanation. An engineering change order for an entire product line benefits the product line as a whole rather than a single unit or batch. It is therefore a product-level cost. Unit-level costs vary with each unit; batch-level costs vary with batches; facility-level costs support the entire plant.

Where it goes wrong. Students often confuse product-level engineering costs with batch-level setup costs because both are indirect.

Authority. ICAI SM: Cost and Management Accounting, Chapter 1 (Introduction to Cost and Management Accounting)

Question 14 · 2 marks · Chapter 1: Introduction to Cost and Management Accounting · hard

Scenario. Which of the following statements about cost and management accounting is correct?

Which of the following statements about cost and management accounting is correct?

1. Financial accounting reports are prepared primarily for internal management and use flexible formats.
2. Management accounting is mandatory for all companies and follows statutory formats.
3. Cost accounting ignores non-financial quantitative information altogether.
4. Cost accounting includes both historical and predetermined cost data and may cover product, department and customer cost objects. (correct answer)

Answer: D — Cost accounting includes both historical and predetermined cost data and may cover product, department and customer cost objects.

Explanation. Cost accounting uses both historical records and predetermined estimates or standards, and can measure costs for products, departments, customers and other cost objects. Financial accounting is primarily external and statutory; management accounting is internal and flexible. Cost accounting does use non-financial quantitative information where relevant, so option (c) is false.

Where it goes wrong. Students often assume cost accounting is only historical or only for products, excluding customers and departments.

Authority. ICAI SM: Cost and Management Accounting, Chapter 1 (Introduction to Cost and Management Accounting)

Question 15 · 2 marks · Chapter 1: Introduction to Cost and Management Accounting · medium

Scenario. A semi-variable cost has a fixed component of ₹75,000 per month and a variable component of ₹12 per unit. At 10,000 units, what are the total cost and average cost per unit?

A semi-variable cost has a fixed component of ₹75,000 per month and a variable component of ₹12 per unit. At 10,000 units, what are the total cost and average cost per unit?

1. ₹1,20,000 and ₹12.00
2. ₹2,70,000 and ₹27.00
3. ₹1,95,000 and ₹19.50 (correct answer)
4. ₹1,95,000 and ₹12.00

Answer: C — ₹1,95,000 and ₹19.50

Explanation. Total cost = fixed cost + variable cost = ₹75,000 + (10,000 × ₹12) = ₹75,000 + ₹1,20,000 = ₹1,95,000. Average cost per unit = ₹1,95,000 ÷ 10,000 = ₹19.50. Option (a) ignores fixed cost; option (b) ignores variable cost or uses the wrong unit level; option (d) has the correct total but ignores fixed cost per unit in the average.

Where it goes wrong. Students often report the variable cost per unit as average cost and forget to add fixed cost per unit.

Authority. ICAI SM: Cost and Management Accounting, Chapter 1 (Introduction to Cost and Management Accounting)