Test 2: Introduction to Cost and Management Accounting: answer key

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

Scenario. Apex Polychem Ltd manufactures two polymer compounds, AP-10 and AP-20, in a single factory. For June 2026 the following cost data were recorded: Direct materials AP-10 ₹12,00,000 (traced to AP-10); Direct materials AP-20 ₹8,00,000 (traced to AP-20); Direct production wages ₹6,00,000 (traced to products); Indirect materials ₹1,20,000 (factory-wide); Factory rent ₹3,00,000 (annual lease, fixed); Depreciation on plant ₹1,80,000 (fixed); Supervisor salary ₹2,40,000 (one supervisor for the factory); Electricity ₹2,10,000 (fixed ₹90,000 plus ₹6 per machine hour; 20,000 machine hours); Quality inspection ₹80,000 (varies with inspections; 400 inspections); Packing cost ₹1,50,000 (₹15 per carton; 10,000 cartons); Sales commission ₹90,000 (5% of sales ₹18,00,000); Administrative salaries ₹1,40,000 (fixed); Rework due to faulty material ₹60,000 (abnormal; caused by supplier material); Normal scrap ₹40,000 (normal); Research for a new compound ₹1,10,000 (product-level); Machine setup ₹2,00,000 (₹2,500 per setup; 80 setups). The factory worked 20,000 machine hours. Production was 20,000 kg of AP-10 and 10,000 kg of AP-20. The production manager controls direct materials usage, direct wages, indirect materials, supervisor, power and setups; factory rent and depreciation are controlled by the corporate office. Sales commission and administrative salaries are not production costs. AP-20 requires a special certification inspection of ₹45,000 for the entire product line; this is product-level. Management is preparing a cost classification note for internal reporting.

At 25,000 machine hours, what is the total electricity cost?

1. ₹2,10,000
2. ₹2,50,000
3. ₹2,40,000 (correct answer)
4. ₹2,25,000

Answer: C — ₹2,40,000

Explanation. Electricity is semi-variable: total cost = fixed component + variable rate × machine hours. Fixed component = ₹90,000; variable rate = ₹6 per machine hour. At 25,000 hours, variable cost = 25,000 × ₹6 = ₹1,50,000. Total electricity cost = ₹90,000 + ₹1,50,000 = ₹2,40,000. Option (a) uses the given 20,000-hour total; option (b) treats the entire cost as variable at ₹10 per hour.

Where it goes wrong. Students often use the given total at 20,000 hours instead of recalculating the variable portion at the new activity level.

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

What is the amount to be excluded from normal product cost as abnormal cost?

1. ₹60,000 (correct answer)
2. ₹40,000
3. ₹1,00,000
4. ₹0

Answer: A — ₹60,000

Explanation. Normal scrap of ₹40,000 is a normal cost and is absorbed in product cost. Rework of ₹60,000 arose due to faulty supplier material, which is abnormal and is excluded from normal product cost; it is charged to the Costing Profit and Loss Account. Therefore the abnormal amount excluded is ₹60,000. Option (b) wrongly treats normal scrap as abnormal; option (c) adds both items.

Where it goes wrong. Students often include normal scrap in abnormal cost or treat all rework as normal production cost.

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

What is the total selling and distribution cost for June 2026?

1. ₹90,000
2. ₹2,40,000 (correct answer)
3. ₹1,50,000
4. ₹3,80,000

Answer: B — ₹2,40,000

Explanation. Selling and distribution costs are incurred for selling and delivering finished products. Sales commission ₹90,000 and packing cost for cartons ₹1,50,000 are selling and distribution costs. Total = ₹90,000 + ₹1,50,000 = ₹2,40,000. Administrative salaries ₹1,40,000 are administration costs, not selling and distribution. Option (d) wrongly adds administrative salaries.

Where it goes wrong. Students often classify packing as production cost or include administrative salaries in selling and distribution cost.

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

What is the total product-level cost incurred by Apex Polychem Ltd?

1. ₹1,10,000
2. ₹45,000
3. ₹1,65,000
4. ₹1,55,000 (correct answer)

Answer: D — ₹1,55,000

Explanation. Product-level costs support an entire product line rather than individual units or batches. Research for the new compound ₹1,10,000 and special certification inspection for AP-20 ₹45,000 are both product-level. Total = ₹1,10,000 + ₹45,000 = ₹1,55,000. Option (a) includes only research; option (b) includes only certification; option (c) incorrectly adds ₹10,000.

Where it goes wrong. Students often treat special certification as unit-level or batch-level instead of product-level.

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. Zenith Consumer Care Ltd runs a personal-care products plant with two production departments, Mixing and Packing, and two service departments, Maintenance and Quality Control. Monthly data are: Mixing direct materials ₹9,00,000 (variable; direct to Mixing); Packing direct materials ₹3,00,000 (variable; direct to Packing); Production wages ₹4,80,000 (variable; direct); Maintenance salaries ₹1,20,000 (fixed; service); Quality control ₹75,000 (fixed; service); Factory insurance ₹90,000 (fixed; facility); Power ₹1,44,000 (semi-variable: fixed ₹48,000 plus ₹8 per machine hour; 12,000 machine hours); Machine setup ₹1,35,000 (stepped fixed: ₹45,000 for every 1,000 setups or part; 2,600 setups); Depreciation ₹2,00,000 (fixed); Sales promotion ₹1,10,000 (discretionary fixed); Delivery charges ₹60,000 (variable; ₹20 per delivery; 3,000 deliveries). The Mixing department manager controls direct materials usage, direct wages, power and setups in Mixing. Maintenance and quality control are controlled by the plant manager. Sales promotion is controlled by marketing. A special customer complaint required rework costing ₹35,000; this was due to an abnormal machine breakdown. Normal rejection cost was ₹15,000. The company is deciding whether to treat maintenance as a service cost centre and sales promotion as a discretionary cost centre. At higher activity, setup cost increases in steps of ₹45,000 per 1,000 setups.

At 3,200 setups, what is the total stepped fixed setup cost?

1. ₹1,80,000 (correct answer)
2. ₹1,35,000
3. ₹2,25,000
4. ₹1,50,000

Answer: A — ₹1,80,000

Explanation. The setup cost is stepped fixed at ₹45,000 for every 1,000 setups or part thereof. At 3,200 setups, the number of steps = 3,200 ÷ 1,000 = 3.2, rounded up to 4 steps. Total setup cost = 4 × ₹45,000 = ₹1,80,000. Option (b) is the cost at 2,600 setups; option (c) assumes 5 steps; option (d) assumes 3.33 steps without rounding up.

Where it goes wrong. Students often multiply by the precise fraction of setups instead of rounding up to the next step.

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

How should the abnormal rework of ₹35,000 and normal rejection of ₹15,000 be treated?

1. Normal rejection ₹15,000 is abnormal and charged to Costing P&L.
2. Abnormal rework ₹35,000 is included in normal product cost.
3. Abnormal rework ₹35,000 is excluded from product cost and charged to Costing P&L. (correct answer)
4. Both normal rejection and abnormal rework are included in product cost.

Answer: C — Abnormal rework ₹35,000 is excluded from product cost and charged to Costing P&L.

Explanation. Normal rejection of ₹15,000 is a normal cost and is absorbed in product cost. Abnormal rework of ₹35,000 arose due to an abnormal machine breakdown, so it is excluded from normal product cost and charged to the Costing Profit and Loss Account. Option (b) wrongly capitalises abnormal rework; option (d) wrongly includes abnormal cost in product cost.

Where it goes wrong. Students often include abnormal rework in product cost because it is incurred inside the factory.

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 total variable cost for the month?

1. ₹17,76,000
2. ₹18,36,000 (correct answer)
3. ₹18,72,000
4. ₹19,80,000

Answer: B — ₹18,36,000

Explanation. Variable costs vary with activity. Include Mixing direct materials ₹9,00,000, Packing direct materials ₹3,00,000, production wages ₹4,80,000, variable power 12,000 × ₹8 = ₹96,000, and delivery charges ₹60,000. Total = ₹9,00,000 + ₹3,00,000 + ₹4,80,000 + ₹96,000 + ₹60,000 = ₹18,36,000. Option (a) omits delivery charges; option (c) adds fixed power; option (d) includes fixed costs.

Where it goes wrong. Students often include the fixed portion of semi-variable power or omit delivery charges.

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

What is the total of costs specifically controlled by the plant manager?

1. ₹1,20,000
2. ₹75,000
3. ₹2,85,000
4. ₹1,95,000 (correct answer)

Answer: D — ₹1,95,000

Explanation. The scenario states that Maintenance and Quality Control are controlled by the plant manager. Maintenance salaries = ₹1,20,000; Quality control = ₹75,000. Total controllable by plant manager = ₹1,20,000 + ₹75,000 = ₹1,95,000. Option (a) includes only maintenance; option (b) includes only quality control; option (c) wrongly adds sales promotion.

Where it goes wrong. Students often include costs controlled by other managers, such as sales promotion by marketing.

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 8,000 units, maintenance cost is ₹1,06,000; at 12,000 units, maintenance cost is ₹1,34,000. Using the high-low method, what is the fixed component?

At 8,000 units, maintenance cost is ₹1,06,000; at 12,000 units, maintenance cost is ₹1,34,000. Using the high-low method, what is the fixed component?

1. ₹50,000 (correct answer)
2. ₹56,000
3. ₹44,000
4. ₹28,000

Answer: A — ₹50,000

Explanation. Variable rate = change in cost ÷ change in units = (₹1,34,000 − ₹1,06,000) ÷ (12,000 − 8,000) = ₹28,000 ÷ 4,000 = ₹7 per unit. Fixed component = total cost at 8,000 units − variable cost = ₹1,06,000 − (8,000 × ₹7) = ₹1,06,000 − ₹56,000 = ₹50,000. Option (b) is the variable cost at 8,000 units; option (d) is the change in cost.

Where it goes wrong. Students often treat the variable cost at the lower activity level as the fixed cost.

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. Supervision cost is ₹60,000 for up to 5,000 units, ₹1,05,000 for 5,001 to 10,000 units, and ₹1,65,000 for 10,001 to 15,000 units. What is total supervision cost at 12,000 units?

Supervision cost is ₹60,000 for up to 5,000 units, ₹1,05,000 for 5,001 to 10,000 units, and ₹1,65,000 for 10,001 to 15,000 units. What is total supervision cost at 12,000 units?

1. ₹60,000
2. ₹1,05,000
3. ₹1,65,000 (correct answer)
4. ₹1,20,000

Answer: C — ₹1,65,000

Explanation. Supervision is a stepped fixed cost. At 12,000 units, activity falls in the 10,001–15,000 units step. The applicable supervision cost is therefore ₹1,65,000. It does not vary with units within that step. Option (b) applies to the 5,001–10,000 step; option (a) applies up to 5,000 units; option (d) assumes a proportional increase, which is incorrect for stepped fixed cost.

Where it goes wrong. Students often interpolate within a step or use the previous step instead of the applicable range.

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. Direct materials are ₹5,00,000; direct labour ₹2,00,000; direct expenses ₹50,000; indirect materials ₹40,000. What is the prime cost?

Direct materials are ₹5,00,000; direct labour ₹2,00,000; direct expenses ₹50,000; indirect materials ₹40,000. What is the prime cost?

1. ₹7,00,000
2. ₹7,50,000 (correct answer)
3. ₹7,90,000
4. ₹7,40,000

Answer: B — ₹7,50,000

Explanation. Prime cost includes direct materials, direct labour and direct expenses. Prime cost = ₹5,00,000 + ₹2,00,000 + ₹50,000 = ₹7,50,000. Indirect materials of ₹40,000 are factory overheads, not part of prime cost. Option (a) omits direct expenses; option (c) wrongly adds indirect materials; option (d) includes indirect materials but omits direct expenses.

Where it goes wrong. Students often include indirect materials in prime cost or forget direct expenses.

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 company incurred normal spoilage of ₹25,000 and abnormal spoilage of ₹40,000. Which treatment is correct?

A company incurred normal spoilage of ₹25,000 and abnormal spoilage of ₹40,000. Which treatment is correct?

1. Normal spoilage is charged to Costing P&L.
2. Abnormal spoilage is added to work-in-progress.
3. Both normal and abnormal spoilage are included in product cost.
4. Abnormal spoilage is excluded from product cost and charged to Costing P&L. (correct answer)

Answer: D — Abnormal spoilage is excluded from product cost and charged to Costing P&L.

Explanation. Normal spoilage is an inherent cost of production and is absorbed in product cost. Abnormal spoilage is not expected under normal operating conditions, so it is excluded from product cost and charged to the Costing Profit and Loss Account. Therefore abnormal spoilage of ₹40,000 is charged to Costing P&L. Option (a) reverses the treatment; option (c) wrongly capitalises abnormal spoilage.

Where it goes wrong. Students often include abnormal spoilage in product cost because it physically arises during production.

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. Carriage outward is ₹80,000; warehouse rent is ₹1,20,000; sales commission is ₹60,000; administrative salaries are ₹2,00,000. What is the total distribution cost?

Carriage outward is ₹80,000; warehouse rent is ₹1,20,000; sales commission is ₹60,000; administrative salaries are ₹2,00,000. What is the total distribution cost?

1. ₹2,00,000 (correct answer)
2. ₹2,60,000
3. ₹1,40,000
4. ₹4,60,000

Answer: A — ₹2,00,000

Explanation. Distribution costs are incurred to deliver finished goods to customers and include carriage outward ₹80,000 and warehouse rent ₹1,20,000. Total distribution cost = ₹80,000 + ₹1,20,000 = ₹2,00,000. Sales commission is a selling cost, and administrative salaries are administration costs. Option (b) wrongly adds sales commission; option (d) adds all costs.

Where it goes wrong. Students often combine selling and distribution costs or include administrative salaries.

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. Fixed cost is ₹2,50,000 and variable cost is ₹30 per unit. What is total cost at 8,000 units?

Fixed cost is ₹2,50,000 and variable cost is ₹30 per unit. What is total cost at 8,000 units?

1. ₹2,50,000
2. ₹2,40,000
3. ₹4,90,000 (correct answer)
4. ₹5,20,000

Answer: C — ₹4,90,000

Explanation. Total cost = fixed cost + variable cost per unit × units. Variable cost at 8,000 units = 8,000 × ₹30 = ₹2,40,000. Total cost = ₹2,50,000 + ₹2,40,000 = ₹4,90,000. Option (a) includes only fixed cost; option (b) includes only variable cost; option (d) uses an incorrect variable amount.

Where it goes wrong. Students often add fixed cost per unit instead of total fixed cost, or omit one cost component.

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 department manager controls indirect materials ₹45,000, maintenance within budget ₹80,000, and variable power ₹35,000. Corporate rent allocated ₹1,20,000 and depreciation ₹60,000 are not controllable by the manager. What is the total controllable cost?

A department manager controls indirect materials ₹45,000, maintenance within budget ₹80,000, and variable power ₹35,000. Corporate rent allocated ₹1,20,000 and depreciation ₹60,000 are not controllable by the manager. What is the total controllable cost?

1. ₹2,80,000
2. ₹1,60,000 (correct answer)
3. ₹2,20,000
4. ₹1,15,000

Answer: B — ₹1,60,000

Explanation. Controllable costs are those influenced by the manager during a period. Include indirect materials ₹45,000, maintenance ₹80,000 and variable power ₹35,000. Total = ₹45,000 + ₹80,000 + ₹35,000 = ₹1,60,000. Allocated corporate rent and depreciation are not controllable by the department manager. Option (a) adds all costs; option (c) includes corporate rent; option (d) omits maintenance.

Where it goes wrong. Students often include allocated corporate costs because they appear in the department's cost report.

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