This chapter-wise practice test covers Chapter 2: Material Cost - Test 3 for CA Intermediate Group 2 students preparing for the January 2027 examination attempt. It carries 50 marks across 25 questions in case scenarios and standalone practical MCQs with a time limit of 60 minutes and no negative marking.
25 questions across 1 chapter, 50 marks and 60 minutes in the timed paper. Every answer below is shown with the working behind it and the authority it rests on.
Law and standards used: ICAI Study Material for CA Intermediate Paper 4: Cost and Management Accounting (relevant for 2027 attempt).
Questions
25
Marks
50
Time limit
60 minutes
Attempt
January 2027
Group
Group 2
Law basis
ICAI Study Material for CA Intermediate Paper 4: Cost and Management Accounting (relevant for 2027 attempt)
Content as of
2026-11-10
Chapters covered
Chapter 2: Material Cost (25 Q)
Questions, answers and explanations
Question 1 · 2 marks · Chapter 2: Material Cost · medium
Scenario. Pragati Engineering Components Ltd. manufactures precision-machined components for automobile and industrial equipment manufacturers. Its annual production plan covers 2,40,000 components, requiring 48,000 machine hours and 30,000 direct labour hours. The company operates at 80% of its installed production capacity and maintains a centralised stores department for controlling high-value alloy steel used in machining operations.
During April, the purchase department received three lots of alloy steel at different prices. No opening stock existed on 1 April. The material was inspected and accepted, and all three lots were available for issue before the first production requisition was received on 12 April.
The relevant stores transactions are:
| Date | Particulars | Quantity | Rate per unit |
| 1 April | Opening stock | Nil | - |
| 3 April | Purchase, Lot A | 100 units | ₹20 |
| 6 April | Purchase, Lot B | 200 units | ₹22 |
| 9 April | Purchase, Lot C | 300 units | ₹24 |
| 12 April | Issue to production | 300 units | To be calculated |
The purchase department confirms that all purchase rates represent the complete material cost entered in the stores ledger. There are no freight adjustments, purchase returns or taxes requiring separate consideration. The production department requires the 300 units for a single manufacturing batch, and the storekeeper has been instructed to evaluate the material issue using different conventional pricing methods for management comparison.
The cost accountant has specifically requested separate calculations under FIFO, LIFO, Simple Average and Weighted Average methods. Under Simple Average, the rates of the available lots are considered without weighting their respective quantities. Under Weighted Average, the total cost of available inventory is divided by its total quantity. The calculations must relate to the first issue, before any previous issue has altered the available inventory layers.
What is the value of material issued to production on 12 April under the FIFO method?
₹5,400 (correct answer)
₹6,000
₹6,600
₹7,200
Answer: A — ₹5,400
Explanation. Under FIFO, the earliest purchased material is issued first. The first lot consists of 100 units at ₹20, costing ₹2,000. The remaining 200 units are taken from Lot B at ₹22, costing ₹4,400. Therefore, total issue value = ₹2,000 + ₹4,400 = ₹5,400. The later Lot C is not required for this issue. Using the latest purchase price for all 300 units would incorrectly apply LIFO rather than FIFO.
Where it goes wrong. Issuing the latest purchased material first instead of consuming the oldest available lot.
Question 2 · 2 marks · Chapter 2: Material Cost · hard
Calculate the value of the 300 units issued on 12 April under the LIFO method.
₹5,400
₹7,200 (correct answer)
₹6,600
₹6,800
Answer: B — ₹7,200
Explanation. Under LIFO, the latest purchase is issued first. Lot C contains 300 units purchased at ₹24 each. Consequently, the entire issue is valued at 300 × ₹24 = ₹7,200. Neither the opening quantity nor Lot B is required for this issue. The FIFO value of ₹5,400 results from consuming the oldest material, while the weighted average value uses the combined inventory cost.
Where it goes wrong. Using the earliest purchase price instead of the latest purchase price under LIFO.
Question 3 · 2 marks · Chapter 2: Material Cost · medium
Determine the issue value of the 300 units under the Simple Average Price Method.
₹6,400
₹6,500
₹6,600 (correct answer)
₹6,800
Answer: C — ₹6,600
Explanation. Simple Average Price = Total of available lot prices ÷ Number of lots. = (₹20 + ₹22 + ₹24) ÷ 3 = ₹22 per unit. Issue value = 300 × ₹22 = ₹6,600. The quantities of 100, 200 and 300 units are deliberately ignored under this method. Giving greater weight to Lot C because it contains more units would incorrectly apply the Weighted Average Price Method.
Where it goes wrong. Weighting the purchase prices according to quantities when calculating Simple Average Price.
Question 5 · 2 marks · Chapter 2: Material Cost · medium
Scenario. Apex Industrial Pumps Ltd. manufactures high-pressure pumps and precision hydraulic assemblies. The plant has an annual capacity of 1,50,000 pump assemblies and operates for 300 working days annually. Production requires a specialised bearing material, B-75, which is purchased from three approved suppliers. The purchase department has observed frequent price changes and wants to compare historical-cost and current-replacement-price valuation of material issues.
The stores ledger records the following transactions for the month of June:
| Date | Particulars | Quantity | Rate per unit |
| 1 June | Opening stock | 250 units | ₹16 |
| 5 June | Purchase from Supplier A | 150 units | ₹18 |
| 9 June | Purchase from Supplier B | 200 units | ₹20 |
| 14 June | Issue to production | 300 units | To be calculated |
On 14 June, the current replacement price of identical bearing material, including the applicable inward freight and handling charges, is ₹21.50 per unit. The company is evaluating the cost of the same 300-unit production issue using FIFO, LIFO and Replacement Price methods.
The stores manager subsequently adopts LIFO for an internal academic comparison and prepares a stock statement. According to the ledger, 300 units remain after the issue. During physical verification, only 294 units are found. The investigation establishes that the missing units resulted from deliberate unauthorised removal by a store employee rather than ordinary deterioration or unavoidable handling loss.
The company requires the shortage to be entered in the issue column at the applicable stores ledger rate. Since the shortage is attributable to pilferage, management considers it an abnormal loss. The resulting material loss must therefore be distinguished from the ordinary material cost charged to production. All transaction quantities are examined, and there are no returns, inter-departmental transfers or other adjustments during this period.
Calculate the value of the 300-unit issue dated 14 June under the FIFO method.
₹5,800
₹4,900 (correct answer)
₹5,100
₹6,000
Answer: B — ₹4,900
Explanation. FIFO requires the oldest material to be issued first. The opening stock of 250 units at ₹16 amounts to ₹4,000. The remaining 50 units are taken from the 5 June purchase at ₹18, amounting to ₹900. Total material issue = ₹4,000 + ₹900 = ₹4,900. The 9 June purchase is not required for this issue. Using the latest purchase lots would produce the LIFO value instead.
Where it goes wrong. Using the latest purchase prices instead of exhausting the opening inventory first.
Question 6 · 2 marks · Chapter 2: Material Cost · hard
What is the value of the 300 units issued on 14 June under the LIFO method?
₹4,900
₹5,400
₹6,000
₹5,800 (correct answer)
Answer: D — ₹5,800
Explanation. LIFO first consumes the latest lot of 200 units at ₹20, costing ₹4,000. The remaining 100 units are drawn from the 5 June purchase at ₹18, costing ₹1,800. Total issue value = ₹4,000 + ₹1,800 = ₹5,800. The opening stock at ₹16 remains untouched. Applying the opening price to the entire issue would incorrectly follow the FIFO sequence.
Where it goes wrong. Failing to exhaust the latest purchase lot before moving to the preceding purchase lot.
Question 7 · 2 marks · Chapter 2: Material Cost · medium
Determine the value of the same 300-unit issue under the Replacement Price Method.
₹6,450 (correct answer)
₹5,800
₹4,900
₹6,000
Answer: A — ₹6,450
Explanation. Replacement Price Method values material issues at the price at which identical material can currently be purchased. The current replacement price, including inward freight and handling, is ₹21.50 per unit. Therefore, issue value = 300 × ₹21.50 = ₹6,450. Historical purchase prices of ₹16, ₹18 and ₹20 are irrelevant to this method. Using the latest historical price of ₹20 would produce ₹6,000, not the current replacement value.
Where it goes wrong. Using the latest historical purchase price instead of the current replacement price at the time of issue.
Question 8 · 2 marks · Chapter 2: Material Cost · hard
The physical stock shortage is attributable to pilferage. Under the company's LIFO stores ledger, what is the amount of abnormal loss to be transferred to the Costing Profit and Loss Account?
₹96
₹120
₹108 (correct answer)
₹144
Answer: C — ₹108
Explanation. After the LIFO issue of 300 units, the remaining stock comprises 250 units at ₹16 and 50 units at ₹18. Physical shortage = 300 − 294 = 6 units. Under LIFO, the latest remaining layer at ₹18 is issued first. Shortage value = 6 × ₹18 = ₹108. Since pilferage is an abnormal and avoidable loss, the amount is transferred to the Costing Profit and Loss Account rather than absorbed by good production.
Where it goes wrong. Valuing the shortage at the original opening-stock price or treating pilferage as normal wastage.
Question 9 · 2 marks · Chapter 2: Material Cost · medium
Scenario. Vikram Steel Fabricators Ltd. manufactures heavy-duty fabricated structures and industrial equipment at a production facility with an annual capacity of 90,000 finished units. The factory records approximately 36,000 machine hours and 22,000 direct labour hours annually. A specialised alloy input is consumed in its fabrication and finishing operations. The material is purchased in bulk and issued to production through authorised material requisition notes.
During the month under review, the company purchased 1,200 kg of alloy at ₹60 per kg. The total purchase value of the material was ₹72,000. Based on the established manufacturing process, management has determined that a normal process wastage of 20% of the material input is unavoidable. Such wastage has no recoverable value and arises from the inherent nature of the fabrication process.
The actual production records show the following:
| Particulars | Quantity |
| Material input | 1,200 kg |
| Normal process wastage | 20% of input |
| Actual good output | 900 kg |
| Material purchase price | ₹60 per kg |
| Total material cost | ₹72,000 |
The production manager's investigation establishes that output below the normal expected good quantity resulted from additional avoidable material wastage caused by careless handling. This excess loss is abnormal and is not to be absorbed by the good production units. The cost accountant must distinguish the expected normal loss from the additional abnormal loss and determine the cost attributable to good production.
The company follows the principle that normal wastage is borne by good production, while the cost of abnormal wastage is transferred to the Costing Profit and Loss Account. For this purpose, the cost per acceptable unit is calculated after allowing for normal wastage. The excess loss is valued at that adjusted cost per good unit, ensuring that the abnormal loss is separately identified rather than being concealed within the production cost.
Calculate the material cost per kilogram of acceptable output after absorbing normal wastage.
₹60
₹72
₹75 (correct answer)
₹80
Answer: C — ₹75
Explanation. Normal wastage = 1,200 × 20% = 240 kg. Expected good output after normal wastage = 1,200 − 240 = 960 kg. Total material cost is ₹72,000. Therefore, cost per acceptable kilogram = ₹72,000 ÷ 960 = ₹75. The entire material cost is borne by normal good production. Dividing by the original 1,200 kg would incorrectly ignore the additional cost absorbed because of normal wastage.
Where it goes wrong. Dividing total material cost by input quantity instead of expected good output after normal wastage.
Question 10 · 2 marks · Chapter 2: Material Cost · hard
What is the quantity of normal process wastage allowed for the given material input?
240 kg (correct answer)
200 kg
180 kg
300 kg
Answer: A — 240 kg
Explanation. Normal wastage is calculated as a percentage of material input. Input quantity = 1,200 kg and normal wastage rate = 20%. Therefore, normal wastage = 1,200 × 20/100 = 240 kg. Expected good output = 1,200 − 240 = 960 kg. The actual production of 900 kg is lower than this expected output and therefore indicates an additional abnormal loss.
Where it goes wrong. Applying the normal wastage percentage to actual good production instead of total material input.
Question 11 · 2 marks · Chapter 2: Material Cost · medium
Calculate the material cost of abnormal wastage that should be transferred to the Costing Profit and Loss Account.
₹3,000
₹3,600
₹4,000
₹4,500 (correct answer)
Answer: D — ₹4,500
Explanation. Expected good output after normal wastage = 1,200 − 240 = 960 kg. Actual good output = 900 kg. Abnormal wastage = 960 − 900 = 60 kg. Adjusted cost per good kg = ₹72,000 ÷ 960 = ₹75. Abnormal loss = 60 × ₹75 = ₹4,500. Since the excess loss arose from careless handling, it is abnormal and must be transferred to the Costing Profit and Loss Account.
Where it goes wrong. Valuing abnormal wastage at the original purchase price instead of the adjusted material cost per acceptable unit.
Question 12 · 2 marks · Chapter 2: Material Cost · hard
Determine the total material cost attributable to the actual 900 kg of good production after separately recognising abnormal wastage.
₹72,000
₹67,500 (correct answer)
₹63,000
₹65,000
Answer: B — ₹67,500
Explanation. Cost per acceptable unit after normal wastage = ₹72,000 ÷ 960 = ₹75 per kg. Actual good output = 900 kg. Material cost attributable to good production = 900 × ₹75 = ₹67,500. The remaining ₹4,500 represents abnormal wastage and is transferred separately to the Costing Profit and Loss Account. The combined amounts reconcile to the original material cost of ₹72,000.
Where it goes wrong. Charging abnormal loss to good production and thereby overstating the material cost of acceptable output.
Question 13 · 2 marks · Chapter 2: Material Cost · medium
Scenario. A stores ledger contains the following remaining material lots immediately before an issue:
| Lot | Quantity | Rate per unit |
| A | Nil (previously exhausted) | ₹10 |
| B | 200 units | ₹12 |
| C | 300 units | ₹14 |
Under the Simple Average Price Method, calculate the value of an issue of 100 units.
A stores ledger contains the following remaining material lots immediately before an issue:
| Lot | Quantity | Rate per unit |
| A | Nil (previously exhausted) | ₹10 |
| B | 200 units | ₹12 |
| C | 300 units | ₹14 |
Under the Simple Average Price Method, calculate the value of an issue of 100 units.
₹1,200
₹1,300 (correct answer)
₹1,400
₹1,250
Answer: B — ₹1,300
Explanation. Under the Simple Average Method, the rate of a completely exhausted lot is excluded from the calculation. Therefore, the rates considered are ₹12 and ₹14 only. Simple average price = (₹12 + ₹14) ÷ 2 = ₹13 per unit. Value of issue = 100 × ₹13 = ₹1,300. Including the exhausted Lot A would incorrectly reduce the average because its material is no longer available in stock.
Where it goes wrong. Including the purchase price of a lot that has already been completely exhausted.
Question 14 · 2 marks · Chapter 2: Material Cost · hard
Scenario. A company has opening stock of 200 units at ₹15 each. It subsequently purchases 300 units at ₹20 each. Under the Weighted Average Price Method, what amount should be charged to production when 250 units are issued?
A company has opening stock of 200 units at ₹15 each. It subsequently purchases 300 units at ₹20 each. Under the Weighted Average Price Method, what amount should be charged to production when 250 units are issued?
₹4,000
₹5,000
₹4,500 (correct answer)
₹4,750
Answer: C — ₹4,500
Explanation. Opening stock value = 200 × ₹15 = ₹3,000. Purchase value = 300 × ₹20 = ₹6,000. Total quantity = 500 units and total value = ₹9,000. Weighted average rate = ₹9,000 ÷ 500 = ₹18 per unit. Issue value = 250 × ₹18 = ₹4,500. The weighted average accounts for both the quantities and respective prices, unlike the simple average method.
Where it goes wrong. Calculating an unweighted average of ₹15 and ₹20 instead of considering the quantities held.
Question 15 · 2 marks · Chapter 2: Material Cost · medium
Scenario. A manufacturing unit records the following inventory transactions:
| Particulars | Quantity | Rate per unit |
| Opening stock | 100 units | ₹30 |
| First purchase | 250 units | ₹32 |
| Second purchase | 150 units | ₹35 |
If 300 units are issued under the LIFO method, determine the value of the material issued.
A manufacturing unit records the following inventory transactions:
| Particulars | Quantity | Rate per unit |
| Opening stock | 100 units | ₹30 |
| First purchase | 250 units | ₹32 |
| Second purchase | 150 units | ₹35 |
If 300 units are issued under the LIFO method, determine the value of the material issued.
₹9,600
₹9,800
₹10,200
₹10,050 (correct answer)
Answer: D — ₹10,050
Explanation. LIFO consumes the latest purchase first. The second purchase contributes 150 units at ₹35 = ₹5,250. The remaining 150 units are taken from the first purchase at ₹32 = ₹4,800. Total issue value = ₹5,250 + ₹4,800 = ₹10,050. The opening stock of 100 units at ₹30 remains untouched. Using opening stock prematurely would incorrectly reverse the LIFO sequence.
Where it goes wrong. Ignoring the requirement to exhaust the latest purchase before issuing from earlier inventory layers.
Question 16 · 2 marks · Chapter 2: Material Cost · hard
Scenario. A company issues 240 units of a material to production. The current purchase price of an identical replacement material is ₹42 per unit, and inward freight required to bring the replacement material to the factory is ₹3 per unit. What is the value of the issue under the Replacement Price Method?
A company issues 240 units of a material to production. The current purchase price of an identical replacement material is ₹42 per unit, and inward freight required to bring the replacement material to the factory is ₹3 per unit. What is the value of the issue under the Replacement Price Method?
₹10,800 (correct answer)
₹10,080
₹10,500
₹11,040
Answer: A — ₹10,800
Explanation. Replacement price represents the current cost of acquiring identical material. Current purchase price = ₹42 per unit. Inward freight = ₹3 per unit. Replacement price = ₹42 + ₹3 = ₹45 per unit. Material issue value = 240 × ₹45 = ₹10,800. Historical purchase prices are not relevant to this calculation. Omitting freight would understate replacement cost because the material must be brought to the factory.
Where it goes wrong. Ignoring inward freight or using historical inventory cost instead of the current replacement cost.
Question 17 · 2 marks · Chapter 2: Material Cost · medium
Scenario. A production department originally received 40 units of material from stores at ₹28 per unit. After completing the job, it returns 15 unused units to stores. At what value should the material returned be recorded in the stores ledger?
A production department originally received 40 units of material from stores at ₹28 per unit. After completing the job, it returns 15 unused units to stores. At what value should the material returned be recorded in the stores ledger?
₹360
₹450
₹420 (correct answer)
₹480
Answer: C — ₹420
Explanation. Material returned to stores is recorded at the original issue price. Original issue price = ₹28 per unit. Returned quantity = 15 units. Value of return = 15 × ₹28 = ₹420. This restores the material at its original stores issue valuation. Using a new market price or a subsequent purchase rate would alter the original valuation and could distort the cost of the job.
Where it goes wrong. Pricing returned material at the current market price instead of the original stores issue price.
Question 18 · 2 marks · Chapter 2: Material Cost · hard
Scenario. A company returns 120 units of material to its supplier. The invoice price is ₹48 per unit, whereas the applicable stores ledger price, including attributable inward costs, is ₹52 per unit. Under the practical procedure described in the study material, what amount should be debited to the Inventory Adjustment Account?
A company returns 120 units of material to its supplier. The invoice price is ₹48 per unit, whereas the applicable stores ledger price, including attributable inward costs, is ₹52 per unit. Under the practical procedure described in the study material, what amount should be debited to the Inventory Adjustment Account?
₹360
₹420
₹600
₹480 (correct answer)
Answer: D — ₹480
Explanation. Difference between stores ledger rate and invoice price = ₹52 − ₹48 = ₹4 per unit. For 120 units, difference = 120 × ₹4 = ₹480. The material returned to the vendor should, strictly speaking, be valued at the stores ledger price. In practice, if the supplier return is recorded at invoice price, the difference is debited to the Inventory Adjustment Account. Using only the invoice value omits this adjustment.
Where it goes wrong. Treating the invoice price as identical to the stores ledger price and ignoring the inventory adjustment.
Question 19 · 2 marks · Chapter 2: Material Cost · medium
Scenario. A factory purchases 1,200 kg of raw material at ₹60 per kg. The normal wastage during production is 20% of input quantity and has no recoverable value. Calculate the material cost of normal wastage that must ultimately be absorbed by good production.
A factory purchases 1,200 kg of raw material at ₹60 per kg. The normal wastage during production is 20% of input quantity and has no recoverable value. Calculate the material cost of normal wastage that must ultimately be absorbed by good production.
₹12,000
₹14,400 (correct answer)
₹15,000
₹18,000
Answer: B — ₹14,400
Explanation. Normal wastage quantity = 1,200 × 20% = 240 kg. Material cost per input kg = ₹60. Cost attributable to normal wastage = 240 × ₹60 = ₹14,400. Since normal wastage is inherent in the production process, its cost is absorbed by good production rather than transferred to the Costing Profit and Loss Account. The cost per acceptable kg consequently increases to ₹75 because the total material expenditure is distributed over 960 good kg.
Where it goes wrong. Treating normal wastage as an abnormal loss and excluding its cost from good production.
Question 20 · 2 marks · Chapter 2: Material Cost · hard
Scenario. A company processes 600 units of material-bearing components at a total material cost of ₹36,000. Of these, 50 units are identified as abnormal defectives. The defective units can be sold for ₹8 per unit. Determine the net abnormal loss transferred to the Costing Profit and Loss Account.
A company processes 600 units of material-bearing components at a total material cost of ₹36,000. Of these, 50 units are identified as abnormal defectives. The defective units can be sold for ₹8 per unit. Determine the net abnormal loss transferred to the Costing Profit and Loss Account.
₹2,600 (correct answer)
₹3,000
₹2,200
₹2,400
Answer: A — ₹2,600
Explanation. Material cost per unit = ₹36,000 ÷ 600 = ₹60. Gross material cost of abnormal defective units = 50 × ₹60 = ₹3,000. Realisable value = 50 × ₹8 = ₹400. Net abnormal loss = ₹3,000 − ₹400 = ₹2,600. The abnormal defective material cost is excluded from good production, and the recoverable amount is deducted before transferring the net loss to the Costing Profit and Loss Account.
Where it goes wrong. Transferring the gross abnormal defective cost without deducting the realisable value.
Question 21 · 2 marks · Chapter 2: Material Cost · medium
Scenario. A factory processes 800 kg of material purchased for ₹32,000. Normal wastage is 20% of the input. Actual good output is 600 kg because of additional avoidable abnormal wastage. Calculate the cost of abnormal wastage to be transferred to the Costing Profit and Loss Account.
A factory processes 800 kg of material purchased for ₹32,000. Normal wastage is 20% of the input. Actual good output is 600 kg because of additional avoidable abnormal wastage. Calculate the cost of abnormal wastage to be transferred to the Costing Profit and Loss Account.
₹1,600
₹2,400
₹3,200
₹2,000 (correct answer)
Answer: D — ₹2,000
Explanation. Normal wastage = 800 × 20% = 160 kg. Expected good output = 800 − 160 = 640 kg. Actual good output = 600 kg. Abnormal wastage = 640 − 600 = 40 kg. Cost per good kg after normal wastage = ₹32,000 ÷ 640 = ₹50. Abnormal wastage cost = 40 × ₹50 = ₹2,000. This abnormal loss is transferred to the Costing Profit and Loss Account rather than being absorbed by good output.
Where it goes wrong. Applying the abnormal wastage quantity to the original purchase price instead of the adjusted cost per acceptable unit.
Question 22 · 2 marks · Chapter 2: Material Cost · hard
Scenario. A company maintains its stores ledger under the Weighted Average Price Method. The opening stock consists of 100 units at ₹30 each, followed by a purchase of 300 units at ₹35 each. Subsequently, 200 units are issued to production. During physical verification, only 192 units are found in stock. Calculate the value of the shortage.
A company maintains its stores ledger under the Weighted Average Price Method. The opening stock consists of 100 units at ₹30 each, followed by a purchase of 300 units at ₹35 each. Subsequently, 200 units are issued to production. During physical verification, only 192 units are found in stock. Calculate the value of the shortage.
₹240
₹280
₹270 (correct answer)
₹300
Answer: C — ₹270
Explanation. Opening stock value = ₹3,000. Purchase value = ₹10,500. Total value = ₹13,500 for 400 units. Weighted average price = ₹13,500 ÷ 400 = ₹33.75. After issuing 200 units, book stock = 200 units. Physical stock = 192 units. Shortage = 8 units. Shortage value = 8 × ₹33.75 = ₹270. The discrepancy is valued using the weighted average rate prescribed by the adopted stores ledger method.
Where it goes wrong. Valuing physical shortage at the latest purchase price rather than the applicable weighted average stores ledger rate.
Question 23 · 2 marks · Chapter 2: Material Cost · medium
Scenario. A material has opening stock of 100 units at ₹20 per unit and a subsequent purchase of 100 units at ₹24 per unit. The company issues 100 units during a period of rising prices. By how much does the issue value under LIFO exceed the issue value under FIFO?
A material has opening stock of 100 units at ₹20 per unit and a subsequent purchase of 100 units at ₹24 per unit. The company issues 100 units during a period of rising prices. By how much does the issue value under LIFO exceed the issue value under FIFO?
₹200
₹400 (correct answer)
₹600
₹800
Answer: B — ₹400
Explanation. Under FIFO, the issue uses 100 units at ₹20, giving ₹2,000. Under LIFO, the issue uses 100 units at ₹24, giving ₹2,400. Difference = ₹2,400 − ₹2,000 = ₹400. In a rising-price situation, LIFO charges the latest and higher cost to production, while FIFO charges the older and lower cost. The difference is therefore ₹400, not the difference between purchase prices multiplied by total stock quantity.
Where it goes wrong. Using the wrong chronological purchase layer or calculating the price difference on the entire quantity available.
Question 24 · 2 marks · Chapter 2: Material Cost · hard
Scenario. A company prepares inventory valuation statements in accordance with AS-2 or Ind AS-2. Its cost accountant proposes adopting the LIFO method because the company is experiencing rising material prices. Which treatment is consistent with the ICAI study material?
A company prepares inventory valuation statements in accordance with AS-2 or Ind AS-2. Its cost accountant proposes adopting the LIFO method because the company is experiencing rising material prices. Which treatment is consistent with the ICAI study material?
LIFO is not permitted under AS-2 and Ind AS-2, although it is included in the study material for academic knowledge. (correct answer)
LIFO is permitted whenever prices are rising, provided the company consistently applies the method.
LIFO is compulsory when the company wishes to match current material prices with production costs.
LIFO is permitted only for closing stock, but not for material issues.
Answer: A — LIFO is not permitted under AS-2 and Ind AS-2, although it is included in the study material for academic knowledge.
Explanation. The ICAI chapter specifically states that LIFO is included for academic knowledge but is not permitted under AS-2 and Ind AS-2. The possibility of charging more current purchase prices to production during inflation does not override the inventory valuation requirements. Accordingly, the proposed LIFO method cannot be adopted for financial inventory valuation under these standards, even though its calculations may be examined academically.
Where it goes wrong. Assuming that the management advantage of LIFO during inflation makes it an acceptable inventory valuation method under AS-2 or Ind AS-2.
Question 25 · 2 marks · Chapter 2: Material Cost · medium
Scenario. A company's stores ledger maintained under FIFO shows the following stock immediately before monthly physical verification:
| Inventory layer | Quantity | Rate per unit |
| Lot A | 30 units | ₹25 |
| Lot B | 50 units | ₹28 |
Physical verification reveals a shortage of 8 units. The investigation confirms that the shortage resulted from deliberate pilferage. What is the correct accounting treatment and amount of the shortage?
A company's stores ledger maintained under FIFO shows the following stock immediately before monthly physical verification:
| Inventory layer | Quantity | Rate per unit |
| Lot A | 30 units | ₹25 |
| Lot B | 50 units | ₹28 |
Physical verification reveals a shortage of 8 units. The investigation confirms that the shortage resulted from deliberate pilferage. What is the correct accounting treatment and amount of the shortage?
₹200 charged to production overhead
₹224 absorbed by good production
₹200 treated as normal wastage
₹200 entered in the issue column and transferred to the Costing Profit and Loss Account (correct answer)
Answer: D — ₹200 entered in the issue column and transferred to the Costing Profit and Loss Account
Explanation. Under FIFO, the shortage is treated as an issue from the earliest available layer. The first 8 units are therefore valued at ₹25 each. Shortage value = 8 × ₹25 = ₹200. Physical shortages are entered in the issue column and priced according to the adopted stores ledger method. Since the shortage arose from deliberate pilferage, it is abnormal and its cost is transferred to the Costing Profit and Loss Account rather than absorbed by good production.
Where it goes wrong. Treating an avoidable shortage caused by pilferage as normal wastage or valuing it using the latest purchase layer.
ICAI SM: Cost and Management Accounting, Chapter 2 (Material Cost)
Questions people ask
What does this Chapter 2: Material Cost - Test 3 practice test cover?
This practice test carries 50 marks across 25 questions covering core costing principles, cost accounting standards, formulas, mathematical models, and practical ICAI case scenarios.
How many questions are there and what is the time limit?
There are 25 questions carrying 2 marks each, giving a maximum score of 50 marks in 60 minutes with no negative marking.
Which study material and syllabus apply to these questions?
Questions strictly reflect the official ICAI Study Material for CA Intermediate Paper 4 Cost and Management Accounting for the 2027 examination sessions.
Can I sit this test in both exam and practice modes?
Yes. Practice mode gives immediate answers with mathematical step-by-step workings and trap explanations after each question. Exam mode simulates actual exam conditions with a live timer and issues a downloadable performance certificate.
