Test 1: Employee Cost and Direct Expenses: answer key

Question 1 · 2 marks · Chapter 3: Employee Cost and Direct Expenses · medium

Scenario. Vikram Precision Components Ltd manufactures automotive bushes at Pune. The HR wing supplied workforce and labour-turnover data for the year ended 31 March 2026. Employees on roll were 1,800 on 1 April 2025 and 2,200 on 31 March 2026. During the year 240 employees left and 180 were replaced. In addition, 100 fresh employees joined because of a new export line; these were not replacements. Replacement costs were: settlement due to leaving ₹3,60,000; recruitment ₹2,70,000; selection ₹1,35,000; training of new recruits ₹4,05,000. Preventive costs incurred were welfare ₹1,80,000; medical ₹90,000; pension contribution ₹1,20,000. A work-study team estimated that turnover led to 20,000 lost productive direct labour hours. The contribution per direct labour hour is ₹45. The company uses average number of employees on roll for turnover ratios and treats new joinings due to expansion separately from replacements. It wants to evaluate turnover under separation, replacement and flux methods and to quantify profit foregone. The production head has asked whether preventive spending should be added to profit foregone for this purpose; the CFO states that preventive cost is not a turnover replacement cost and is not included in profit foregone, though it is tracked separately. Data summary: opening roll 1,800; closing roll 2,200; separations 240; replacements 180; expansion joinings 100; replacement costs total ₹11,70,000; lost contribution from lost hours is to be computed using ₹45 per hour. All turnover ratios are to be expressed as a percentage of average employees on roll.

What is the average number of employees on roll for Vikram Precision Components Ltd for the year ended 31 March 2026?

1. 2,000 employees (correct answer)
2. 1,800 employees
3. 2,200 employees
4. 2,100 employees

Answer: A — 2,000 employees

Explanation. Average employees on roll = (opening roll + closing roll) ÷ 2 = (1,800 + 2,200) ÷ 2 = 2,000 employees. Option b uses only opening roll; option c uses only closing roll; option d incorrectly averages 1,800 and 2,400 or uses a wrong closing figure. The average roll is the denominator for all three turnover methods.

Where it goes wrong. Using closing roll or opening roll alone instead of the average of opening and closing roll.

Authority. ICAI SM: Cost and Management Accounting, Chapter 3 (Employee Cost and Direct Expenses)

Question 2 · 2 marks · Chapter 3: Employee Cost and Direct Expenses · hard

What is the labour-turnover rate under the flux method, including new joinings due to expansion, for Vikram Precision Components Ltd?

1. 21.0%
2. 26.0% (correct answer)
3. 12.0%
4. 9.0%

Answer: B — 26.0%

Explanation. Flux method including new joinings = (separations + replacements + new expansion joinings) ÷ average employees × 100 = (240 + 180 + 100) ÷ 2,000 × 100 = 520 ÷ 2,000 × 100 = 26%. Option a is the standard flux rate (240 + 180) ÷ 2,000 = 21%, omitting expansion joinings. Option c is the separation rate 240 ÷ 2,000 = 12%; option d is the replacement rate 180 ÷ 2,000 = 9%.

Where it goes wrong. Omitting the 100 expansion joinings and reporting standard flux of 21% instead of flux including new recruitment.

Authority. ICAI SM: Cost and Management Accounting, Chapter 3 (Employee Cost and Direct Expenses)

Question 3 · 2 marks · Chapter 3: Employee Cost and Direct Expenses · medium

What is the replacement cost per employee replaced for Vikram Precision Components Ltd?

1. ₹5,850
2. ₹6,500 (correct answer)
3. ₹7,200
4. ₹8,667

Answer: B — ₹6,500

Explanation. Settlement cost per separated employee = Total settlement cost ₹11,70,000 ÷ 180 separations = ₹6,500.

Where it goes wrong. Adding preventive costs to replacement costs, or dividing by separations instead of replacements.

Authority. ICAI SM: Cost and Management Accounting, Chapter 3 (Employee Cost and Direct Expenses)

Question 4 · 2 marks · Chapter 3: Employee Cost and Direct Expenses · hard

What is the profit foregone on account of labour turnover for Vikram Precision Components Ltd, taking replacement cost plus lost contribution?

1. ₹9,00,000
2. ₹11,70,000
3. ₹15,50,000
4. ₹20,70,000 (correct answer)

Answer: D — ₹20,70,000

Explanation. Total labor turnover financial loss = Lost contribution (₹9,00,000) + Settlement & recruitment cost (₹11,70,000) = ₹20,70,000.

Where it goes wrong. Adding preventive cost of ₹3,90,000 and arriving at ₹24,60,000, or taking only replacement cost.

Authority. ICAI SM: Cost and Management Accounting, Chapter 3 (Employee Cost and Direct Expenses)

Question 5 · 2 marks · Chapter 3: Employee Cost and Direct Expenses · medium

Scenario. Apex Polychem Ltd operates a continuous-process polymer plant at Vadodara. The cost accountant is preparing a quarterly labour-turnover note for the quarter ended 30 June 2026. The HR department reports that the employee-turnover rate under the replacement method is 6%, under the separation method is 4%, and under the flux method is 10%. The number of workers replaced during the quarter was 36. The company maintains a policy of computing turnover on the average number of employees on roll during the quarter and of expressing quarterly rates on an annual-equivalent basis by multiplying by four quarters. Cost records show settlement cost due to leaving of ₹4,500 per separation; recruitment, selection and training cost of ₹7,500 per replacement. Preventive costs for the quarter were ₹2,10,000, incurred on medical aid, welfare and pension administration. The plant manager has asked for the average roll, number of separations, annual-equivalent separation rate, and total replacement cost for the quarter. The CFO clarifies that preventive costs are tracked separately and are not part of replacement cost. The company wants to compare its quarterly turnover with industry norms and to identify whether high turnover is caused by avoidable factors such as strained supervision or by unavoidable factors such as seasonal demand. All computations are to follow the standard ICAI treatment: replacement cost includes settlement due to leaving plus recruitment, selection and training of replacements; preventive cost is not added to replacement cost.

What is the average number of employees on roll for Apex Polychem Ltd for the quarter ended 30 June 2026?

1. 600 employees (correct answer)
2. 540 employees
3. 660 employees
4. 900 employees

Answer: A — 600 employees

Explanation. Under the replacement method, turnover rate = replacements ÷ average employees × 100. Given replacements = 36 and rate = 6%, average employees = 36 ÷ 6% = 36 ÷ 0.06 = 600 employees. Option b uses separation rate 4% incorrectly; option c adds replacements to average; option d uses 6% as a fraction of 54 wrongly.

Where it goes wrong. Dividing replacements by the separation rate or by flux rate instead of the replacement rate.

Authority. ICAI SM: Cost and Management Accounting, Chapter 3 (Employee Cost and Direct Expenses)

Question 6 · 2 marks · Chapter 3: Employee Cost and Direct Expenses · hard

What is the number of employees who left and were discharged during the quarter for Apex Polychem Ltd?

1. 36 employees
2. 24 employees (correct answer)
3. 60 employees
4. 18 employees

Answer: B — 24 employees

Explanation. Separation rate = separations ÷ average employees × 100. Given average employees = 600 and separation rate = 4%, separations = 600 × 4% = 24 employees. Option a is the number of replacements; option c is flux numerator (24 + 36); option d uses 3% or wrong average.

Where it goes wrong. Using the number of replacements (36) as separations, or using the flux rate.

Authority. ICAI SM: Cost and Management Accounting, Chapter 3 (Employee Cost and Direct Expenses)

Question 7 · 2 marks · Chapter 3: Employee Cost and Direct Expenses · medium

What is the annual-equivalent separation rate for Apex Polychem Ltd?

1. 12%
2. 40%
3. 16% (correct answer)
4. 10%

Answer: C — 16%

Explanation. Quarterly separation rate = 4%. Annual-equivalent rate = quarterly rate × 4 quarters = 4% × 4 = 16%. Option a is 3% × 4; option b is the annual flux rate 10% × 4 = 40%; option d is the quarterly flux rate, not annual equivalent.

Where it goes wrong. Multiplying the flux rate (10%) or replacement rate (6%) by four instead of the separation rate.

Authority. ICAI SM: Cost and Management Accounting, Chapter 3 (Employee Cost and Direct Expenses)

Question 8 · 2 marks · Chapter 3: Employee Cost and Direct Expenses · hard

What is the total replacement cost for the quarter for Apex Polychem Ltd?

1. ₹3,42,000
2. ₹5,88,000
3. ₹3,24,000
4. ₹3,78,000 (correct answer)

Answer: D — ₹3,78,000

Explanation. Settlement cost = 24 separations × ₹4,500 = ₹1,08,000. Recruitment/selection/training cost = 36 replacements × ₹7,500 = ₹2,70,000. Total replacement cost = ₹1,08,000 + ₹2,70,000 = ₹3,78,000. Option b wrongly adds preventive cost ₹2,10,000. Option a uses 36 × ₹4,500 + 24 × ₹7,500 incorrectly; option c uses a wrong mix.

Where it goes wrong. Adding preventive cost to replacement cost, or multiplying separations by replacement cost and replacements by settlement cost.

Authority. ICAI SM: Cost and Management Accounting, Chapter 3 (Employee Cost and Direct Expenses)

Question 9 · 2 marks · Chapter 3: Employee Cost and Direct Expenses · medium

Scenario. Zenith Consumer Care Ltd had 900 employees on 1 April and 1,100 on 31 March. During the year, 120 employees separated, 80 were replaced, and 50 new employees were recruited for expansion. What is the flux rate including new recruitment?

Zenith Consumer Care Ltd had 900 employees on 1 April and 1,100 on 31 March. During the year, 120 employees separated, 80 were replaced, and 50 new employees were recruited for expansion. What is the flux rate including new recruitment?

1. 25% (correct answer)
2. 20%
3. 12%
4. 8%

Answer: A — 25%

Explanation. Average employees = (900 + 1,100) ÷ 2 = 1,000. Flux including new recruitment = (separations + replacements + new expansion joinings) ÷ average × 100 = (120 + 80 + 50) ÷ 1,000 × 100 = 250 ÷ 1,000 × 100 = 25%. Option b omits the 50 expansion joinings: (120 + 80) ÷ 1,000 = 20%. Option c is separation rate; option d is replacement rate.

Where it goes wrong. Excluding new expansion joinings from the flux numerator and reporting 20%.

Authority. ICAI SM: Cost and Management Accounting, Chapter 3 (Employee Cost and Direct Expenses)

Question 10 · 2 marks · Chapter 3: Employee Cost and Direct Expenses · hard

Scenario. Orion Metals Ltd has an average employee roll of 800. During the year, 64 employees left the organisation. What is the separation-method labour-turnover rate?

Orion Metals Ltd has an average employee roll of 800. During the year, 64 employees left the organisation. What is the separation-method labour-turnover rate?

1. 6%
2. 8% (correct answer)
3. 10%
4. 12%

Answer: B — 8%

Explanation. Separation method rate = employees separated ÷ average employees on roll × 100 = 64 ÷ 800 × 100 = 8%. Option a uses 48 separations; option c uses 80 separations; option d uses a wrong average of about 533. The denominator must be average roll, not closing or opening roll.

Where it goes wrong. Using closing employees or number of replacements as the denominator/numerator.

Authority. ICAI SM: Cost and Management Accounting, Chapter 3 (Employee Cost and Direct Expenses)

Question 11 · 2 marks · Chapter 3: Employee Cost and Direct Expenses · medium

Scenario. Apex Engineering Works has an average employee roll of 1,250. It replaced 75 employees during the year. What is the replacement-method labour-turnover rate?

Apex Engineering Works has an average employee roll of 1,250. It replaced 75 employees during the year. What is the replacement-method labour-turnover rate?

1. 4%
2. 5%
3. 6% (correct answer)
4. 7%

Answer: C — 6%

Explanation. Replacement method rate = employees replaced ÷ average employees on roll × 100 = 75 ÷ 1,250 × 100 = 6%. Option b uses 62.5 replacements; option a uses 50 replacements; option d uses a wrong average of about 1,071. New expansion joinings are excluded from replacements.

Where it goes wrong. Including expansion joinings in the numerator or using separations instead of replacements.

Authority. ICAI SM: Cost and Management Accounting, Chapter 3 (Employee Cost and Direct Expenses)

Question 12 · 2 marks · Chapter 3: Employee Cost and Direct Expenses · hard

Scenario. Nova Plastics Ltd computed a quarterly labour-turnover rate of 6% under the separation method. What is the annual-equivalent separation rate?

Nova Plastics Ltd computed a quarterly labour-turnover rate of 6% under the separation method. What is the annual-equivalent separation rate?

1. 18%
2. 20%
3. 22%
4. 24% (correct answer)

Answer: D — 24%

Explanation. Annual-equivalent rate = quarterly rate × number of quarters in a year = 6% × 4 = 24%. Option a uses 4.5% × 4; option b uses 5% × 4; option c uses 5.5% × 4. The conversion is valid only when the quarterly rate is representative and the period is exactly one quarter.

Where it goes wrong. Multiplying by 12 months or by 3 instead of by 4 quarters.

Authority. ICAI SM: Cost and Management Accounting, Chapter 3 (Employee Cost and Direct Expenses)

Question 13 · 2 marks · Chapter 3: Employee Cost and Direct Expenses · medium

Scenario. Sunrise Ceramics Ltd had 720 employees at the beginning and 880 at the end of the year. During the year, 96 employees separated. What is the separation-method turnover rate?

Sunrise Ceramics Ltd had 720 employees at the beginning and 880 at the end of the year. During the year, 96 employees separated. What is the separation-method turnover rate?

1. 12% (correct answer)
2. 10%
3. 11%
4. 13%

Answer: A — 12%

Explanation. Average employees = (720 + 880) ÷ 2 = 800. Separation rate = 96 ÷ 800 × 100 = 12%. Option b uses 80 separations; option c uses a wrong average of about 873; option d uses 104 separations. Opening and closing rolls must be averaged first.

Where it goes wrong. Dividing separations by closing roll 880 and getting about 10.91%, then rounding wrongly.

Authority. ICAI SM: Cost and Management Accounting, Chapter 3 (Employee Cost and Direct Expenses)

Question 14 · 2 marks · Chapter 3: Employee Cost and Direct Expenses · hard

Scenario. Everest Foods Ltd incurred preventive labour-turnover costs of ₹3,60,000. Its average employee roll during the year was 1,200. What is the preventive cost per average employee?

Everest Foods Ltd incurred preventive labour-turnover costs of ₹3,60,000. Its average employee roll during the year was 1,200. What is the preventive cost per average employee?

1. ₹250
2. ₹300 (correct answer)
3. ₹350
4. ₹400

Answer: B — ₹300

Explanation. Preventive cost per average employee = total preventive cost ÷ average employees = ₹3,60,000 ÷ 1,200 = ₹300. Option a uses 1,440 employees; option c uses about 1,029 employees; option d uses 900 employees. Preventive costs include medical, welfare and pension-type benefits intended to retain employees.

Where it goes wrong. Dividing by closing roll or by separations instead of average employees on roll.

Authority. ICAI SM: Cost and Management Accounting, Chapter 3 (Employee Cost and Direct Expenses)

Question 15 · 2 marks · Chapter 3: Employee Cost and Direct Expenses · medium

Scenario. Which of the following is an avoidable cause of labour turnover?

Which of the following is an avoidable cause of labour turnover?

1. Seasonal nature of the business
2. Disciplinary measures taken by management
3. Strained relationship with supervisors (correct answer)
4. Change in plant location

Answer: C — Strained relationship with supervisors

Explanation. Avoidable causes are those that management can reduce through timely action, such as dissatisfaction with supervision, poor working conditions, low wages and strained relations. Seasonal demand, disciplinary action and plant relocation are usually unavoidable causes. Therefore, strained relationship with supervisors is an avoidable cause and is the correct classification.

Where it goes wrong. Treating disciplinary measures or seasonal demand as avoidable because they can be anticipated.

Authority. ICAI SM: Cost and Management Accounting, Chapter 3 (Employee Cost and Direct Expenses)

Question 16 · 2 marks · Chapter 3: Employee Cost and Direct Expenses · hard

Scenario. Which of the following is a preventive cost of labour turnover?

Which of the following is a preventive cost of labour turnover?

1. Recruitment cost of new workers
2. Training cost of new recruits
3. Settlement cost due to leaving
4. Medical benefits provided to employees (correct answer)

Answer: D — Medical benefits provided to employees

Explanation. Preventive costs are incurred to retain employees and prevent turnover, e.g., medical benefits, welfare, pension and other retention benefits. Recruitment, training of new recruits and settlement due to leaving are replacement costs because they arise after employees leave. Medical benefits therefore belong to preventive cost.

Where it goes wrong. Classifying training of new recruits as preventive because it is employee-related; it is replacement cost.

Authority. ICAI SM: Cost and Management Accounting, Chapter 3 (Employee Cost and Direct Expenses)

Question 17 · 2 marks · Chapter 3: Employee Cost and Direct Expenses · medium

Scenario. Mahalaxmi Textiles Ltd incurred recruitment cost ₹1,20,000, selection cost ₹80,000, training cost of new recruits ₹1,50,000, and settlement cost due to leaving ₹90,000. What is its total replacement cost?

Mahalaxmi Textiles Ltd incurred recruitment cost ₹1,20,000, selection cost ₹80,000, training cost of new recruits ₹1,50,000, and settlement cost due to leaving ₹90,000. What is its total replacement cost?

1. ₹4,40,000 (correct answer)
2. ₹4,00,000
3. ₹4,60,000
4. ₹4,20,000

Answer: A — ₹4,40,000

Explanation. Total replacement cost = recruitment ₹1,20,000 + selection ₹80,000 + training ₹1,50,000 + settlement due to leaving ₹90,000 = ₹4,40,000. Option b omits ₹40,000; option c adds ₹20,000; option d omits selection cost. Preventive costs are not part of replacement cost.

Where it goes wrong. Excluding settlement cost because it is paid to leavers, or excluding selection cost.

Authority. ICAI SM: Cost and Management Accounting, Chapter 3 (Employee Cost and Direct Expenses)

Question 18 · 2 marks · Chapter 3: Employee Cost and Direct Expenses · hard

Scenario. In a factory, 45 employees separated and 30 employees were replaced during the year. Average employees on roll were 500. What is the flux-method turnover rate?

In a factory, 45 employees separated and 30 employees were replaced during the year. Average employees on roll were 500. What is the flux-method turnover rate?

1. 12%
2. 15% (correct answer)
3. 18%
4. 10%

Answer: B — 15%

Explanation. Flux method rate = (separations + replacements) ÷ average employees × 100 = (45 + 30) ÷ 500 × 100 = 75 ÷ 500 × 100 = 15%. Option a is 60 ÷ 500; option c is 90 ÷ 500; option d is 50 ÷ 500. The flux method combines both separations and replacements.

Where it goes wrong. Using only separations (9%) or only replacements (6%) instead of their sum.

Authority. ICAI SM: Cost and Management Accounting, Chapter 3 (Employee Cost and Direct Expenses)

Question 19 · 2 marks · Chapter 3: Employee Cost and Direct Expenses · medium

Scenario. Under the replacement method of measuring labour turnover, how are new employees appointed purely because of expansion treated?

Under the replacement method of measuring labour turnover, how are new employees appointed purely because of expansion treated?

1. Included in the numerator as replacements
2. Included in the denominator as average employees only
3. Excluded from the number of replacements (correct answer)
4. Treated as separations for the period

Answer: C — Excluded from the number of replacements

Explanation. The replacement method considers only actual replacements of employees who have left. New employees appointed due to expansion are not replacements and are excluded from the numerator. They may affect average roll if they are on roll during the period, but they are not counted as replacements. Including them would overstate turnover.

Where it goes wrong. Adding expansion joinings to replacements and thus inflating the replacement-method turnover rate.

Authority. ICAI SM: Cost and Management Accounting, Chapter 3 (Employee Cost and Direct Expenses)

Question 20 · 2 marks · Chapter 3: Employee Cost and Direct Expenses · hard

Scenario. Which of the following is a replacement cost associated with labour turnover?

Which of the following is a replacement cost associated with labour turnover?

1. Medical benefits provided to existing employees
2. Pension contribution for retained employees
3. Welfare expenses incurred to retain employees
4. Training cost of new recruits (correct answer)

Answer: D — Training cost of new recruits

Explanation. Replacement costs arise because employees leave and new workers must be recruited, selected and trained; they also include settlement cost due to leaving. Training cost of new recruits is therefore a replacement cost. Medical benefits, pension contribution and welfare expenses are preventive costs incurred to retain employees and reduce turnover.

Where it goes wrong. Classifying all employee welfare and training costs as preventive; training of replacements is replacement cost.

Authority. ICAI SM: Cost and Management Accounting, Chapter 3 (Employee Cost and Direct Expenses)