Test 2: Employee Cost and Direct Expenses: answer key

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

Scenario. Vikram Steels Ltd operates a fabrication shop in Raipur. A direct worker, Ramesh, is paid a basic wage of ₹100 per hour for a normal working week of 48 hours (8 hours × 6 days). Overtime is paid at 150% of basic wage. During the week ended 7 June 2026, Ramesh was paid for 52 hours: 48 normal hours and 4 overtime hours worked on Job X at the request of a customer who needed urgent delivery. The time records show: Job X 25 hours (including the 4 overtime hours); Job Y 19 hours; normal idle time allowed for rest and machine setting 3 hours; abnormal idle time due to a machine breakdown 5 hours. Total paid hours reconcile with booked hours: 25 + 19 + 3 + 5 = 52. The company treats normal idle time as part of production cost and abnormal idle time as a separate item in Costing Profit and Loss Account. Overtime premium is analysed separately from normal wages. The machine breakdown was not due to any worker; it arose because a bearing failed. The cost accountant must compute idle-time cost, abnormal loss, overtime premium and the amount chargeable to Job X. Assume no other allowances. The company wants to know how each element should be treated in cost accounts. All amounts are in rupees.

What is the cost of normal idle time for Ramesh, and how should it be treated?

1. ₹500, charged to Costing Profit and Loss Account
2. ₹300, treated as part of production cost (correct answer)
3. ₹300, treated as abnormal loss
4. ₹500, treated as part of production cost

Answer: B — ₹300, treated as part of production cost

Explanation. Normal idle time is 3 hours and the basic wage rate is ₹100 per hour. Cost = 3 × ₹100 = ₹300. Normal idle time cannot be avoided in the normal course of business and is therefore treated as part of production cost, either through the standard rate or overhead rate. Option a uses abnormal idle hours and wrong treatment; option c wrongly treats normal idle time as abnormal loss; option d uses abnormal idle hours.

Where it goes wrong. Using the abnormal idle hours of 5 instead of normal idle hours of 3, or charging normal idle time to Costing P&L.

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 abnormal idle time cost for Ramesh, and where should it be charged?

1. ₹300, charged to production cost
2. ₹500, charged to production cost
3. ₹500, charged to Costing Profit and Loss Account (correct answer)
4. ₹800, charged to Costing Profit and Loss Account

Answer: C — ₹500, charged to Costing Profit and Loss Account

Explanation. Abnormal idle time is 5 hours due to machine breakdown. Cost = 5 × ₹100 = ₹500. Abnormal idle time is not a part of production cost; it is shown separately in the Costing Profit and Loss Account. Option a uses normal idle hours; option b uses correct amount but wrong treatment; option d adds normal and abnormal idle hours.

Where it goes wrong. Adding normal and abnormal idle hours and charging the total to Costing P&L, or treating abnormal idle cost as production cost.

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

How much overtime premium was incurred on Job X, and how should it be treated?

1. ₹200, charged directly to Job X (correct answer)
2. ₹400, charged directly to Job X
3. ₹200, charged to production overhead
4. ₹600, charged directly to Job X

Answer: A — ₹200, charged directly to Job X

Explanation. Overtime hours on Job X are 4. Overtime rate is 150% of ₹100 = ₹150 per hour. Overtime premium = 4 × (₹150 − ₹100) = 4 × ₹50 = ₹200. Since overtime was worked at the customer's request for urgent delivery, the premium is charged directly to Job X. Option b uses ₹100 per hour premium; option c uses correct amount but wrong treatment; option d uses total overtime wages.

Where it goes wrong. Charging total overtime wages of ₹600 instead of only the premium of ₹200, or treating customer-urgency premium as overhead.

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 total employee cost should be charged to Job X, assuming overtime premium is charged directly to the job?

1. ₹2,500
2. ₹2,900
3. ₹2,300
4. ₹2,700 (correct answer)

Answer: D — ₹2,700

Explanation. Job X booked 25 hours, including 4 overtime hours. Normal wages for all job hours = 25 × ₹100 = ₹2,500. Overtime premium = 4 × (₹150 − ₹100) = ₹200. Total charge to Job X = ₹2,500 + ₹200 = ₹2,700. Option a omits overtime premium; option b double counts premium; option c deducts premium instead of adding it.

Where it goes wrong. Charging only normal wages to the job, or adding full overtime wages instead of only the premium.

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 runs a polymer packaging plant in Vadodara. Eight direct workers are paid ₹80 per hour for a normal 40-hour week. During the peak week ended 28 June 2026, total overtime hours were 120, all worked on weekdays after normal hours. Overtime premium is 50% of basic wage. The 120 overtime hours are analysed as: 50 hours due to seasonal peak demand and general production pressure; 40 hours worked on Job A at the request of a customer who needed expedition; 30 hours caused by an avoidable machine breakdown; the breakdown was due to poor maintenance by the Maintenance Department. The company policy is: overtime premium for customer urgency is charged directly to the job; for seasonal/general pressure it is treated as production overhead; for avoidable delays caused by another department it is charged to that department. Normal wages for overtime hours are charged to the respective jobs or overhead as appropriate. There was no normal idle time in the week. The cost accountant must compute total overtime premium, premium charged to Job A, premium charged to production overhead, and premium charged to Maintenance Department. No other premium or allowances apply. All amounts in rupees.

What is the total overtime premium for the peak week at Apex Polychem Ltd?

1. ₹4,800 (correct answer)
2. ₹2,400
3. ₹6,000
4. ₹3,600

Answer: A — ₹4,800

Explanation. Basic wage rate = ₹80 per hour. Overtime premium rate = 50% of ₹80 = ₹40 per hour. Total overtime hours = 120. Total overtime premium = 120 × ₹40 = ₹4,800. Option b uses only 60 hours; option c uses ₹50 per hour; option d uses ₹30 per hour. The total premium is allocated among Job A, overhead and Maintenance Department.

Where it goes wrong. Multiplying overtime hours by total overtime rate ₹120 instead of premium rate ₹40.

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 amount of overtime premium should be charged directly to Job A?

1. ₹2,000
2. ₹1,600 (correct answer)
3. ₹1,200
4. ₹4,800

Answer: B — ₹1,600

Explanation. Job A overtime hours = 40. Overtime premium rate = ₹40 per hour. Premium charged to Job A = 40 × ₹40 = ₹1,600. Since the overtime was at the customer's request, it is a direct charge to the job. Option a is the seasonal-peak premium; option c is the maintenance-breakdown premium; option d is total premium.

Where it goes wrong. Charging all ₹4,800 premium to Job A instead of only the 40 customer-urgency hours.

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 amount of overtime premium should be charged to production overhead for seasonal peak and general pressure?

1. ₹1,600
2. ₹1,200
3. ₹2,000 (correct answer)
4. ₹4,800

Answer: C — ₹2,000

Explanation. Seasonal peak and general pressure account for 50 overtime hours. Premium rate = ₹40 per hour. Premium charged to production overhead = 50 × ₹40 = ₹2,000. Overtime premium for general production programmes is treated as overhead. Option a is Job A premium; option b is Maintenance Department premium; option d is total premium.

Where it goes wrong. Treating seasonal/general-pressure premium as a direct job cost or charging the entire premium to overhead.

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 amount of overtime premium should be charged to the Maintenance Department?

1. ₹2,000
2. ₹1,600
3. ₹800
4. ₹1,200 (correct answer)

Answer: D — ₹1,200

Explanation. Avoidable machine breakdown due to poor maintenance accounts for 30 overtime hours. Premium rate = ₹40 per hour. Premium charged to Maintenance Department = 30 × ₹40 = ₹1,200. When overtime arises due to the fault of another department, the premium is charged to that department. Option a is seasonal-peak premium; option b is Job A premium; option c uses ₹26.67 per hour.

Where it goes wrong. Charging the breakdown premium to production overhead instead of the responsible Maintenance Department.

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. A worker is paid for 2,400 hours per annum. Normal idle time allowed is 200 hours, and abnormal idle time is 50 hours. The wage rate is ₹90 per hour. What amount is charged to Costing Profit and Loss Account for abnormal idle time?

A worker is paid for 2,400 hours per annum. Normal idle time allowed is 200 hours, and abnormal idle time is 50 hours. The wage rate is ₹90 per hour. What amount is charged to Costing Profit and Loss Account for abnormal idle time?

1. ₹4,500 (correct answer)
2. ₹18,000
3. ₹22,500
4. ₹2,000

Answer: A — ₹4,500

Explanation. Abnormal idle time is 50 hours. Abnormal idle cost = 50 × ₹90 = ₹4,500. This amount is excluded from production cost and charged to Costing Profit and Loss Account. Option b is the normal idle cost 200 × ₹90 = ₹18,000, which is part of production cost. Option c adds normal and abnormal idle cost. Option d uses an incorrect number of hours.

Where it goes wrong. Charging normal idle cost of ₹18,000 to Costing P&L, or adding normal and abnormal idle costs.

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. A worker worked 15 overtime hours at the request of a customer. The basic wage rate is ₹120 per hour and overtime premium is 50%. What overtime premium is charged directly to the customer's job?

A worker worked 15 overtime hours at the request of a customer. The basic wage rate is ₹120 per hour and overtime premium is 50%. What overtime premium is charged directly to the customer's job?

1. ₹450
2. ₹900 (correct answer)
3. ₹1,350
4. ₹1,800

Answer: B — ₹900

Explanation. Overtime premium rate = 50% of ₹120 = ₹60 per hour. Premium for 15 hours = 15 × ₹60 = ₹900. Since overtime is at the customer's request, the premium is a direct charge to the job. Option a uses ₹30 per hour; option c adds normal wages and premium; option d uses total overtime wages of 15 × ₹180.

Where it goes wrong. Charging total overtime wages ₹1,800 instead of only the premium ₹900.

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. A factory paid wages for 1,200 hours. Productive time booked was 1,050 hours, and normal idle time allowed was 100 hours. The wage rate is ₹60 per hour. What is the abnormal idle time cost?

A factory paid wages for 1,200 hours. Productive time booked was 1,050 hours, and normal idle time allowed was 100 hours. The wage rate is ₹60 per hour. What is the abnormal idle time cost?

1. ₹6,000
2. ₹9,000
3. ₹3,000 (correct answer)
4. ₹2,400

Answer: C — ₹3,000

Explanation. Abnormal idle hours = paid hours − productive hours − normal idle hours = 1,200 − 1,050 − 100 = 50 hours. Abnormal idle cost = 50 × ₹60 = ₹3,000. This is charged to Costing Profit and Loss Account. Option a is normal idle cost 100 × ₹60; option b adds both idle costs; option d uses 40 hours.

Where it goes wrong. Treating all unbooked time of 150 hours as abnormal, or including normal idle time in abnormal loss.

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. Overtime of 80 hours was worked due to general production pressure. Basic wage is ₹75 per hour and overtime premium is 40%. What amount is charged to production overhead?

Overtime of 80 hours was worked due to general production pressure. Basic wage is ₹75 per hour and overtime premium is 40%. What amount is charged to production overhead?

1. ₹1,200
2. ₹3,000
3. ₹4,800
4. ₹2,400 (correct answer)

Answer: D — ₹2,400

Explanation. Overtime premium rate = 40% of ₹75 = ₹30 per hour. Premium charged to production overhead = 80 × ₹30 = ₹2,400. Overtime premium for general pressure is treated as overhead. Option a uses 40 hours; option b uses ₹37.50 per hour; option c uses total overtime wages of 80 × ₹105 = ₹8,400 incorrectly.

Where it goes wrong. Charging full overtime wages to overhead instead of only the premium portion.

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. Seasonal peak required 60 overtime hours. Basic wage is ₹50 per hour and overtime premium is 60%. What overtime premium is charged to production overhead?

Seasonal peak required 60 overtime hours. Basic wage is ₹50 per hour and overtime premium is 60%. What overtime premium is charged to production overhead?

1. ₹1,800 (correct answer)
2. ₹900
3. ₹2,700
4. ₹3,600

Answer: A — ₹1,800

Explanation. Overtime premium rate = 60% of ₹50 = ₹30 per hour. Premium = 60 × ₹30 = ₹1,800. Seasonal-peak overtime premium is treated as production overhead because it relates to the general production programme. Option b uses ₹15 per hour; option c uses ₹45 per hour; option d uses total overtime wages of ₹80 per hour.

Where it goes wrong. Using the full overtime rate of ₹80 per hour instead of the premium rate of ₹30 per hour.

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. Overtime of 25 hours was caused by an avoidable delay in another department. Basic wage is ₹60 per hour and overtime premium is 50%. What amount is charged to that department?

Overtime of 25 hours was caused by an avoidable delay in another department. Basic wage is ₹60 per hour and overtime premium is 50%. What amount is charged to that department?

1. ₹1,500
2. ₹750 (correct answer)
3. ₹1,125
4. ₹600

Answer: B — ₹750

Explanation. Overtime premium rate = 50% of ₹60 = ₹30 per hour. Premium charged to the responsible department = 25 × ₹30 = ₹750. When overtime is due to the fault of another department, the premium is charged to that department rather than to general overhead. Option a uses total overtime wages; option c uses ₹45 per hour; option d uses ₹24 per hour.

Where it goes wrong. Charging the premium to production overhead instead of to the department responsible for the avoidable delay.

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. A firm allows 3 hours of normal idle time per day for 30 days. The wage rate is ₹80 per hour. What is the normal idle time cost and its treatment?

A firm allows 3 hours of normal idle time per day for 30 days. The wage rate is ₹80 per hour. What is the normal idle time cost and its treatment?

1. ₹2,400, charged to Costing Profit and Loss Account
2. ₹7,200, charged to Costing Profit and Loss Account
3. ₹7,200, treated as part of production cost (correct answer)
4. ₹2,400, treated as part of production cost

Answer: C — ₹7,200, treated as part of production cost

Explanation. Normal idle hours = 3 × 30 = 90 hours. Normal idle cost = 90 × ₹80 = ₹7,200. Normal idle time is unavoidable in the normal course of business and is included in production cost by suitably setting standard hours or overhead rates. Options a and d use only 30 hours; option b uses correct amount but wrong treatment.

Where it goes wrong. Charging normal idle time to Costing P&L as abnormal loss, or multiplying 3 hours by only one day.

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. Abnormal idle time of 120 hours arose due to a strike. The wage rate is ₹70 per hour. What is the abnormal idle cost and its treatment?

Abnormal idle time of 120 hours arose due to a strike. The wage rate is ₹70 per hour. What is the abnormal idle cost and its treatment?

1. ₹8,400, treated as production cost
2. ₹4,200, charged to Costing Profit and Loss Account
3. ₹4,200, treated as production cost
4. ₹8,400, charged to Costing Profit and Loss Account (correct answer)

Answer: D — ₹8,400, charged to Costing Profit and Loss Account

Explanation. Abnormal idle cost = 120 × ₹70 = ₹8,400. Idle time due to strike is abnormal and uncontrollable in the normal course; it is not included in production cost and is charged to Costing Profit and Loss Account. Option a uses correct amount but wrong treatment; option b uses 60 hours; option c uses both wrong amount and treatment.

Where it goes wrong. Including strike-related idle time in product cost because it relates to factory workers.

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. Overtime of 18 hours was worked due to abnormal flood conditions. Basic wage is ₹100 per hour and overtime premium is 50%. How should the overtime premium be treated?

Overtime of 18 hours was worked due to abnormal flood conditions. Basic wage is ₹100 per hour and overtime premium is 50%. How should the overtime premium be treated?

1. ₹900, charged to Costing Profit and Loss Account (correct answer)
2. ₹1,800, charged to Costing Profit and Loss Account
3. ₹900, charged to production overhead
4. ₹1,800, charged to the job directly

Answer: A — ₹900, charged to Costing Profit and Loss Account

Explanation. Overtime premium rate = 50% of ₹100 = ₹50 per hour. Premium = 18 × ₹50 = ₹900. Overtime worked due to abnormal conditions such as flood is not charged to production cost or jobs; it is charged to Costing Profit and Loss Account. Option b uses total overtime wages; option c uses correct amount but wrong treatment; option d uses total wages and wrong treatment.

Where it goes wrong. Charging flood-related overtime premium to production overhead because it is a factory 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. A worker's normal working hours are 48 per week. He worked 54 hours. Basic wage is ₹80 per hour and overtime premium is 50%. What are his total weekly wages?

A worker's normal working hours are 48 per week. He worked 54 hours. Basic wage is ₹80 per hour and overtime premium is 50%. What are his total weekly wages?

1. ₹4,320
2. ₹4,560 (correct answer)
3. ₹4,800
4. ₹5,040

Answer: B — ₹4,560

Explanation. Normal wages = 48 × ₹80 = ₹3,840. Overtime hours = 54 − 48 = 6. Overtime rate = ₹80 × 150% = ₹120 per hour. Overtime wages = 6 × ₹120 = ₹720. Total wages = ₹3,840 + ₹720 = ₹4,560. Option a ignores premium; option c pays all 54 hours at ₹80 plus premium incorrectly; option d uses double rate for all hours.

Where it goes wrong. Paying overtime hours at only the premium rate, or applying overtime rate to all 54 hours.

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. A worker worked 20 overtime hours on a customer's urgent order and 30 overtime hours due to general pressure. Basic wage is ₹90 per hour and overtime premium is 50%. What premium is charged directly to the customer's job?

A worker worked 20 overtime hours on a customer's urgent order and 30 overtime hours due to general pressure. Basic wage is ₹90 per hour and overtime premium is 50%. What premium is charged directly to the customer's job?

1. ₹1,350
2. ₹2,250
3. ₹900 (correct answer)
4. ₹450

Answer: C — ₹900

Explanation. Overtime premium rate = 50% of ₹90 = ₹45 per hour. Premium for customer-urgency hours = 20 × ₹45 = ₹900, charged directly to the job. Option a is the general-pressure premium 30 × ₹45 = ₹1,350; option b is total premium 50 × ₹45; option d uses 10 hours.

Where it goes wrong. Charging total premium of ₹2,250 to the customer's job instead of only the 20 customer-related hours.

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 statement correctly describes the usual cost-accounting treatment of normal and abnormal idle time?

Which statement correctly describes the usual cost-accounting treatment of normal and abnormal idle time?

1. Normal idle time is charged to Costing P&L; abnormal idle time is treated as production cost
2. Both normal and abnormal idle time are treated as production cost
3. Both normal and abnormal idle time are charged to Costing P&L
4. Normal idle time is treated as part of production cost; abnormal idle time is charged to Costing P&L (correct answer)

Answer: D — Normal idle time is treated as part of production cost; abnormal idle time is charged to Costing P&L

Explanation. Normal idle time is unavoidable in the normal course of business and is absorbed in production cost through standard hours or overhead rates. Abnormal idle time arises from abnormal causes and is excluded from production cost; it is shown separately in Costing Profit and Loss Account. Option a reverses the treatment; options b and c wrongly combine the two categories.

Where it goes wrong. Treating all idle time as production cost, or charging normal idle time to Costing P&L as a loss.

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