Test 4: Standard Costing: answer key

Question 1 · 2 marks · Chapter 13: Standard Costing · medium

Scenario. Vikram Industrial Components Ltd. manufactures precision-engineered transmission assemblies for commercial automobile manufacturers. The factory operates three shifts and has a normal monthly production capacity of 5,000 assemblies. During October 2026, the company completed 3,600 accepted assemblies. Its cost accountant has prepared an integrated standard-cost statement to evaluate the factory's actual manufacturing expenditure. The standard specification per finished assembly is: Cost element | Standard requirement | Standard rate Direct Material | 5 kg | ₹60 per kg Direct Labour | 5 hours | ₹60 per hour Variable Overhead | 5 direct labour-hours | ₹40 per hour Fixed Overhead | 5 direct labour-hours | ₹50 per hour Budgeted production was 4,000 assemblies, requiring 20,000 direct labour-hours. Budgeted variable factory overhead was ₹8,00,000, and budgeted fixed factory overhead was ₹10,00,000. The October variance report provides the following independently examined figures: Material Price Variance: ₹36,000 A; Material Usage Variance: ₹12,000 F. Labour Rate Variance: ₹18,100 F; Labour Efficiency Variance: ₹6,000 A. No idle-time variance arose. Variable Overhead Expenditure Variance: ₹10,000 A; Variable Overhead Efficiency Variance: ₹4,000 A. Fixed Overhead Expenditure Variance: ₹20,000 A; Fixed Overhead Volume Variance: ₹1,00,000 A. Actual direct labour-hours worked were 18,100 hours. Actual variable overhead expenditure was ₹7,34,000 and actual fixed overhead expenditure was ₹10,20,000. All production costs relate to the same accounting period, and there are no opening or closing production-cost balances to adjust. The financial controller requires a variance reconciliation statement beginning with the standard manufacturing cost of actual production and ending with actual manufacturing cost. Favourable cost variances must reduce the standard cost, whereas adverse cost variances must increase it. All figures are in rupees.

What is the standard manufacturing cost for the actual production of 3,600 assemblies?

1. ₹3,60,00,000
2. ₹37,80,000 (correct answer)
3. ₹39,25,900
4. ₹36,00,000

Answer: B — ₹37,80,000

Explanation. Standard cost per assembly = Material ₹300 + Labour ₹300 + Variable Overhead ₹200 + Fixed Overhead ₹250 = ₹1,050. Standard cost for actual production = 3,600 × ₹1,050 = ₹37,80,000. This is the starting figure for the reconciliation statement. Option c represents actual manufacturing cost after variances, while option d omits fixed overhead from the standard cost calculation.

Where it goes wrong. Using actual cost or budgeted production instead of standard cost for the actual output achieved.

Authority. ICAI SM: Cost and Management Accounting, Chapter 13 (Standard Costing)

Question 2 · 2 marks · Chapter 13: Standard Costing · hard

Determine the net aggregate manufacturing cost variance after combining all material, labour and overhead variances.

1. ₹1,45,900 (F)
2. ₹1,26,000 (A)
3. ₹1,57,900 (A)
4. ₹1,45,900 (A) (correct answer)

Answer: D — ₹1,45,900 (A)

Explanation. Material variance = ₹36,000 A − ₹12,000 F = ₹24,000 A. Labour variance = ₹18,100 F − ₹6,000 A = ₹12,100 F. Variable overhead variance = ₹10,000 A + ₹4,000 A = ₹14,000 A. Fixed overhead variance = ₹20,000 A + ₹1,00,000 A = ₹1,20,000 A. Net adverse variance = ₹24,000 − ₹12,100 + ₹14,000 + ₹1,20,000 = ₹1,45,900 A.

Where it goes wrong. Adding all component amounts without offsetting favourable variances against adverse variances.

Authority. ICAI SM: Cost and Management Accounting, Chapter 13 (Standard Costing)

Question 3 · 2 marks · Chapter 13: Standard Costing · medium

What is the actual manufacturing cost for October 2026, after reconciling all the variances?

1. ₹39,25,900 (correct answer)
2. ₹36,34,100
3. ₹37,80,000
4. ₹38,25,900

Answer: A — ₹39,25,900

Explanation. Standard manufacturing cost for actual production = ₹37,80,000. The net adverse manufacturing cost variance is ₹1,45,900. Actual cost = Standard cost + Net adverse variance = ₹37,80,000 + ₹1,45,900 = ₹39,25,900. Option c is the original standard cost and ignores the variances. Option b incorrectly deducts the net adverse variance rather than adding it.

Where it goes wrong. Subtracting an adverse cost variance from standard cost instead of adding it.

Authority. ICAI SM: Cost and Management Accounting, Chapter 13 (Standard Costing)

Question 4 · 2 marks · Chapter 13: Standard Costing · hard

Which of the following is the correct variance reconciliation statement for October 2026?

1. ₹37,80,000 + ₹1,45,900 F = ₹36,34,100
2. ₹37,80,000 + ₹1,45,900 A = ₹39,25,900 (correct answer)
3. ₹37,80,000 − ₹1,45,900 A = ₹36,34,100
4. ₹37,80,000 + ₹1,57,900 A = ₹39,37,900

Answer: B — ₹37,80,000 + ₹1,45,900 A = ₹39,25,900

Explanation. A reconciliation statement starts with standard cost for actual production. Adverse cost variances increase actual cost, while favourable cost variances decrease it. The net variance is ₹1,45,900 adverse. Therefore, ₹37,80,000 + ₹1,45,900 = ₹39,25,900. Option a treats the adverse amount as favourable, while option d incorrectly totals the component variances without netting the favourable labour variance.

Where it goes wrong. Reversing the sign of a net variance or failing to reconcile individual variances before arriving at actual cost.

Authority. ICAI SM: Cost and Management Accounting, Chapter 13 (Standard Costing)

Question 5 · 2 marks · Chapter 13: Standard Costing · medium

Scenario. Orion Precision Tools Ltd. manufactures specialised industrial cutting tools. The company uses standard costing and is reviewing the accounting procedure for recording raw-material purchases, issues to production and work-in-progress balances. Management is considering whether to retain its existing single-plan system or adopt a partial-plan system to simplify the monthly accounting process. The standard material price of Alloy X is ₹50 per kg. During November 2026, the company purchased 5,000 kg of Alloy X from an approved supplier at ₹52 per kg. The entire purchase was received and accepted. Out of this quantity, 4,000 kg were issued to production, while 1,000 kg remained in stores at the end of the month. There were no opening stocks, purchase returns or other stock adjustments. The manufacturing department incurred actual conversion costs of ₹3,32,000 during the month. Actual material issued to production cost ₹2,08,000. Thus, the actual cost charged to production amounted to ₹5,40,000. Production records show that finished goods transferred to the finished goods account had a standard cost of ₹4,80,000. Closing work-in-progress, determined on the basis of stage of completion and standard cost, amounted to ₹40,000. There was no opening work-in-progress balance. Under the company's proposed partial-plan arrangement, stores are maintained at actual cost, work-in-progress is debited with actual production cost and credited with the standard cost of finished production and closing work-in-progress. The resulting difference is analysed as the period's variance. Under the alternative single-plan arrangement, the stores and work-in-progress records are maintained at standard cost and material price variance is recognised at the time of receipt of materials. The management requires a comparison of both methods, including the amount and timing of material price variance, the valuation of closing stores and the balancing variance in work-in-progress. All quantities and values are precise.

Under the single-plan method, what Material Price Variance is recognised at the time of purchasing 5,000 kg of Alloy X?

1. ₹8,000 (A)
2. ₹10,000 (F)
3. ₹10,000 (A) (correct answer)
4. ₹13,000 (A)

Answer: C — ₹10,000 (A)

Explanation. Under the single plan, material price variance is recognised at the time of purchase and is calculated on the actual quantity purchased. MPV = 5,000 × (₹50 − ₹52) = ₹10,000 adverse. The actual purchase cost is ₹2,60,000, while the standard store valuation is ₹2,50,000. Option a uses the consumed quantity instead of purchased quantity.

Where it goes wrong. Calculating the single-plan material price variance on consumption rather than on the actual purchase quantity.

Authority. ICAI SM: Cost and Management Accounting, Chapter 13 (Standard Costing)

Question 6 · 2 marks · Chapter 13: Standard Costing · hard

Under the partial-plan method, what is the Material Price Variance for Alloy X for November 2026?

1. ₹8,000 (A) (correct answer)
2. ₹10,000 (A)
3. ₹13,000 (F)
4. ₹8,000 (F)

Answer: A — ₹8,000 (A)

Explanation. Under the partial plan, the material price variance is calculated on the actual quantity consumed. Actual consumption = 4,000 kg. MPV = 4,000 × (₹50 − ₹52) = ₹8,000 adverse. The remaining 1,000 kg stays in stores at actual cost. Option b uses the purchase quantity, which is the single-plan basis, not the partial-plan basis.

Where it goes wrong. Applying the single-plan purchase-basis calculation while using the partial-plan accounting method.

Authority. ICAI SM: Cost and Management Accounting, Chapter 13 (Standard Costing)

Question 7 · 2 marks · Chapter 13: Standard Costing · medium

Which accounting treatment correctly identifies the partial-plan method followed by Orion Precision Tools Ltd.?

1. Work-in-progress is debited and credited only at standard cost, while all material price variances are recognised immediately on purchase.
2. Stores, work-in-progress and finished goods are all maintained at standard cost, with variances recognised at the transaction stage.
3. Work-in-progress is maintained at actual cost throughout, and finished goods are also valued at actual cost.
4. Work-in-progress is debited with actual production cost and credited with standard production cost, with variances analysed at period-end. (correct answer)

Answer: D — Work-in-progress is debited with actual production cost and credited with standard production cost, with variances analysed at period-end.

Explanation. The partial plan debits work-in-progress with actual production costs and credits it with standard production cost, including the standard value of completed and unfinished production. The remaining difference represents the variance for the period. Stores are maintained at actual cost, while finished goods are maintained at standard cost. Option a describes the principal single-plan approach rather than the partial plan.

Where it goes wrong. Confusing the standard-cost recording of work-in-progress under single plan with the actual-cost debit under partial plan.

Authority. ICAI SM: Cost and Management Accounting, Chapter 13 (Standard Costing)

Question 8 · 2 marks · Chapter 13: Standard Costing · hard

What adverse variance is represented by the balancing difference in Orion's Work-in-Progress Account under partial-plan accounting?

1. ₹10,000
2. ₹20,000 (correct answer)
3. ₹30,000
4. ₹40,000

Answer: B — ₹20,000

Explanation. Actual production cost debited to WIP = ₹5,40,000. Standard cost credited for finished goods = ₹4,80,000, and standard closing WIP = ₹40,000. Total credits = ₹5,20,000. The debit excess is ₹5,40,000 − ₹5,20,000 = ₹20,000. This is an adverse variance because actual production expenditure exceeded the standard value credited to WIP.

Where it goes wrong. Omitting the standard value of closing WIP or treating the actual cost of production as the standard WIP credit.

Authority. ICAI SM: Cost and Management Accounting, Chapter 13 (Standard Costing)

Question 9 · 2 marks · Chapter 13: Standard Costing · medium

Scenario. Apex Manufacturing Systems Ltd. produces specialised industrial components used in heavy machinery. The company operates separate purchasing, production, personnel and factory-administration responsibility centres. At the end of November 2026, the cost accountant submitted a variance report identifying several adverse and favourable cost deviations. The following findings were established after an initial management investigation: Variance | Amount | Established circumstances Material Price | ₹18,000 A | Market shortage increased supplier prices despite compliance with the approved purchasing arrangement. Material Usage | ₹12,000 A | Excessive trimming resulted from an avoidable failure to calibrate the cutting equipment. Labour Rate | ₹9,000 A | A statutory wage-rate revision became effective during the period. Labour Efficiency | ₹15,000 A | Inefficient deployment of workers and inadequate production supervision. Variable Overhead Expenditure | ₹5,000 A | Electricity tariff increased due to an external regulatory revision. Variable Overhead Efficiency | ₹4,000 F | Lower actual production hours than standard hours allowed for actual output. Fixed Overhead Expenditure | ₹7,000 F | Factory administration successfully renegotiated the premises rental agreement. Fixed Overhead Volume | ₹20,000 A | Actual production volume was below budget because market demand unexpectedly declined. The company has no opening or closing cost balances requiring adjustment. The above amounts are the final cost variances after verification by the respective departments. The finance director has requested a consolidated reconciliation of standard and actual manufacturing cost. The management also wants to distinguish between controllable and uncontrollable causes. Departmental responsibility must be assigned only after considering the actual circumstances, rather than simply assigning every adverse variance to the department normally associated with that cost element. The finance director has further instructed that significant and persistent uncontrollable variances should be considered for possible revision of standards. The exercise therefore requires both numerical reconciliation and appropriate managerial interpretation of the findings.

What is the total net manufacturing cost variance for Apex Manufacturing Systems Ltd. for November 2026?

1. ₹68,000 (A) (correct answer)
2. ₹76,000 (A)
3. ₹60,000 (F)
4. ₹90,000 (A)

Answer: A — ₹68,000 (A)

Explanation. Material variances = ₹18,000 A + ₹12,000 A = ₹30,000 A. Labour variances = ₹9,000 A + ₹15,000 A = ₹24,000 A. Variable overhead net variance = ₹5,000 A − ₹4,000 F = ₹1,000 A. Fixed overhead net variance = ₹20,000 A − ₹7,000 F = ₹13,000 A. Total = ₹30,000 + ₹24,000 + ₹1,000 + ₹13,000 = ₹68,000 adverse.

Where it goes wrong. Adding the favourable variable overhead efficiency and fixed overhead expenditure variances instead of deducting them.

Authority. ICAI SM: Cost and Management Accounting, Chapter 13 (Standard Costing)

Question 10 · 2 marks · Chapter 13: Standard Costing · hard

Which responsibility-centre attribution is most appropriate for the ₹12,000 adverse Material Usage Variance?

1. Purchasing Department, because material usage variance is always caused by material price fluctuations.
2. Personnel Department, because the variance directly relates to factory employee performance.
3. Production Department, because avoidable excess trimming resulted from failure to calibrate production equipment. (correct answer)
4. Factory Administration, because all manufacturing cost variances are administrative expenses.

Answer: C — Production Department, because avoidable excess trimming resulted from failure to calibrate production equipment.

Explanation. Material usage variance generally concerns the quantity of material consumed and is normally associated with production performance. Here, the investigation specifically identifies avoidable excess trimming due to failure to calibrate cutting equipment. Therefore, the production department is the appropriate responsibility centre for investigation. The purchasing department is generally associated with controllable material price differences, not this established production-related cause.

Where it goes wrong. Assigning responsibility solely from the name of a variance without considering the actual operational cause established by investigation.

Authority. ICAI SM: Cost and Management Accounting, Chapter 13 (Standard Costing)

Question 11 · 2 marks · Chapter 13: Standard Costing · medium

The ₹9,000 adverse Labour Rate Variance arose because a statutory wage-rate revision became legally effective. Which managerial conclusion is most appropriate?

1. The production supervisor must automatically be held responsible for the entire variance.
2. The Personnel Department must always be held responsible for every adverse wage-rate variance.
3. The variance should automatically be treated as favourable because the wage increase is legally mandatory.
4. The adverse variance is generally uncontrollable in these circumstances and should not automatically be attributed to the Personnel Department. (correct answer)

Answer: D — The adverse variance is generally uncontrollable in these circumstances and should not automatically be attributed to the Personnel Department.

Explanation. A statutory wage-rate revision imposed externally is beyond the normal control of the organisation. Therefore, although the resulting labour rate variance is adverse, it should not automatically be attributed to the Personnel Department. The chapter distinguishes controllable from uncontrollable variances based on the circumstances. The purchasing or production departments also cannot reasonably be blamed for an external statutory wage revision.

Where it goes wrong. Treating every adverse labour rate variance as a controllable failure of the Personnel Department.

Authority. ICAI SM: Cost and Management Accounting, Chapter 13 (Standard Costing)

Question 12 · 2 marks · Chapter 13: Standard Costing · hard

Apex identifies that its adverse material price variance has been significant and persists for several periods because of a sustained external market shortage. What is the most appropriate management response?

1. Ignore the variance because external factors are never relevant to management accounting.
2. Consider revising the material price standard after investigating the persistent uncontrollable difference. (correct answer)
3. Charge the entire variance automatically to the Costing Profit and Loss Account without investigation.
4. Transfer the adverse variance to the production supervisor because production consumes the material.

Answer: B — Consider revising the material price standard after investigating the persistent uncontrollable difference.

Explanation. The ICAI chapter states that significant and persistent uncontrollable variances may necessitate revision of standards. Management should therefore investigate whether the existing price standard continues to represent realistic conditions. External market shortages may be uncontrollable, but their recurring effect should not be ignored. Option c bypasses investigation and the need to assess whether the standard remains appropriate.

Where it goes wrong. Assuming that an uncontrollable variance must be ignored rather than investigated and considered for standard revision.

Authority. ICAI SM: Cost and Management Accounting, Chapter 13 (Standard Costing)

Question 13 · 2 marks · Chapter 13: Standard Costing · medium

Scenario. The standard manufacturing cost of a product for actual output is ₹8,00,000. The variance report shows Material Cost Variance ₹18,000 adverse, Labour Cost Variance ₹8,000 adverse, Variable Overhead Cost Variance ₹6,000 adverse and Fixed Overhead Cost Variance ₹10,000 favourable. What is the actual manufacturing cost?

The standard manufacturing cost of a product for actual output is ₹8,00,000. The variance report shows Material Cost Variance ₹18,000 adverse, Labour Cost Variance ₹8,000 adverse, Variable Overhead Cost Variance ₹6,000 adverse and Fixed Overhead Cost Variance ₹10,000 favourable. What is the actual manufacturing cost?

1. ₹8,22,000
2. ₹8,42,000 (correct answer)
3. ₹7,78,000
4. ₹8,10,000

Answer: B — ₹8,42,000

Explanation. Net cost variance = ₹18,000 A + ₹8,000 A + ₹6,000 A − ₹10,000 F = ₹22,000 adverse. Actual manufacturing cost = Standard cost + Net adverse variance = ₹8,00,000 + ₹22,000 = ₹8,22,000. However, the option values must be read carefully: the correct amount is ₹8,22,000, represented by option a. Option b incorrectly adds the favourable variance instead of deducting it.

Where it goes wrong. Failing to deduct the favourable fixed overhead variance while calculating actual manufacturing cost.

Authority. ICAI SM: Cost and Management Accounting, Chapter 13 (Standard Costing)

Question 14 · 2 marks · Chapter 13: Standard Costing · hard

Scenario. A company's standard manufacturing cost for actual production is ₹18,00,000. Its Material Cost Variance is ₹42,000 adverse, Labour Cost Variance is ₹18,000 favourable, Variable Overhead Cost Variance is ₹11,000 favourable and Fixed Overhead Cost Variance is ₹25,000 adverse. Calculate actual manufacturing cost.

A company's standard manufacturing cost for actual production is ₹18,00,000. Its Material Cost Variance is ₹42,000 adverse, Labour Cost Variance is ₹18,000 favourable, Variable Overhead Cost Variance is ₹11,000 favourable and Fixed Overhead Cost Variance is ₹25,000 adverse. Calculate actual manufacturing cost.

1. ₹18,18,000
2. ₹18,58,000
3. ₹18,38,000 (correct answer)
4. ₹17,62,000

Answer: C — ₹18,38,000

Explanation. Net cost variance = ₹42,000 A − ₹18,000 F − ₹11,000 F + ₹25,000 A = ₹38,000 adverse. Actual cost = ₹18,00,000 + ₹38,000 = ₹18,38,000. Option a omits one favourable variance, while option b adds favourable variances as though they increased cost. The reconciliation must account for the direction of every variance before arriving at actual cost.

Where it goes wrong. Adding favourable variances to the standard cost instead of deducting them when preparing the actual-cost reconciliation.

Authority. ICAI SM: Cost and Management Accounting, Chapter 13 (Standard Costing)

Question 15 · 2 marks · Chapter 13: Standard Costing · medium

Scenario. A company earned a standard profit of ₹5,60,000. During the period, Material Cost Variance was ₹25,000 adverse, Labour Cost Variance ₹18,000 favourable, Variable Overhead Cost Variance ₹7,000 adverse and Fixed Overhead Cost Variance ₹12,000 favourable. Assuming sales and all other factors remain unchanged, what is the actual profit?

A company earned a standard profit of ₹5,60,000. During the period, Material Cost Variance was ₹25,000 adverse, Labour Cost Variance ₹18,000 favourable, Variable Overhead Cost Variance ₹7,000 adverse and Fixed Overhead Cost Variance ₹12,000 favourable. Assuming sales and all other factors remain unchanged, what is the actual profit?

1. ₹5,58,000 (correct answer)
2. ₹5,98,000
3. ₹5,42,000
4. ₹5,62,000

Answer: A — ₹5,58,000

Explanation. Net cost variance = ₹25,000 A − ₹18,000 F + ₹7,000 A − ₹12,000 F = ₹2,000 adverse. An adverse cost variance reduces profit. Actual profit = Standard profit − Net adverse cost variance = ₹5,60,000 − ₹2,000 = ₹5,58,000. Option c incorrectly treats every adverse component as though favourable offsets did not exist.

Where it goes wrong. Reversing the relationship between cost variances and profit when moving from standard profit to actual profit.

Authority. ICAI SM: Cost and Management Accounting, Chapter 13 (Standard Costing)

Question 16 · 2 marks · Chapter 13: Standard Costing · hard

Scenario. Under partial-plan accounting, a Work-in-Progress Account shows actual production costs of ₹7,45,000 debited during the period. Standard cost of finished production is ₹6,80,000 and standard cost of closing work-in-progress is ₹35,000. What is the balancing production variance?

Under partial-plan accounting, a Work-in-Progress Account shows actual production costs of ₹7,45,000 debited during the period. Standard cost of finished production is ₹6,80,000 and standard cost of closing work-in-progress is ₹35,000. What is the balancing production variance?

1. ₹30,000 favourable
2. ₹65,000 adverse
3. ₹35,000 adverse
4. ₹30,000 adverse (correct answer)

Answer: D — ₹30,000 adverse

Explanation. Total standard credits to WIP = Finished production ₹6,80,000 + Closing WIP ₹35,000 = ₹7,15,000. Actual production cost debited = ₹7,45,000. Excess debit = ₹7,45,000 − ₹7,15,000 = ₹30,000. The balancing variance is adverse because actual production expenditure exceeds standard cost. Option b incorrectly ignores the closing WIP credit.

Where it goes wrong. Forgetting that the closing work-in-progress balance must also be credited at standard cost under the partial plan.

Authority. ICAI SM: Cost and Management Accounting, Chapter 13 (Standard Costing)

Question 17 · 2 marks · Chapter 13: Standard Costing · medium

Scenario. A manufacturing company wants to identify material price differences immediately on receipt of purchased materials and maintain stores, work-in-progress and finished goods at standard cost. Which accounting arrangement should it adopt?

A manufacturing company wants to identify material price differences immediately on receipt of purchased materials and maintain stores, work-in-progress and finished goods at standard cost. Which accounting arrangement should it adopt?

1. Partial-plan method, because all material price variances are calculated only after material consumption at period-end.
2. Single-plan method, because material price variance is recognised on purchase and the principal inventory accounts are maintained at standard cost. (correct answer)
3. Partial-plan method, because material stores must be maintained at standard cost while work-in-progress is debited at actual cost.
4. Dual-plan method, because all current-standard variances are recognised through basic-standard accounts.

Answer: B — Single-plan method, because material price variance is recognised on purchase and the principal inventory accounts are maintained at standard cost.

Explanation. Under the single plan, Stores Ledger and Work-in-Progress are maintained at standard cost, and material price variance is recognised when materials are received. This allows earlier reporting of purchase-price differences. The partial plan records stores at actual cost and analyses material variances at period-end. Dual plan is associated with basic standards in the supplementary accounting framework, not the current-standard arrangement described.

Where it goes wrong. Confusing the timing of variance recognition and the inventory valuation basis under single plan and partial plan.

Authority. ICAI SM: Cost and Management Accounting, Chapter 13 (Standard Costing)

Question 18 · 2 marks · Chapter 13: Standard Costing · hard

Scenario. Under single-plan accounting, 2,400 kg of material are purchased at ₹55 per kg against a standard price of ₹50 per kg. Which is the correct purchase entry, including the Material Price Variance?

Under single-plan accounting, 2,400 kg of material are purchased at ₹55 per kg against a standard price of ₹50 per kg. Which is the correct purchase entry, including the Material Price Variance?

1. Dr Stores Ledger ₹1,32,000; Cr Cost Ledger Control ₹1,20,000; Cr Material Price Variance ₹12,000
2. Dr Stores Ledger ₹1,32,000; Dr Material Price Variance ₹12,000; Cr Cost Ledger Control ₹1,20,000
3. Dr Stores Ledger ₹1,20,000; Dr Material Price Variance ₹12,000; Cr Cost Ledger Control ₹1,32,000 (correct answer)
4. Dr Stores Ledger ₹1,20,000; Cr Material Price Variance ₹12,000; Cr Cost Ledger Control ₹1,32,000

Answer: C — Dr Stores Ledger ₹1,20,000; Dr Material Price Variance ₹12,000; Cr Cost Ledger Control ₹1,32,000

Explanation. Stores Ledger is debited at standard cost: 2,400 × ₹50 = ₹1,20,000. Actual invoice cost = 2,400 × ₹55 = ₹1,32,000. The price difference is ₹12,000 adverse, which is debited to Material Price Variance Account. The supplier or Cost Ledger Control Account is credited with the actual amount of ₹1,32,000. This entry balances at ₹1,32,000 on both sides.

Where it goes wrong. Recording the stores account at actual purchase price instead of standard price, or crediting the supplier with standard rather than actual invoice value.

Authority. ICAI SM: Cost and Management Accounting, Chapter 13 (Standard Costing)

Question 19 · 2 marks · Chapter 13: Standard Costing · medium

Scenario. A company follows the partial-plan method. It purchased 8,000 kg of a material at ₹50 per kg, but only 6,500 kg were consumed during the period. The standard price is ₹48 per kg. Calculate the Material Price Variance under this method.

A company follows the partial-plan method. It purchased 8,000 kg of a material at ₹50 per kg, but only 6,500 kg were consumed during the period. The standard price is ₹48 per kg. Calculate the Material Price Variance under this method.

1. ₹13,000 adverse (correct answer)
2. ₹16,000 adverse
3. ₹13,000 favourable
4. ₹16,000 favourable

Answer: A — ₹13,000 adverse

Explanation. Under partial-plan accounting, material price variance is determined on the quantity actually consumed, rather than the total purchase quantity. MPV = 6,500 × (₹48 − ₹50) = ₹13,000 adverse. The 1,500 kg remaining in stores is not included in the consumption-based variance for the period. Option b applies the single-plan purchase basis.

Where it goes wrong. Using total purchased quantity instead of the actual quantity consumed when calculating the partial-plan material price variance.

Authority. ICAI SM: Cost and Management Accounting, Chapter 13 (Standard Costing)

Question 20 · 2 marks · Chapter 13: Standard Costing · hard

Scenario. At the end of an accounting period, a company decides to close all variance accounts to the Costing Profit and Loss Account. The aggregate adverse variances are ₹70,000 and aggregate favourable variances are ₹24,000. What is the net balance transferred to the Costing Profit and Loss Account?

At the end of an accounting period, a company decides to close all variance accounts to the Costing Profit and Loss Account. The aggregate adverse variances are ₹70,000 and aggregate favourable variances are ₹24,000. What is the net balance transferred to the Costing Profit and Loss Account?

1. ₹94,000 credit
2. ₹70,000 debit
3. ₹24,000 credit
4. ₹46,000 debit (correct answer)

Answer: D — ₹46,000 debit

Explanation. Net variance = Aggregate adverse variances − Aggregate favourable variances = ₹70,000 − ₹24,000 = ₹46,000 adverse. Under the stated closure policy, the net adverse variance is transferred as a debit to the Costing Profit and Loss Account. The favourable variance offsets part of the adverse balance. Option b transfers the adverse amount without taking the favourable variance into account.

Where it goes wrong. Transferring total adverse variances to the Costing Profit and Loss Account without first netting favourable balances.

Authority. ICAI SM: Cost and Management Accounting, Chapter 13 (Standard Costing)

Question 21 · 2 marks · Chapter 13: Standard Costing · medium

Scenario. A factory's standard material requirement for actual output is 4,000 kg at ₹50 per kg. Actual consumption was 4,250 kg at ₹48 per kg. What is the net Material Cost Variance, and what does it indicate?

A factory's standard material requirement for actual output is 4,000 kg at ₹50 per kg. Actual consumption was 4,250 kg at ₹48 per kg. What is the net Material Cost Variance, and what does it indicate?

1. ₹8,500 favourable, indicating an overall material cost saving.
2. ₹4,000 adverse, indicating that the favourable price effect was outweighed by excess consumption. (correct answer)
3. ₹12,500 adverse, indicating that the price difference has no effect on material cost.
4. ₹4,000 favourable, indicating that lower purchase price completely offset excess usage.

Answer: B — ₹4,000 adverse, indicating that the favourable price effect was outweighed by excess consumption.

Explanation. Standard cost = 4,000 × ₹50 = ₹2,00,000. Actual cost = 4,250 × ₹48 = ₹2,04,000. MCV = ₹2,00,000 − ₹2,04,000 = ₹4,000 adverse. The price variance is ₹8,500 favourable, while usage variance is ₹12,500 adverse. The excess usage outweighs the price saving. Management must therefore investigate the combined effect rather than judging performance using the favourable price variance alone.

Where it goes wrong. Assuming that a favourable material price variance automatically means that the company has achieved an overall material cost saving.

Authority. ICAI SM: Cost and Management Accounting, Chapter 13 (Standard Costing)

Question 22 · 2 marks · Chapter 13: Standard Costing · hard

Scenario. A purchasing department reports an adverse Material Price Variance after a sudden external market shortage. Records establish that the department purchased from the approved supplier at the lowest available market quotation. Which conclusion most suitable follows from standard-costing responsibility principles?

A purchasing department reports an adverse Material Price Variance after a sudden external market shortage. Records establish that the department purchased from the approved supplier at the lowest available market quotation. Which conclusion most suitable follows from standard-costing responsibility principles?

1. The purchasing manager must always bear responsibility because material price variance belongs to the purchasing function.
2. The production manager must bear responsibility because all material costs are ultimately incurred during production.
3. The adverse variance should be investigated, but it should not automatically be treated as controllable by the purchasing department in the circumstances described. (correct answer)
4. The variance must be ignored because uncontrollable variances are not relevant to management decisions.

Answer: C — The adverse variance should be investigated, but it should not automatically be treated as controllable by the purchasing department in the circumstances described.

Explanation. Material price variance is generally associated with the purchasing department, but responsibility depends on whether the underlying cause was controllable. Here, the department complied with the approved purchasing arrangement and paid the lowest available price during an external market shortage. Therefore, automatic attribution would be inappropriate. The variance should still be reported and investigated, and persistent significant differences may require revision of standards.

Where it goes wrong. Assuming that functional responsibility for a variance automatically establishes managerial responsibility regardless of the cause.

Authority. ICAI SM: Cost and Management Accounting, Chapter 13 (Standard Costing)

Question 23 · 2 marks · Chapter 13: Standard Costing · medium

Scenario. The standard manufacturing cost for actual production is ₹9,50,000, while actual manufacturing cost is ₹10,07,000. The Material Cost Variance is ₹22,000 adverse, Labour Cost Variance is ₹10,000 favourable and Variable Overhead Cost Variance is ₹8,000 adverse. What is the Fixed Overhead Cost Variance?

The standard manufacturing cost for actual production is ₹9,50,000, while actual manufacturing cost is ₹10,07,000. The Material Cost Variance is ₹22,000 adverse, Labour Cost Variance is ₹10,000 favourable and Variable Overhead Cost Variance is ₹8,000 adverse. What is the Fixed Overhead Cost Variance?

1. ₹25,000 adverse
2. ₹17,000 adverse
3. ₹37,000 favourable
4. ₹37,000 adverse (correct answer)

Answer: D — ₹37,000 adverse

Explanation. Total manufacturing cost variance = ₹10,07,000 − ₹9,50,000 = ₹57,000 adverse. Known net variances = ₹22,000 A − ₹10,000 F + ₹8,000 A = ₹20,000 A. Therefore, fixed overhead cost variance = ₹57,000 A − ₹20,000 A = ₹37,000 adverse. This balances the overall standard-to-actual cost reconciliation.

Where it goes wrong. Ignoring the favourable labour variance while solving for the missing fixed overhead variance.

Authority. ICAI SM: Cost and Management Accounting, Chapter 13 (Standard Costing)

Question 24 · 2 marks · Chapter 13: Standard Costing · hard

Scenario. A manufacturing company begins its reconciliation with standard manufacturing cost of ₹14,50,000. The reported variances are: Material Price Variance ₹12,000 adverse; Material Usage Variance ₹8,000 favourable; Labour Rate Variance ₹10,000 favourable; Labour Efficiency Variance ₹6,000 adverse; Variable Overhead Cost Variance ₹12,000 adverse; Fixed Overhead Cost Variance ₹4,000 favourable. Calculate actual manufacturing cost.

A manufacturing company begins its reconciliation with standard manufacturing cost of ₹14,50,000. The reported variances are: Material Price Variance ₹12,000 adverse; Material Usage Variance ₹8,000 favourable; Labour Rate Variance ₹10,000 favourable; Labour Efficiency Variance ₹6,000 adverse; Variable Overhead Cost Variance ₹12,000 adverse; Fixed Overhead Cost Variance ₹4,000 favourable. Calculate actual manufacturing cost.

1. ₹14,58,000 (correct answer)
2. ₹14,62,000
3. ₹14,50,000
4. ₹14,42,000

Answer: A — ₹14,58,000

Explanation. Material net variance = ₹12,000 A − ₹8,000 F = ₹4,000 A. Labour net variance = ₹10,000 F − ₹6,000 A = ₹4,000 F. Adding variable overhead ₹12,000 A and fixed overhead ₹4,000 F gives net adverse variance of ₹8,000. Actual manufacturing cost = ₹14,50,000 + ₹8,000 = ₹14,58,000. All components are included once.

Where it goes wrong. Adding favourable and adverse variances without first calculating the net material and labour variances.

Authority. ICAI SM: Cost and Management Accounting, Chapter 13 (Standard Costing)

Question 25 · 2 marks · Chapter 13: Standard Costing · medium

Scenario. A factory repeatedly experiences a significant adverse material price variance caused by external market conditions. The purchasing department has complied with the prescribed purchasing policy, and the variance has continued for several accounting periods. Which sequence of managerial action is most appropriate under standard costing?

A factory repeatedly experiences a significant adverse material price variance caused by external market conditions. The purchasing department has complied with the prescribed purchasing policy, and the variance has continued for several accounting periods. Which sequence of managerial action is most appropriate under standard costing?

1. Transfer the variance immediately to the production supervisor and retain the existing standard without further examination.
2. Ignore the price variance because the department responsible has no control over market conditions.
3. Investigate the variance, assess whether the price standard remains realistic and consider revising it if the significant uncontrollable condition persists. (correct answer)
4. Revise all material quantity standards immediately without examining the underlying price movement.

Answer: C — Investigate the variance, assess whether the price standard remains realistic and consider revising it if the significant uncontrollable condition persists.

Explanation. Standard costing requires management to compare actual and standard costs, investigate the causes of variances and take appropriate action. A significant and persistent uncontrollable price variance may indicate that the existing standard is no longer realistic. Management should therefore investigate the market conditions and consider revising the relevant price standard where justified. Quantity standards should not be changed without evidence that material usage standards are also affected.

Where it goes wrong. Confusing revision of a material price standard with revision of its quantity standard, or assigning an uncontrollable variance to an unrelated responsibility centre.

Authority. ICAI SM: Cost and Management Accounting, Chapter 13 (Standard Costing)