Test 10: answer key

Question 1 · 2 marks · Budgets & Budgetary Control · hard

Scenario. Sahyadri Compressors Ltd. manufactures the AC-40 reciprocating compressor at its Chakan plant. The marketing department has finalised the unit sales forecast for the coming financial year 2027-28 as follows: Quarter 1 - 32,000 units; Quarter 2 - 40,000 units; Quarter 3 - 36,000 units; Quarter 4 - 44,000 units. Sales in Quarter 1 of 2028-29 are projected at 46,000 units. The finished goods inventory on 1 April 2027 is 4,800 units. The production planning policy of the company requires each quarter's production to be 85% of that quarter's sales plus 15% of the following quarter's sales, so that closing finished goods at the end of every quarter equal 15% of the next quarter's sales; the opening finished goods of the year are also consistent with this policy. Each AC-40 consumes 3.5 kg of grade-VX7 steel plate. Raw material inventory of grade-VX7 on 1 April 2027 is 12,000 kg and the stores department has been instructed to hold 18,000 kg on 31 March 2028. The purchase desk has negotiated a slab rate: Rs. 240 per kg for the first 5,00,000 kg lifted during the year and Rs. 225 per kg for every kilogram beyond 5,00,000 kg. The entire year's requirement is contracted in a single annual purchase order and no other purchase of this grade is expected.

What is the budgeted production of AC-40 compressors for Quarter 3 of 2027-28?

1. 30,600 units
2. 36,000 units
3. 37,200 units (correct answer)
4. 37,600 units

Answer: C — 37,200 units

Working. 0.85 x 36,000 = 30,600; 0.15 x 44,000 = 6,600; total = 37,200 units.

Explanation. Quarter 3 production is 85% of the current quarter's sales plus 15% of the following quarter's sales, because the company holds closing finished goods equal to 15% of the next quarter's sales. Thus 0.85 x 36,000 = 30,600 units and 0.15 x 44,000 = 6,600 units, giving 37,200 units. The Quarter 4 sales figure, not the Quarter 3 figure, drives the closing stock element of Quarter 3.

Where it goes wrong. Taking 15% of Quarter 3 sales (5,400 units) instead of Quarter 4 sales gives 36,000 units, option (b).

Authority. ICAI Study Material, Paper 4: Cost and Management Accounting, Module relevant for Budgets & Budgetary Control

Question 2 · 2 marks · Budgets & Budgetary Control · medium

The total number of AC-40 units to be produced during 2027-28 is:

1. 1,54,100 units (correct answer)
2. 1,47,200 units
3. 1,52,000 units
4. 1,58,900 units

Answer: A — 1,54,100 units

Working. Q1: 27,200 + 6,000 = 33,200; Q2: 34,000 + 5,400 = 39,400; Q3: 30,600 + 6,600 = 37,200; Q4: 37,400 + 6,900 = 44,300. Total = 1,54,100 units.

Explanation. Quarterly production under the stated policy works out to Q1 33,200, Q2 39,400, Q3 37,200 and Q4 44,300 units, aggregating 1,54,100 units. The same figure is obtained from the inventory identity: annual sales 1,52,000 units plus closing finished goods of 6,900 units (15% of 46,000) less opening finished goods of 4,800 units.

Where it goes wrong. Adding closing stock but ignoring opening stock gives 1,58,900 units, option (d).

Authority. ICAI Study Material, Paper 4: Cost and Management Accounting, Module relevant for Budgets & Budgetary Control

Question 3 · 2 marks · Budgets & Budgetary Control · medium

The quantity of grade-VX7 steel plate to be consumed during 2027-28 is:

1. 5,32,000 kg
2. 5,45,350 kg
3. 5,56,150 kg
4. 5,39,350 kg (correct answer)

Answer: D — 5,39,350 kg

Working. 1,54,100 units x 3.5 kg = 5,39,350 kg.

Explanation. Consumption is driven by the production budget, not by purchases. Annual production of 1,54,100 units at 3.5 kg per unit gives 5,39,350 kg. The stores requirement of 18,000 kg at year end and the opening balance of 12,000 kg affect only the purchase quantity, which is 5,39,350 + 18,000 - 12,000 = 5,45,350 kg.

Where it goes wrong. Option (b) is the purchase quantity, obtained by adding closing stock and deducting opening stock.

Authority. ICAI Study Material, Paper 4: Cost and Management Accounting, Module relevant for Budgets & Budgetary Control

Question 4 · 2 marks · Budgets & Budgetary Control · hard

The cost of the annual purchase of grade-VX7 steel plate is:

1. Rs. 13,08,84,000
2. Rs. 13,02,03,750 (correct answer)
3. Rs. 12,61,53,750
4. Rs. 12,27,03,750

Answer: B — Rs. 13,02,03,750

Working. 5,45,350 kg; 5,00,000 x 240 = 12,00,00,000; 45,350 x 225 = 1,02,03,750; total = Rs. 13,02,03,750.

Explanation. Purchases equal consumption of 5,39,350 kg plus the closing stock of 18,000 kg less the opening stock of 12,000 kg, that is 5,45,350 kg. The slab rate applies to the first 5,00,000 kg at Rs. 240 and the balance 45,350 kg at Rs. 225, giving Rs. 12,00,00,000 plus Rs. 1,02,03,750.

Where it goes wrong. Applying Rs. 240 uniformly over 5,45,350 kg gives Rs. 13,08,84,000, option (a), which ignores the slab.

Authority. ICAI Study Material, Paper 4: Cost and Management Accounting, Module relevant for Budgets & Budgetary Control

Question 5 · 2 marks · Employee Cost and Direct Expenses · medium

Scenario. Vasudha Alloy Castings Ltd. pays its furnace operators Rs. 180 per hour for a normal eight-hour shift. Under the company's agreement with the operators, work beyond the shift is paid at twice the ordinary rate. In a month, operator Ramesh worked 42 hours of overtime. Of these, 30 hours were put in on a customer order that the company had accepted against a delivery deadline and which the customer had specifically asked to be expedited; the balance 12 hours were worked to recover output lost when a ladle crane motor burnt out and the shop remained idle for two days.

How should the overtime premium of Rs. 7,560 be dealt with in the cost records for the month?

1. Rs. 7,560 charged to the customer order and nothing to Costing P&L A/c
2. Rs. 5,400 charged to the customer order and Rs. 2,160 to Costing P&L A/c (correct answer)
3. Rs. 5,400 charged to factory overheads and Rs. 2,160 to Costing P&L A/c
4. Rs. 2,160 charged to the customer order and Rs. 5,400 to Costing P&L A/c

Answer: B — Rs. 5,400 charged to the customer order and Rs. 2,160 to Costing P&L A/c

Working. Premium per hour = 360 - 180 = Rs. 180. Order: 30 x 180 = Rs. 5,400. Costing P&L: 12 x 180 = Rs. 2,160.

Explanation. The ordinary rate is Rs. 180 per hour and the overtime rate is Rs. 360, so the premium is Rs. 180 per hour. Overtime worked at the specific request of a customer to expedite an order is charged to that order, giving 30 x 180 = Rs. 5,400. Overtime worked to make good output lost through a machine breakdown is an abnormal cost and is written off to Costing Profit and Loss Account, giving 12 x 180 = Rs. 2,160.

Where it goes wrong. Charging the entire premium of Rs. 7,560 to the order, option (a), ignores the abnormal loss element.

Authority. ICAI Study Material, Paper 4: Cost and Management Accounting, Module relevant for Employee Cost and Direct Expenses

Question 6 · 2 marks · Joint Products and By-Products · hard

Scenario. Kaveri Refineries Ltd. runs a topping refinery at Haldia. In a month it charges 40,000 barrels of crude NS-4 into the crude distillation unit. The crude costs Rs. 7,40,00,000 and the conversion cost of the distillation unit up to the split-off point is Rs. 1,90,00,000. The split-off yields 20,000 barrels of petrol, 14,000 barrels of diesel and 6,000 barrels of residual bitumen. Petrol is sold in the wholesale market at Rs. 4,050 per barrel and diesel at Rs. 3,750 per barrel, both at the split-off point, and neither is processed further. Residual bitumen cannot be sold in the crude state for fuel use because of its sulphur content and is, therefore, blended in a separate unit at a cost of Rs. 30,00,000 per month; the blending converts the 6,000 barrels into 4,800 barrels of polymer-modified bitumen (PMB) which fetches Rs. 1,875 per barrel. The joint cost of Rs. 9,30,00,000 is apportioned to the three products on the net realisable value at split-off basis, the bitumen's realisable value being taken after the blending cost. A road construction contractor has now offered to lift the entire 6,000 barrels of residual bitumen in the crude state every month at Rs. 1,600 per barrel, with no blending at the refinery.

Under the net realisable value at split-off method, the joint cost apportioned to diesel is:

1. Rs. 3,25,50,000
2. Rs. 3,50,00,000 (correct answer)
3. Rs. 3,10,00,000
4. Rs. 3,48,75,000

Answer: B — Rs. 3,50,00,000

Working. Petrol 20,000 x 4,050 = 8,10,00,000; diesel 14,000 x 3,750 = 5,25,00,000; bitumen 90,00,000 - 30,00,000 = 60,00,000. Total 13,95,00,000. Diesel = 9,30,00,000 x 525/1395 = 3,50,00,000.

Explanation. Net realisable values are petrol Rs. 8,10,00,000, diesel Rs. 5,25,00,000 and bitumen Rs. 90,00,000 less Rs. 30,00,000 blending cost, that is Rs. 60,00,000, giving a total of Rs. 13,95,00,000. Diesel therefore takes Rs. 9,30,00,000 x 5,25,00,000 / 13,95,00,000 = Rs. 3,50,00,000, the ratio of the three net realisable values being 54 : 35 : 4.

Where it goes wrong. Apportioning on physical barrels gives diesel 35% of Rs. 9,30,00,000, that is Rs. 3,25,50,000, option (a).

Authority. ICAI Study Material, Paper 4: Cost and Management Accounting, Module relevant for Joint Products and By-Products

Question 7 · 2 marks · Joint Products and By-Products · medium

The realisable value per barrel attributed to residual bitumen at the split-off point for the apportionment is:

1. Rs. 750
2. Rs. 1,250
3. Rs. 1,500
4. Rs. 1,000 (correct answer)

Answer: D — Rs. 1,000

Working. (4,800 x 1,875 - 30,00,000) / 6,000 = (90,00,000 - 30,00,000)/6,000 = Rs. 1,000 per barrel.

Explanation. The net realisable value of bitumen at split-off is the blended realisation of Rs. 90,00,000 (4,800 barrels at Rs. 1,875) reduced by the post-split-off blending cost of Rs. 30,00,000, giving Rs. 60,00,000 for 6,000 barrels of crude bitumen, that is Rs. 1,000 per barrel. Post-separation costs are deducted to bring the bitumen on to the same split-off footing as petrol and diesel.

Where it goes wrong. Dividing the PMB realisation of Rs. 90,00,000 by 6,000 barrels gives Rs. 1,500, option (c), which ignores the blending cost.

Authority. ICAI Study Material, Paper 4: Cost and Management Accounting, Module relevant for Joint Products and By-Products

Question 8 · 2 marks · Joint Products and By-Products · hard

By what amount does the contractor's offer improve the monthly result compared with blending the bitumen into PMB?

1. Rs. 6,00,000
2. Rs. 30,00,000
3. Rs. 36,00,000 (correct answer)
4. Rs. 66,00,000

Answer: C — Rs. 36,00,000

Working. As-is: 6,000 x 1,600 = 96,00,000. Blended NRV: 90,00,000 - 30,00,000 = 60,00,000. Difference = 36,00,000.

Explanation. Selling the 6,000 barrels in the crude state yields 6,000 x Rs. 1,600 = Rs. 96,00,000 with no further cost. Blending gives 4,800 x Rs. 1,875 = Rs. 90,00,000 less Rs. 30,00,000, that is Rs. 60,00,000. The contractor's offer is therefore better by Rs. 96,00,000 - Rs. 60,00,000 = Rs. 36,00,000. The joint cost is unaffected because it is sunk at the split-off point.

Where it goes wrong. Comparing only the two revenue figures gives Rs. 6,00,000, option (a), and omits the blending cost saved.

Authority. ICAI Study Material, Paper 4: Cost and Management Accounting, Module relevant for Joint Products and By-Products

Question 9 · 2 marks · Joint Products and By-Products · hard

The joint cost borne per barrel of petrol under the net realisable value method is:

1. Rs. 2,325
2. Rs. 2,643
3. Rs. 2,700 (correct answer)
4. Rs. 1,550

Answer: C — Rs. 2,700

Working. Petrol share = 9,30,00,000 x 810/1395 = 5,40,00,000; per barrel = 5,40,00,000/20,000 = Rs. 2,700.

Explanation. Petrol's share of the joint cost is Rs. 9,30,00,000 x 8,10,00,000 / 13,95,00,000 = Rs. 5,40,00,000. Spread over 20,000 barrels this gives Rs. 2,700 per barrel. The figure reflects the high realisable value of petrol relative to its volume, which is the essence of the net realisable value method.

Where it goes wrong. Apportioning on physical barrels gives Rs. 4,65,00,000 for petrol, that is Rs. 2,325 per barrel, option (a).

Authority. ICAI Study Material, Paper 4: Cost and Management Accounting, Module relevant for Joint Products and By-Products

Question 10 · 2 marks · Marginal Costing · medium

Scenario. Trishul Cements Ltd. sells its ordinary Portland cement at Rs. 520 per tonne; the variable cost is Rs. 364 per tonne and annual fixed costs are Rs. 62,40,000. At this price and cost structure the break-even point works out to 40,000 tonnes a year. The technical team has proposed switching the kiln to a cheaper fuel blend. The proposal will trim the variable cost to Rs. 338 per tonne but will raise fixed costs to Rs. 76,44,000 a year through higher fuel-handling charges; the selling price will remain Rs. 520 per tonne.

If the fuel-blend proposal is implemented, which of the following correctly describes the effect on the break-even point and on the angle of incidence?

1. Break-even point rises to 42,000 tonnes and the angle of incidence becomes wider (correct answer)
2. Break-even point rises to 42,000 tonnes and the angle of incidence becomes narrower
3. Break-even point falls to 36,000 tonnes and the angle of incidence becomes wider
4. Break-even point stays at 40,000 tonnes and the angle of incidence is unchanged

Answer: A — Break-even point rises to 42,000 tonnes and the angle of incidence becomes wider

Working. Old contribution 156; old BEP 62,40,000/156 = 40,000 t. New contribution 182; new BEP 76,44,000/182 = 42,000 t. Steeper profit line = wider angle.

Explanation. The revised contribution is Rs. 520 - Rs. 338 = Rs. 182 per tonne, so the break-even point becomes Rs. 76,44,000 / Rs. 182 = 42,000 tonnes against 40,000 tonnes earlier. Because contribution per unit has risen from Rs. 156 to Rs. 182, the profit line climbs more steeply once break-even is crossed, so the angle of incidence widens even though the break-even point has moved up.

Where it goes wrong. Assuming that a wider angle of incidence must always accompany a lower break-even point.

Authority. ICAI Study Material, Paper 4: Cost and Management Accounting, Module relevant for Marginal Costing

Question 11 · 2 marks · Marginal Costing · medium

Scenario. Anantara Pumps Ltd. runs a single machining cell comprising eight CNC turning centres which together supply 12,000 machine hours a year to three products. Demand for each product exceeds what the cell can supply, and the products are made only on these machines. Product X sells at Rs. 1,850 and carries a variable cost of Rs. 1,250, consuming 1.5 machine hours per unit; the sales department has booked firm orders for a maximum of 3,200 units. Product Y sells at Rs. 2,400 with a variable cost of Rs. 1,680 and takes 2.0 machine hours per unit, with a maximum market of 3,000 units. Product Z, a high-volume utility model, sells at Rs. 1,150, carries a variable cost of Rs. 700 and needs only 0.75 machine hour per unit; up to 8,000 units can be absorbed by the market. The cell cannot be expanded during the year and no subcontracting is possible. Annual fixed costs attributable to the cell are Rs. 38,40,000 and are incurred irrespective of the mix chosen. Management wishes to settle the production plan purely on the basis of contribution per machine hour, the machine hour being the binding constraint, and no inventories are carried.

The contribution per machine hour of Product Y is:

1. Rs. 360 (correct answer)
2. Rs. 300
3. Rs. 400
4. Rs. 480

Answer: A — Rs. 360

Working. 720/2.0 = Rs. 360 per machine hour.

Explanation. Y's contribution per unit is Rs. 2,400 - Rs. 1,680 = Rs. 720, and each unit absorbs 2.0 machine hours, so the contribution per machine hour is Rs. 720 / 2.0 = Rs. 360. For comparison, X yields Rs. 600 / 1.5 = Rs. 400 and Z yields Rs. 450 / 0.75 = Rs. 600 per machine hour, so Y ranks last on the limiting factor despite the largest contribution per unit.

Where it goes wrong. Ranking products by contribution per unit (Y Rs. 720 is the highest) instead of by contribution per machine hour.

Authority. ICAI Study Material, Paper 4: Cost and Management Accounting, Module relevant for Marginal Costing

Question 12 · 2 marks · Marginal Costing · hard

In what sequence should the three products be scheduled to maximise the total contribution of the cell?

1. Product Y first, then Product X, then Product Z
2. Product X first, then Product Z, then Product Y
3. Product Z first, then Product X, then Product Y (correct answer)
4. Product Z first, then Product Y, then Product X

Answer: C — Product Z first, then Product X, then Product Y

Working. CM/hr: X 400; Y 360; Z 600. Ranking descending: Z, X, Y.

Explanation. Under a single binding constraint, products are ranked by contribution per unit of the key factor. The figures are Z Rs. 450 / 0.75 = Rs. 600, X Rs. 600 / 1.5 = Rs. 400 and Y Rs. 720 / 2.0 = Rs. 360 per machine hour, so the sequence is Z, then X, then Y. Meeting Z and X demand consumes 10,800 of the 12,000 hours, leaving only a residual for Y.

Where it goes wrong. Ranking by contribution per unit, which places Y first and Z last, option (a).

Authority. ICAI Study Material, Paper 4: Cost and Management Accounting, Module relevant for Marginal Costing

Question 13 · 2 marks · Marginal Costing · hard

How many units of Product Y form part of the optimal production plan?

1. 300 units
2. 600 units (correct answer)
3. 900 units
4. 1,200 units

Answer: B — 600 units

Working. 12,000 - (6,000 + 4,800) = 1,200 hours; 1,200/2.0 = 600 units of Y.

Explanation. Full demand of Z uses 8,000 x 0.75 = 6,000 hours and full demand of X uses 3,200 x 1.5 = 4,800 hours, a total of 10,800 hours. The unexpended capacity is 1,200 hours, and since Y needs 2.0 hours per unit, 1,200 / 2.0 = 600 units of Y can be made. Y's market limit of 3,000 units is not reached.

Where it goes wrong. Dividing the balance of 1,200 hours by 1.5 or by 0.75, the hour rates of X and Z, gives options (c) and (d).

Authority. ICAI Study Material, Paper 4: Cost and Management Accounting, Module relevant for Marginal Costing

Question 14 · 2 marks · Marginal Costing · hard

The maximum profit obtainable from the machining cell for the year is:

1. Rs. 16,80,000
2. Rs. 9,60,000
3. Rs. 19,20,000
4. Rs. 21,12,000 (correct answer)

Answer: D — Rs. 21,12,000

Working. 36,00,000 + 19,20,000 + 4,32,000 = 59,52,000; less 38,40,000 = Rs. 21,12,000.

Explanation. Total contribution is 8,000 units of Z at Rs. 450 (Rs. 36,00,000), 3,200 units of X at Rs. 600 (Rs. 19,20,000) and 600 units of Y at Rs. 720 (Rs. 4,32,000), aggregating Rs. 59,52,000. Deducting the fixed cost of Rs. 38,40,000, which is unaffected by the mix, gives a maximum profit of Rs. 21,12,000.

Where it goes wrong. Leaving the residual 1,200 hours idle gives contribution of Rs. 55,20,000 and profit of Rs. 16,80,000, option (a).

Authority. ICAI Study Material, Paper 4: Cost and Management Accounting, Module relevant for Marginal Costing

Question 15 · 2 marks · Overheads - Absorption Costing Method · hard

Scenario. Nandini Polymers Ltd. absorbs production overheads at a predetermined rate of Rs. 85 per machine hour. During the year 24,000 machine hours were worked and the actual production overheads incurred were Rs. 21,84,000. The total under-absorption, on investigation, comprised Rs. 54,000 traceable to defective production planning that kept a line idle, and the balance traceable to a general rise in the prices of indirect materials and consumables. Production for the year was 12,000 units, of which 9,000 units were sold; 3,000 units remained in the finished goods store and work-in-progress was equivalent to 500 completed units. There was no opening stock.

How should the under-absorbed overhead be disposed of between the Cost of Sales Account and the Costing Profit and Loss Account?

1. Rs. 64,800 to Cost of Sales A/c and Rs. 54,000 to Costing P&L A/c (correct answer)
2. Rs. 90,000 to Cost of Sales A/c and Rs. 54,000 to Costing P&L A/c
3. Rs. 64,800 to Cost of Sales A/c and Rs. 90,000 to Costing P&L A/c
4. Rs. 79,200 to Cost of Sales A/c and Rs. 54,000 to Costing P&L A/c

Answer: A — Rs. 64,800 to Cost of Sales A/c and Rs. 54,000 to Costing P&L A/c

Working. Under-absorption = 21,84,000 - 20,40,000 = 1,44,000. P&L = 54,000. Balance 90,000/12,500 = Rs. 7.20; cost of sales = 9,000 x 7.20 = Rs. 64,800.

Explanation. Overheads absorbed are 24,000 x Rs. 85 = Rs. 20,40,000 against actuals of Rs. 21,84,000, so Rs. 1,44,000 is under-absorbed. The Rs. 54,000 attributable to defective planning is abnormal and is charged to Costing Profit and Loss Account. The balance of Rs. 90,000 is spread by a supplementary rate over 9,000 sold + 3,000 finished goods + 500 equivalent WIP = 12,500 units, giving Rs. 7.20 per unit; cost of sales bears 9,000 x Rs. 7.20 = Rs. 64,800.

Where it goes wrong. Debiting the entire Rs. 90,000 to cost of sales, option (b), ignores the finished goods and work-in-progress shares.

Authority. ICAI Study Material, Paper 4: Cost and Management Accounting, Module relevant for Overheads - Absorption Costing Method