Test 11: answer key

Question 1 · 2 marks · Overheads-Absorption Costing Method · hard

Scenario. Orion Precision Components Pvt. Ltd. operates a specialised CNC machining centre for aerospace brackets. For the year 2027-28, the centre's annual data are assembled as follows. The CNC centre cost ₹48,00,000 and has an estimated residual value of ₹3,00,000 after a useful life of 8 years; depreciation is charged on a time basis. Insurance is 2% per annum on the capital cost. Rent apportioned to the centre is ₹2,40,000 per annum and supervisor salary allocated is ₹3,60,000 per annum. Two operators are engaged exclusively for the centre at ₹28,000 per month each. A fixed annual maintenance contract costs ₹1,80,000. The centre is expected to run productively for 4,200 machine hours in the year and to spend 600 hours on setting-up and changeovers. Power consumption is 18 kWh per productive running hour and 3 kWh per setting-up hour; power costs ₹8.50 per kWh. Consumable inserts and coolant cost ₹135 per productive running hour, while variable repairs cost ₹45 per productive running hour. The company absorbs overheads on productive machine hours.

What is the annual power cost of the CNC machining centre?

1. ₹6,42,600
2. ₹6,57,900 (correct answer)
3. ₹6,73,200
4. ₹6,15,600

Answer: B — ₹6,57,900

Working. Productive power = 4,200 × 18 × 8.50 = ₹6,42,600. Setting-up power = 600 × 3 × 8.50 = ₹15,300. Total = ₹6,57,900.

Explanation. Power is consumed both during productive running and during setting-up. The productive portion is 4,200 × 18 × ₹8.50 and the setting-up portion is 600 × 3 × ₹8.50. Adding both gives ₹6,57,900. Option (a) ignores setting-up power, while option (c) treats setting-up hours as productive hours.

Where it goes wrong. Charging power only on productive hours and ignoring the 600 setting-up hours.

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

Question 2 · 2 marks · Overheads-Absorption Costing Method · medium

What is the total annual standing charge of the CNC centre?

1. ₹20,64,000
2. ₹21,42,000
3. ₹21,10,500 (correct answer)
4. ₹21,58,500

Answer: C — ₹21,10,500

Working. Depreciation = 5,62,500. Insurance = 48,00,000 × 2% = 96,000. Rent = 2,40,000. Supervisor = 3,60,000. Operators = 2 × 28,000 × 12 = 6,72,000. Maintenance = 1,80,000. Total = 5,62,500 + 96,000 + 2,40,000 + 3,60,000 + 6,72,000 + 1,80,000 = ₹21,10,500.

Explanation. Standing charges include depreciation on a time basis, insurance, apportioned rent, supervisor salary, operator wages and the fixed maintenance contract. Depreciation is (₹48,00,000 − ₹3,00,000) ÷ 8 = ₹5,62,500. Adding the remaining fixed items gives ₹21,10,500. Option (a) omits operator wages or insurance, and option (d) over-adds a variable item.

Where it goes wrong. Excluding operator wages from comprehensive machine hour rate when the operators are exclusively engaged on the centre.

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

Question 3 · 2 marks · Overheads-Absorption Costing Method · hard

What is the variable cost per productive machine hour of the CNC centre?

1. ₹292.86
2. ₹381.64
3. ₹324.50
4. ₹336.64 (correct answer)

Answer: D — ₹336.64

Working. Power per productive hour = 6,57,900 ÷ 4,200 = 156.6429. Add inserts and coolant 135 and repairs 45 = ₹336.6429 ≈ ₹336.64.

Explanation. The total annual power cost is spread over 4,200 productive hours because the rate is per productive hour. Power per productive hour is ₹6,57,900 ÷ 4,200 = ₹156.6429. Adding consumable inserts and coolant ₹135 and variable repairs ₹45 gives ₹336.6429, rounded to ₹336.64. Option (a) spreads power only over productive-hours power and omits one variable item.

Where it goes wrong. Dividing only productive-hours power by productive hours and adding just one of the two running costs.

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

Question 4 · 2 marks · Overheads-Absorption Costing Method · hard

What is the comprehensive machine hour rate for the CNC centre?

1. ₹839.14 (correct answer)
2. ₹681.64
3. ₹859.14
4. ₹789.50

Answer: A — ₹839.14

Working. Fixed per hour = 21,10,500 ÷ 4,200 = 502.50. Variable per hour = 336.6429. Comprehensive rate = 502.50 + 336.6429 = ₹839.1429 ≈ ₹839.14.

Explanation. The comprehensive rate combines standing charges per productive hour and variable cost per productive hour. Standing charges per hour are ₹21,10,500 ÷ 4,200 = ₹502.50. Variable cost per hour is ₹336.6429. The total is ₹839.1429, rounded to ₹839.14. Option (b) omits part of standing charges; option (c) overstates by adding an extra variable cost.

Where it goes wrong. Adding total annual costs and dividing by total hours including setting-up hours, or omitting operator wages from standing charges.

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

Question 5 · 2 marks · Service Costing · medium

Scenario. Sapphire Transit operates 6 deluxe passenger buses on an intercity route of 45 km one way. Each bus makes 3 round trips per day and runs 26 days in a month. The seating capacity of each bus is 52 passengers and average occupancy is 75%. Monthly operating cost of the fleet is ₹18,72,000. The transport manager wants the total passenger-kilometres for the month and the cost per seat-kilometre.

What are the total passenger-kilometres for the month and the cost per seat-kilometre, respectively?

1. ₹21,90,240 and ₹0.855
2. ₹16,42,680 and ₹0.855 (correct answer)
3. ₹16,42,680 and ₹1.140
4. ₹21,90,240 and ₹1.140

Answer: B — ₹16,42,680 and ₹0.855

Working. Distance = 6 × 45 × 2 × 3 × 26 = 42,120 km. Seat-km = 42,120 × 52 = 21,90,240. Passenger-km = 21,90,240 × 0.75 = 16,42,680. Cost per seat-km = 18,72,000 ÷ 21,90,240 = ₹0.8547 ≈ ₹0.855.

Explanation. Fleet distance is 6 buses × 45 km × 2 × 3 trips × 26 days = 42,120 km. Seat-kilometres are 42,120 × 52 = 21,90,240. Passenger-kilometres are 21,90,240 × 75% = 16,42,680. Cost per seat-kilometre is ₹18,72,000 ÷ 21,90,240 = ₹0.855. Option (a) mistakes seat-km for passenger-km; option (c) gives cost per passenger-km.

Where it goes wrong. Using seat-kilometres as passenger-kilometres or dividing cost by passenger-km when seat-km cost is asked.

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

Question 6 · 2 marks · Material Cost · medium

Scenario. Vertex Controls uses FIFO for material 'Alloy Rod AR-7'. On 1 October 2026, opening stock was 600 kg at ₹210 per kg. Receipts during October were: 4 October, 1,200 kg at ₹218; 12 October, 800 kg at ₹224; 22 October, 1,000 kg at ₹230; and 28 October, 500 kg at ₹236. Issues were: 6 October, 800 kg; 14 October, 1,000 kg; 24 October, 1,200 kg; and 30 October, 600 kg. On 31 October 2026, a physical stock verification found 380 kg on hand; no material was issued after 30 October. The stores ledger had not been adjusted for the physical verification result. The company treats shortage arising from pilferage as abnormal and values it at the relevant FIFO issue price.

Under FIFO, what is the cost of materials issued on 24 October 2026?

1. ₹2,68,000
2. ₹2,76,000
3. ₹2,71,200 (correct answer)
4. ₹2,64,800

Answer: C — ₹2,71,200

Working. 800 × 224 = 1,79,200. 400 × 230 = 92,000. Total = ₹2,71,200.

Explanation. Before the 24 October issue, the oldest remaining lot is 800 kg at ₹224, followed by 1,000 kg at ₹230. The issue of 1,200 kg therefore takes 800 kg at ₹224 and 400 kg at ₹230. The value is ₹1,79,200 + ₹92,000 = ₹2,71,200. Option (a) uses a simple average and option (b) uses the latest price for the full quantity.

Where it goes wrong. Using the latest purchase price for the entire issue instead of exhausting the oldest lot first.

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

Question 7 · 2 marks · Material Cost · hard

What is the total cost of materials issued during October 2026 under FIFO?

1. ₹7,82,400
2. ₹8,04,000
3. ₹7,68,000
4. ₹7,96,800 (correct answer)

Answer: D — ₹7,96,800

Working. 6 Oct: 600 × 210 + 200 × 218 = 1,69,600. 14 Oct: 1,000 × 218 = 2,18,000. 24 Oct: 800 × 224 + 400 × 230 = 2,71,200. 30 Oct: 600 × 230 = 1,38,000. Total = ₹7,96,800.

Explanation. The four issues are valued sequentially under FIFO. The 6 October issue uses opening stock and part of the 4 October receipt; the 14 October issue uses the balance of the 4 October lot; the 24 October issue uses the 12 October and 22 October lots; and the 30 October issue uses the 22 October lot. The total is ₹7,96,800. Option (a) omits part of the opening stock value.

Where it goes wrong. Ignoring the opening stock layer while valuing the first issue.

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

Question 8 · 2 marks · Material Cost · medium

What is the value of closing stock as per the stores ledger before physical verification?

1. ₹1,18,000 (correct answer)
2. ₹1,28,800
3. ₹1,06,200
4. ₹1,24,000

Answer: A — ₹1,18,000

Working. Closing book quantity = 500 kg. Value = 500 × 236 = ₹1,18,000.

Explanation. After the 30 October issue, only 500 kg from the 28 October receipt remains. Under FIFO the closing stock is valued at ₹236 per kg, giving ₹1,18,000. Option (b) uses the ₹230 rate and option (d) uses a weighted average.

Where it goes wrong. Valuing the remaining stock at the previous receipt rate instead of the latest remaining lot.

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

Question 9 · 2 marks · Material Cost · hard

What is the value of the abnormal shortage and the value of physical stock after adjustment, respectively?

1. ₹24,000 and ₹94,000
2. ₹28,320 and ₹89,680 (correct answer)
3. ₹33,600 and ₹84,400
4. ₹26,400 and ₹91,600

Answer: B — ₹28,320 and ₹89,680

Working. Book stock 500 kg − physical 380 kg = 120 kg shortage. Shortage = 120 × 236 = ₹28,320. Physical stock = 380 × 236 = ₹89,680.

Explanation. The ledger shows 500 kg, but physical stock is 380 kg, so shortage is 120 kg. The remaining stock is from the ₹236 lot, so shortage value is 120 × ₹236 = ₹28,320. Physical stock value is 380 × ₹236 = ₹89,680. Option (a) values shortage at ₹200 per kg and option (c) at ₹280 per kg.

Where it goes wrong. Comparing physical stock with total receipts instead of with the stores ledger balance.

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

Question 10 · 2 marks · Standard Costing · hard

Scenario. Zenith Components uses standard costing. The standard material specification for one unit of product ZX is 4 kg at ₹50 per kg. During August 2026, output was 2,000 units. The purchasing team bought a lower-grade material and actual usage was 8,500 kg at ₹46 per kg. Usage exceeded the standard because the lower grade caused more rejects. Calculate the material price variance, material usage variance and net material cost variance, and interpret the purchasing decision.

Which statement correctly shows the variances and the purchasing interpretation?

1. MPV ₹25,000 F; MUV ₹34,000 A; net MCV ₹9,000 A
2. MPV ₹34,000 F; MUV ₹25,000 F; net MCV ₹59,000 F
3. MPV ₹34,000 F; MUV ₹25,000 A; net MCV ₹9,000 F (correct answer)
4. MPV ₹25,000 A; MUV ₹34,000 F; net MCV ₹9,000 A

Answer: C — MPV ₹34,000 F; MUV ₹25,000 A; net MCV ₹9,000 F

Working. MPV = (50 − 46) × 8,500 = ₹34,000 F. MUV = (8,000 − 8,500) × 50 = ₹25,000 A. MCV = 34,000 F − 25,000 A = ₹9,000 F.

Explanation. MPV = (₹50 − ₹46) × 8,500 = ₹34,000 F. Standard quantity for 2,000 units is 8,000 kg. MUV = (8,000 − 8,500) × ₹50 = ₹25,000 A. Net MCV = ₹34,000 F − ₹25,000 A = ₹9,000 F. The lower price saved more than the usage penalty, but the adverse usage signals a quality issue. Option (a) reverses the MPV and MUV amounts.

Where it goes wrong. Calculating MUV at actual price instead of standard price, or reversing the signs of the two variances.

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

Question 11 · 2 marks · Process & Operation Costing · medium

Scenario. Crestline Chemicals operates Process II on a weighted average basis. On 1 November 2026, opening work-in-process was 1,200 units. Materials were 100 percent complete, labour 60% complete and overheads 40% complete. Opening WIP cost included materials ₹1,20,000, labour ₹30,000 and overheads ₹20,000. During November, 8,800 units were introduced. Completed output transferred to Process III was 8,000 units. Closing WIP was 1,600 units: materials 100 percent complete, labour 75% complete and overheads 50% complete. Normal loss was 400 units with no realisable value. Current costs were materials ₹8,40,000, labour ₹4,30,000 and overheads ₹3,32,000. The company uses equivalent production for valuation.

Using the weighted average method, what are the equivalent units for labour?

1. 8,000 units
2. 8,800 units
3. 9,600 units
4. 9,200 units (correct answer)

Answer: D — 9,200 units

Working. Labour EU = 8,000 completed + (1,600 × 75%) = 8,000 + 1,200 = 9,200 units.

Explanation. Under weighted average, equivalent units are completed units plus equivalent units in closing WIP. For labour, completed units are 8,000 and closing WIP is 1,600 × 75% = 1,200. Total equivalent units are 9,200. Option (a) ignores closing WIP; option (c) treats closing WIP as fully complete.

Where it goes wrong. Adding opening WIP again or ignoring the degree of completion of closing WIP.

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

Question 12 · 2 marks · Process & Operation Costing · medium

What is the cost per equivalent unit for overheads under the weighted average method?

1. ₹40.00 (correct answer)
2. ₹44.00
3. ₹36.00
4. ₹50.00

Answer: A — ₹40.00

Working. Total OH = 20,000 + 3,32,000 = 3,52,000. OH EU = 8,000 + 800 = 8,800. Rate = 3,52,000 ÷ 8,800 = ₹40.

Explanation. Total overhead cost is opening ₹20,000 plus current ₹3,32,000 = ₹3,52,000. Overhead equivalent units are 8,000 completed + 1,600 × 50% = 8,800. Cost per equivalent unit is ₹3,52,000 ÷ 8,800 = ₹40. Option (b) divides by 8,000 only and option (d) uses labour equivalent units.

Where it goes wrong. Dividing by completed units only instead of completed plus equivalent closing WIP.

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

Question 13 · 2 marks · Process & Operation Costing · hard

What is the value of units completed and transferred to Process III?

1. ₹14,80,000
2. ₹15,20,000 (correct answer)
3. ₹15,60,000
4. ₹16,00,000

Answer: B — ₹15,20,000

Working. Material rate = 9,60,000 ÷ 9,600 = 100. Labour rate = 4,60,000 ÷ 9,200 = 50. OH rate = 3,52,000 ÷ 8,800 = 40. Total rate = 190. Completed = 8,000 × 190 = ₹15,20,000.

Explanation. Material cost per EU is ₹9,60,000 ÷ 9,600 = ₹100; labour is ₹4,60,000 ÷ 9,200 = ₹50; overhead is ₹3,52,000 ÷ 8,800 = ₹40. Cost per completed unit is ₹190. For 8,000 completed units, value is 8,000 × ₹190 = ₹15,20,000. Option (a) uses an incomplete cost build-up.

Where it goes wrong. Using only current costs and ignoring opening WIP costs under weighted average.

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

Question 14 · 2 marks · Process & Operation Costing · hard

What is the value of closing work-in-process?

1. ₹2,40,000
2. ₹2,64,000
3. ₹2,52,000 (correct answer)
4. ₹2,76,000

Answer: C — ₹2,52,000

Working. Material = 1,600 × 100 = 1,60,000. Labour = 1,200 × 50 = 60,000. OH = 800 × 40 = 32,000. Total = ₹2,52,000.

Explanation. Closing WIP has 1,600 units. Material equivalent units are 1,600 at ₹100 = ₹1,60,000. Labour equivalent units are 1,200 at ₹50 = ₹60,000. Overhead equivalent units are 800 at ₹40 = ₹32,000. Total closing WIP is ₹2,52,000. Option (b) treats labour and overheads as fully complete.

Where it goes wrong. Valuing all 1,600 closing units at the full completed-unit cost of ₹190.

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

Question 15 · 2 marks · Cost Sheet · hard

Scenario. Nova Process Systems incurred the following during 2026-27: ₹6,80,000 on research and development for improving the efficiency of its existing manufacturing process; ₹1,20,000 on market research for a proposed new product; and ₹90,000 on fundamental research not related to any specific product or process. The company is preparing a cost sheet and wants to classify these costs.

How much should be included in cost of production and selling overhead, respectively?

1. ₹6,80,000 and ₹90,000
2. ₹1,20,000 and ₹6,80,000
3. ₹7,70,000 and ₹1,20,000
4. ₹6,80,000 and ₹1,20,000 (correct answer)

Answer: D — ₹6,80,000 and ₹1,20,000

Working. Process improvement R&D = ₹6,80,000 → cost of production. Market research = ₹1,20,000 → selling overhead. Fundamental research = ₹90,000 → administration overhead.

Explanation. R&D for improving an existing manufacturing process is process-related and forms part of cost of production. Market research is a selling overhead. Fundamental research unrelated to a specific product or process is treated as administration overhead. Therefore, cost of production includes ₹6,80,000 and selling overhead includes ₹1,20,000. Option (a) wrongly puts fundamental research into selling overhead.

Where it goes wrong. Classifying all research costs as administration overhead or treating market research as production cost.

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