Test 14: answer key

Question 1 · 2 marks · Standard Costing · hard

Scenario. NovaCure Labs produces analgesic tablets in a granulation plant. A standard input batch of 1,000 kg yields 900 kg of good granules after a normal loss of 10%. The standard input mix is AX-40 50%, BX-25 30% and CX-10 20%. Standard prices are AX-40 ₹240 per kg, BX-25 ₹180 per kg and CX-10 ₹120 per kg. During September, the plant produced 4,680 kg of good granules. Actual inputs consumed were AX-40 2,800 kg at ₹252 per kg, BX-25 1,600 kg at ₹174 per kg and CX-10 1,100 kg at ₹126 per kg, giving a total actual input of 5,500 kg. For the granulation gang, the standard mix per 1,000 kg input is 120 skilled hours at ₹150, 180 semi-skilled hours at ₹100 and 100 unskilled hours at ₹70. In September the gang actually worked 130 skilled hours at ₹160, 160 semi-skilled hours at ₹105 and 120 unskilled hours at ₹75, a total of 410 hours. The cost office computes material mix, material yield, labour gang mix and material price variances for the month. All variances are reported as favourable or adverse.

What is the material mix variance for September?

1. ₹3,000 (A) (correct answer)
2. ₹3,000 (F)
3. ₹2,400 (A)
4. ₹2,400 (F)

Answer: A — ₹3,000 (A)

Working. RSQ: AX = 5,500×50% = 2,750 kg; BX = 5,500×30% = 1,650 kg; CX = 5,500×20% = 1,100 kg. MMV = (2,750−2,800)×240 + (1,650−1,600)×180 + (1,100−1,100)×120 = −12,000 + 9,000 + 0 = ₹3,000 (A).

Explanation. Material mix variance compares revised standard quantity in standard proportion with actual quantity, at standard price. Actual total input is 5,500 kg; applying 50:30:20 gives RSQ of 2,750 kg, 1,650 kg and 1,100 kg. The adverse net figure arises because AX-40 was overused and BX-25 underused relative to the standard mix.

Where it goes wrong. Using standard quantity for actual output instead of RSQ based on actual total input gives a different figure and confuses mix with yield.

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

Question 2 · 2 marks · Standard Costing · hard

What is the material yield variance for September?

1. ₹56,400 (A)
2. ₹59,400 (A) (correct answer)
3. ₹59,400 (F)
4. ₹62,400 (A)

Answer: B — ₹59,400 (A)

Working. SQ for actual output: 5,200×50%=2,600; ×30%=1,560; ×20%=1,040. MYV = (2,600−2,750)×240 + (1,560−1,650)×180 + (1,040−1,100)×120 = −36,000 −16,200 −7,200 = ₹59,400 (A).

Explanation. Yield variance measures the effect of actual input quantity differing from the standard input for the actual output, after putting actual input in standard proportion. Standard input for 4,680 kg good output is 4,680÷90% = 5,200 kg. Comparing SQ with RSQ at standard prices gives an adverse total of ₹59,400.

Where it goes wrong. Comparing standard quantity directly with actual quantity gives material usage variance, not yield variance.

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

Question 3 · 2 marks · Standard Costing · hard

What is the labour gang mix variance for September?

1. ₹175 (A)
2. ₹225 (F)
3. ₹175 (F) (correct answer)
4. ₹225 (A)

Answer: C — ₹175 (F)

Working. Actual total hours = 410. RSH: skilled 410×120/400=123; semi-skilled 410×180/400=184.5; unskilled 410×100/400=102.5. LMV = (123−130)×150 + (184.5−160)×100 + (102.5−120)×70 = −1,050 + 2,450 −1,225 = ₹175 (F).

Explanation. Labour gang mix variance uses actual total hours worked and restates them in the standard gang ratio. The standard ratio is 120:180:100, or 30:45:25. The favourable total arises because more semi-skilled hours and fewer unskilled hours were used than the standard proportion, at the standard rates.

Where it goes wrong. Using standard hours for actual output instead of revised standard hours based on actual total hours mixes efficiency with mix.

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

Question 4 · 2 marks · Standard Costing · medium

What is the material price variance for September?

1. ₹30,600 (A) (correct answer)
2. ₹30,600 (F)
3. ₹33,600 (A)
4. ₹27,600 (A)

Answer: A — ₹30,600 (A)

Working. MPV = (240−252)×2,800 + (180−174)×1,600 + (120−126)×1,100 = −33,600 + 9,600 −6,600 = ₹30,600 (A).

Explanation. Material price variance is actual quantity multiplied by the difference between standard price and actual price. BX-25 gave a favourable price difference, but the adverse differences on AX-40 and CX-10 outweighed it. The net result is adverse ₹30,600.

Where it goes wrong. Using quantity purchased instead of quantity consumed, or reversing the price difference sign, changes the result.

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

Question 5 · 2 marks · Overheads - Absorption Costing Method · medium

Scenario. Orbit Foundry has two production cost centres. The Machining Centre is machine-intensive, while the Finishing Centre is labour-intensive. Budgeted overheads and activity are: Machining Centre ₹18,60,000 and 62,000 machine hours; Finishing Centre ₹9,45,000 and 31,500 direct labour hours. A customer job used 240 machine hours in Machining and 180 direct labour hours in Finishing. The cost accountant selects absorption bases after considering the dominant factor in each centre.

What overhead should be absorbed by the customer job?

1. ₹12,000
2. ₹12,600 (correct answer)
3. ₹13,200
4. ₹11,400

Answer: B — ₹12,600

Working. Machining rate = 18,60,000÷62,000 = ₹30 per machine hour. Finishing rate = 9,45,000÷31,500 = ₹30 per DLH. Absorbed = 240×30 + 180×30 = 7,200 + 5,400 = ₹12,600.

Explanation. Absorption bases are selected by the dominant activity of each cost centre. Machining is machine-intensive, so machine hours are suitable; Finishing is labour-intensive, so direct labour hours are suitable. The job absorbs ₹30 per machine hour and ₹30 per direct labour hour.

Where it goes wrong. Using a single factory-wide direct labour hour rate ignores the different cost behaviour of the two centres.

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

Question 6 · 2 marks · Marginal Costing · medium

Scenario. Meridian Kitchenware operates three product lines. Line C, Serveware, has sales of ₹52,00,000 for the year. Its variable costs are direct materials ₹18,20,000, direct labour ₹7,80,000 and variable overheads ₹4,40,000. Line C is charged with fixed costs of ₹27,50,000 under the existing absorption costing system. This comprises a line manager salary of ₹4,80,000, dedicated warehouse rent of ₹6,20,000, a cancelable equipment lease of ₹3,00,000, depreciation on a dedicated packing machine of ₹2,50,000, and apportioned corporate overheads of ₹11,00,000. The packing machine will be retained with no resale value if Line C is dropped. Corporate overheads will continue unchanged. The management is reviewing an absorption-costing report that shows Line C with a net loss of ₹5,90,000. The finance team is asked to separate avoidable line-specific fixed costs from unavoidable allocated costs and to evaluate the financial effect of discontinuing Serveware.

What is the contribution of Line C?

1. ₹21,60,000 (correct answer)
2. ₹30,40,000
3. ₹19,20,000
4. ₹23,40,000

Answer: A — ₹21,60,000

Working. Variable cost = 18,20,000 + 7,80,000 + 4,40,000 = ₹30,40,000. Contribution = 52,00,000 − 30,40,000 = ₹21,60,000.

Explanation. Contribution is sales less total variable costs. The variable costs include direct materials, direct labour and variable overheads. Fixed costs, whether avoidable or allocated, are not deducted when computing contribution.

Where it goes wrong. Deducting the avoidable fixed costs or the absorption-costing net loss from sales gives a segment result, not contribution.

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

Question 7 · 2 marks · Marginal Costing · hard

What fixed costs are avoidable if Line C is discontinued?

1. ₹27,50,000
2. ₹13,50,000
3. ₹14,00,000 (correct answer)
4. ₹16,50,000

Answer: C — ₹14,00,000

Working. Avoidable fixed cost = 4,80,000 + 6,20,000 + 3,00,000 = ₹14,00,000. Depreciation ₹2,50,000 and corporate allocation ₹11,00,000 are not avoidable.

Explanation. Only fixed costs that would cease because of discontinuation are avoidable. The line manager salary, cancelable warehouse rent and cancelable equipment lease are avoidable. Depreciation on the retained machine and apportioned corporate overheads continue.

Where it goes wrong. Treating all fixed costs charged to Line C as avoidable overstates savings and can reverse the decision.

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

Question 8 · 2 marks · Marginal Costing · hard

What is the net effect on company profit if Line C is discontinued?

1. Profit decreases by ₹7,60,000 (correct answer)
2. Profit increases by ₹7,60,000
3. Profit decreases by ₹5,90,000
4. Profit increases by ₹5,90,000

Answer: A — Profit decreases by ₹7,60,000

Working. Lost contribution = ₹21,60,000. Savings = avoidable fixed cost ₹14,00,000. Net effect = 21,60,000 − 14,00,000 = ₹7,60,000 decrease in profit.

Explanation. Discontinuing Line C sacrifices its contribution but saves avoidable fixed costs. The net loss in contribution exceeds the savings, so company profit falls. The absorption-costing loss is not the decision measure because it includes unavoidable allocations and retained depreciation.

Where it goes wrong. Accepting the apparent ₹5,90,000 loss as the saving from closure ignores lost contribution and unavoidable costs.

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

Question 9 · 2 marks · Marginal Costing · hard

At what sales value would discontinuing Line C become financially neutral?

1. ₹31,50,000
2. ₹35,20,000
3. ₹37,00,000
4. ₹33,70,370 (correct answer)

Answer: D — ₹33,70,370

Working. P/V ratio = 21,60,000÷52,00,000 = 0.4153846. Required sales = 14,00,000÷0.4153846 = ₹33,70,370 (approx.).

Explanation. Neutrality occurs when Line C's contribution equals the avoidable fixed cost saved. The contribution-to-sales ratio is contribution divided by sales. Dividing avoidable fixed cost by this ratio gives the sales value at which keeping or dropping the line has the same financial effect.

Where it goes wrong. Using total fixed cost or the absorption loss instead of avoidable fixed cost gives an incorrect threshold.

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

Question 10 · 2 marks · Employee Cost and Direct Expenses · medium

Scenario. Precision Components uses Taylor's differential piece-rate plan for a machining cell. Standard output is 250 pieces in an 8-hour shift. The ordinary piece rate is ₹20 per piece. The lower differential rate is 80% of the ordinary rate, and the higher differential rate is 120% of the ordinary rate. On Monday, an operator produced 238 pieces. The payroll department is computing the operator's earnings for the shift.

What are the operator's earnings for Monday under Taylor's plan?

1. ₹4,760
2. ₹3,808 (correct answer)
3. ₹4,080
4. ₹3,570

Answer: B — ₹3,808

Working. Lower rate = 20×80% = ₹16 per piece. Earnings = 238×16 = ₹3,808.

Explanation. Taylor's plan pays a lower piece rate when output is below standard and a higher rate when output reaches or exceeds standard. Actual output of 238 pieces is below the standard of 250 pieces, so the lower rate of 80% of ₹20 applies.

Where it goes wrong. Applying the higher differential rate despite output being below standard overstates earnings.

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

Question 11 · 2 marks · Joint Products and By-Products · medium

Scenario. Zenith Aromatics processes 20,000 kg of raw material in an extraction process. Joint cost up to the split-off point is ₹18,40,000. At split-off, the process yields main product P 12,000 kg, by-product B 2,000 kg and normal loss 6,000 kg. By-product B can be sold at split-off for ₹40 per kg, incurring selling cost of ₹5 per kg. Alternatively, B can be processed further at a cost of ₹28,000 to yield 1,800 kg of upgraded B selling at ₹62 per kg, with selling cost of ₹4 per kg. Main product P can be sold at split-off for ₹180 per kg. If P is further processed at an additional cost of ₹3,20,000, it yields 11,400 kg of final P selling at ₹225 per kg, with final selling cost of ₹8 per kg. The company deducts the net realisable value of by-product B at split-off from joint cost before allocating the balance to main product P. The production manager also wants a further-processing decision for P based only on the incremental net benefit.

What is the net realisable value of by-product B at split-off?

1. ₹80,000
2. ₹70,000 (correct answer)
3. ₹60,000
4. ₹84,000

Answer: B — ₹70,000

Working. NRV of B at split-off = 2,000×(40−5) = 2,000×35 = ₹70,000.

Explanation. Net realisable value at split-off is sales value at split-off less selling costs incurred to make the sale. The further-processing alternative is not used when the by-product is accounted for at split-off NRV.

Where it goes wrong. Deducting further-processing cost or using gross sales value without selling cost gives a different NRV.

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

Question 12 · 2 marks · Joint Products and By-Products · hard

What joint cost is allocated to main product P after crediting by-product B?

1. ₹18,40,000
2. ₹16,70,000
3. ₹17,70,000 (correct answer)
4. ₹17,10,000

Answer: C — ₹17,70,000

Working. Joint cost allocated to P = 18,40,000 − 70,000 = ₹17,70,000.

Explanation. When by-product NRV is deducted from joint cost, the balance is allocated to the main product. The by-product credit reduces the joint cost that would otherwise burden main product P.

Where it goes wrong. Allocating full joint cost to P ignores the by-product credit; deducting further-processing cost of B is also inappropriate here.

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

Question 13 · 2 marks · Joint Products and By-Products · hard

What is the cost per kg of main product P at split-off?

1. ₹153.33
2. ₹145.00
3. ₹150.00
4. ₹147.50 (correct answer)

Answer: D — ₹147.50

Working. Cost per kg of P = ₹17,70,000÷12,000 kg = ₹147.50 per kg.

Explanation. After crediting by-product NRV, the remaining joint cost is divided by the quantity of main product P obtained at split-off. The normal loss quantity is not included in the denominator for P's cost per kg.

Where it goes wrong. Dividing by total input or by input less normal loss instead of P output gives a misleading per-kg cost.

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

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

What is the incremental effect of further processing main product P?

1. Net advantage ₹6,200; process P further
2. Net disadvantage ₹13,800; sell P at split-off
3. Net disadvantage ₹6,200; sell P at split-off (correct answer)
4. Net advantage ₹13,800; process P further

Answer: C — Net disadvantage ₹6,200; sell P at split-off

Working. Final net sales = 11,400×(225−8) = ₹24,73,800. Split-off sales = 12,000×180 = ₹21,60,000. Incremental net revenue = ₹3,13,800. Less additional cost ₹3,20,000 = ₹6,200 net disadvantage.

Explanation. The further-processing decision compares incremental net sales value with incremental processing cost. Final P net sales value is after final selling cost. The incremental cost exceeds the incremental net revenue, so P should be sold at split-off.

Where it goes wrong. Ignoring final selling cost or comparing gross sales values overstates the benefit of further processing.

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

Question 15 · 2 marks · Unit & Batch Costing · medium

Scenario. PrintWorks receives an order for 12,000 brochures. Production runs in batches of 1,500 brochures. Each batch incurs a setup cost of ₹4,800, direct materials of ₹18,000, direct labour of 120 hours at ₹90 per hour, and variable overhead at ₹40 per direct labour hour. Fixed order-level overhead is ₹36,000. The cost estimator is determining the cost per brochure for this batch-costing order.

What is the cost per brochure for the order?

1. ₹27.60
2. ₹30.60
3. ₹25.60
4. ₹28.60 (correct answer)

Answer: D — ₹28.60

Working. Batches = 12,000÷1,500 = 8. Per batch = 4,800 + 18,000 + 120×90 + 120×40 = 4,800+18,000+10,800+4,800 = ₹38,400. Total = 8×38,400 + 36,000 = 3,43,200. Cost per brochure = 3,43,200÷12,000 = ₹28.60.

Explanation. Batch costing accumulates costs for each batch and then divides by units in the batch. Setup cost is a batch-level cost, while materials, labour and variable overhead vary with each batch. Order-level fixed overhead is added to total batch cost before computing cost per brochure.

Where it goes wrong. Omitting setup cost or fixed order-level overhead understates the cost per brochure.

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