Test 15: answer key

Question 1 · 2 marks · Cost Sheet · medium

Scenario. Veyra Furniture Components Pvt. Ltd. manufactures modular desk frames. For the year ended 31 March 2026, the trial balance extract shows: opening raw materials ₹2,40,000; purchases of raw materials ₹18,60,000; freight inward ₹45,000; GST on raw purchases ₹2,10,000 (input credit available); closing raw materials ₹2,85,000. Direct wages ₹6,40,000. Factory rent ₹1,20,000; factory power ₹96,000; depreciation on plant ₹1,50,000; indirect factory labour ₹88,000; factory insurance ₹32,000; repairs to plant ₹54,000. Opening WIP ₹1,15,000; closing WIP ₹1,42,000. Opening finished goods ₹2,60,000; closing finished goods ₹3,05,000. Sale of factory scrap ₹12,000. Administration salaries ₹1,80,000; sales commission ₹92,000; delivery van expenses ₹68,000; advertisement ₹1,05,000. Sales revenue ₹34,50,000. The company classifies power, factory rent, plant depreciation, indirect factory labour, factory insurance and plant repairs as factory overheads; scrap recovery is a credit in cost of production. GST is excluded because input credit is available. No primary packing, quality-control cost, R&D cost or abnormal loss is reported. Administrative salaries are general administration; delivery, commission and advertisement are selling and distribution. There is no opening or closing stores stock. The company prepares a functional cost sheet and absorbs actual factory overheads. All amounts are in rupees for the same accounting year; no interest or finance cost appears in the extract.

What is the prime cost for the year?

1. ₹25,00,000 (correct answer)
2. ₹23,35,000
3. ₹26,50,000
4. ₹27,10,000

Answer: A — ₹25,00,000

Working. Raw material consumed = 2,40,000 + 18,60,000 + 45,000 − 2,85,000 = 18,60,000. Prime cost = 18,60,000 + 6,40,000 = 25,00,000.

Explanation. Material consumed is opening raw material plus purchases plus freight inward less closing raw material: ₹2,40,000 + ₹18,60,000 + ₹45,000 − ₹2,85,000 = ₹18,60,000. Prime cost adds direct wages of ₹6,40,000, giving ₹25,00,000. GST is excluded because input credit is available.

Where it goes wrong. Adding GST to material cost or ignoring freight inward gives a different prime cost.

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

Question 2 · 2 marks · Cost Sheet · hard

What is the factory cost for the year?

1. ₹30,01,000 (correct answer)
2. ₹30,13,000
3. ₹30,40,000
4. ₹31,28,000

Answer: A — ₹30,01,000

Working. Factory overheads = 1,20,000 + 96,000 + 1,50,000 + 88,000 + 32,000 + 54,000 = ₹5,40,000. Gross works cost = ₹25,00,000 + ₹5,40,000 = ₹30,40,000. Net Works Cost (Factory Cost) = ₹30,40,000 + ₹1,15,000 - ₹1,42,000 - ₹12,000 = ₹30,01,000.

Explanation. Factory cost is gross works cost ₹30,40,000 plus opening WIP ₹1,15,000 less closing WIP ₹1,42,000 less sale of factory scrap ₹12,000 = ₹30,01,000. Option (b) reflects gross factory cost before scrap deduction.

Where it goes wrong. Omitting WIP adjustment gives gross works cost ₹30,40,000; deducting scrap too early gives ₹30,01,000.

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

Question 3 · 2 marks · Cost Sheet · medium

What is the cost of goods sold for the year?

1. ₹30,01,000
2. ₹29,44,000
3. ₹29,56,000 (correct answer)
4. ₹28,96,000

Answer: C — ₹29,56,000

Working. Cost of production = 30,13,000 − 12,000 = 30,01,000. COGS = 30,01,000 + 2,60,000 − 3,05,000 = 29,56,000.

Explanation. Factory cost is ₹30,13,000. Credit scrap recovery ₹12,000 to get cost of production ₹30,01,000. Add opening finished goods ₹2,60,000 and deduct closing finished goods ₹3,05,000: cost of goods sold ₹29,56,000. This is before general administration and selling costs.

Where it goes wrong. Using factory cost instead of cost of production, or ignoring the finished-goods movement, changes the result.

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

Question 4 · 2 marks · Cost Sheet · hard

What is the net operating profit for the year?

1. ₹98,000
2. ₹1,10,000
3. ₹57,000
4. ₹49,000 (correct answer)

Answer: D — ₹49,000

Working. Cost of sales = 29,56,000 + 1,80,000 + 92,000 + 68,000 + 1,05,000 = 34,01,000. Profit = 34,50,000 − 34,01,000 = 49,000.

Explanation. Cost of sales is COGS ₹29,56,000 plus administration ₹1,80,000, commission ₹92,000, delivery ₹68,000 and advertisement ₹1,05,000 = ₹34,01,000. Operating profit is sales ₹34,50,000 less ₹34,01,000 = ₹49,000.

Where it goes wrong. Omitting one selling cost, or including GST, produces an inflated profit.

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

Question 5 · 2 marks · Service Costing · hard

Scenario. Crestview Residency has 60 standard rooms, 30 deluxe rooms and 10 suites. For the year, standard rooms are occupied 80% of 300 operating days, deluxe rooms 60%, and suites 50%. For equivalent-unit costing, a deluxe room carries a weight of 1.8 standard rooms and a suite 3.0 standard rooms. The hotel uses equivalent single-room-days to apportion common housekeeping overhead. All rooms are available for the full 300 days; no seasonal adjustment is made.

What is the total equivalent single-room-days for apportioning housekeeping overhead?

1. 28,620 (correct answer)
2. 21,300
3. 24,900
4. 30,060

Answer: A — 28,620

Working. Standard = 60 × 0.80 × 300 = 14,400. Deluxe = 30 × 0.60 × 300 × 1.8 = 9,720. Suite = 10 × 0.50 × 300 × 3 = 4,500. Total = 28,620.

Explanation. Standard occupied room-days: 60 × 80% × 300 = 14,400. Deluxe: 30 × 60% × 300 = 5,400 room-days; equivalent = 5,400 × 1.8 = 9,720. Suites: 10 × 50% × 300 = 1,500; equivalent = 1,500 × 3 = 4,500. Total = 14,400 + 9,720 + 4,500 = 28,620 equivalent single-room-days.

Where it goes wrong. Using available room-days without occupancy, or failing to apply the room weights, produces a lower figure.

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

Question 6 · 2 marks · Material Cost · medium

Scenario. Kaveri Auto Spares Ltd. uses component KR-7 in a braking assembly. The replenishment lead time is one cycle. Carrying cost of safety buffer is ₹48 per unit per cycle; stock-out penalty is ₹220 per unit short. During lead time, demand above routine consumption has the following distribution: excess demand 0 units with probability 0.28; 40 units 0.24; 80 units 0.20; 120 units 0.16; 160 units 0.12. Management is considering safety stock levels of 0, 40, 80, 120 or 160 units. For each level, shortage units equal the excess demand over safety stock when positive; expected stock-out cost is probability-weighted shortage units multiplied by ₹220; carrying cost is safety units multiplied by ₹48. The sum gives the cycle cost. KR-7 is procured from a distant supplier; emergency purchases are not permitted. The probabilities are mutually exclusive and sum to one; shortage beyond 160 units is not expected. Purchasing wants a compact analysis for a single cycle, not annual demand; no quantity discounts, normal loss or other stock-out cost are included.

At a safety stock level of 80 units, what is the expected shortage in units for one cycle?

1. 8.0 units
2. 16.0 units (correct answer)
3. 24.0 units
4. 32.0 units

Answer: B — 16.0 units

Working. Expected shortage = (120 − 80) × 0.16 + (160 − 80) × 0.12 = 6.4 + 9.6 = 16.0 units.

Explanation. At safety stock 80, shortage occurs only for excess demand of 120 and 160 units. Shortage units are (120 − 80) × 0.16 = 6.4 and (160 − 80) × 0.12 = 9.6; total expected shortage = 16.0 units. Lower excess demands do not create shortage because they are within the buffer.

Where it goes wrong. Subtracting only the 160-unit tail or applying probability to full excess demand rather than the excess over safety stock gives a wrong figure.

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

Question 7 · 2 marks · Material Cost · hard

At a safety stock level of 40 units, what is the expected stock-out cost for one cycle?

1. ₹6,864
2. ₹7,216
3. ₹7,744 (correct answer)
4. ₹8,448

Answer: C — ₹7,744

Working. Expected shortage = 40×0.20 + 80×0.16 + 120×0.12 = 8 + 12.8 + 14.4 = 35.2. Stock-out cost = 35.2 × 220 = 7,744.

Explanation. At safety stock 40, expected shortage = (80 − 40) × 0.20 + (120 − 40) × 0.16 + (160 − 40) × 0.12 = 8 + 12.8 + 14.4 = 35.2 units. Stock-out cost = 35.2 × ₹220 = ₹7,744. Carrying cost is not part of this question.

Where it goes wrong. Using the 80-unit safety level or omitting the 80-unit demand layer gives a lower stock-out cost.

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

Question 8 · 2 marks · Material Cost · hard

At a safety stock level of 120 units, what is the total cycle cost, including stock-out and carrying cost?

1. ₹7,360
2. ₹7,680
3. ₹6,240
4. ₹6,816 (correct answer)

Answer: D — ₹6,816

Working. Shortage = (160 − 120) × 0.12 = 4.8. Stock-out cost = 4.8 × 220 = 1,056. Carrying = 120 × 48 = 5,760. Total = 6,816.

Explanation. At safety stock 120, only excess demand of 160 creates shortage: (160 − 120) × 0.12 = 4.8 units. Stock-out cost = 4.8 × ₹220 = ₹1,056. Carrying cost = 120 × ₹48 = ₹5,760. Total cycle cost = ₹1,056 + ₹5,760 = ₹6,816.

Where it goes wrong. Forgetting the 160-unit tail understates stock-out cost; using 80-unit safety gives ₹7,360.

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

Question 9 · 2 marks · Material Cost · hard

Which safety stock level minimises total cycle cost among the five levels considered?

1. 120 units (correct answer)
2. 80 units
3. 160 units
4. 40 units

Answer: A — 120 units

Working. 0: 14,080; 40: 7,744+1,920=9,664; 80: 3,520+3,840=7,360; 120: 1,056+5,760=6,816; 160: 0+7,680=7,680.

Explanation. Total costs are: 0 units ₹14,080; 40 units ₹9,664; 80 units ₹7,360; 120 units ₹6,816; 160 units ₹7,680. The minimum is at 120 units. A 160-unit buffer removes shortage but its extra carrying cost exceeds the stock-out saving.

Where it goes wrong. Selecting 160 units to eliminate shortage ignores the higher carrying cost of the buffer.

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

Question 10 · 2 marks · Budgets and Budgetary Control · medium

Scenario. Nova Services evaluates four discretionary decision packages under zero-based budgeting. Package P has incremental cost ₹80,000 and incremental benefit ₹1,20,000. Package Q has incremental cost ₹50,000 and incremental benefit ₹95,000. Package R has incremental cost ₹30,000 and incremental benefit ₹48,000. Package S has incremental cost ₹1,10,000 and incremental benefit ₹1,80,000. The committee ranks packages by benefit-cost ratio after evaluating each package against organisational objectives.

If the packages are ranked by benefit-cost ratio, which package ranks first?

1. Package P
2. Package Q (correct answer)
3. Package R
4. Package S

Answer: B — Package Q

Working. P = 1,20,000/80,000 = 1.50; Q = 95,000/50,000 = 1.90; R = 48,000/30,000 = 1.60; S = 1,80,000/1,10,000 = 1.636.

Explanation. Benefit-cost ratios are P 1.50, Q 1.90, R 1.60 and S 1.64. Ranking by ratio places Package Q first. ZBB ranks decision packages after evaluation; absolute benefit or absolute net benefit alone can mislead because the resource cost differs.

Where it goes wrong. Ranking by absolute benefit puts S first, but its cost is also much higher.

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

Question 11 · 2 marks · Overheads; Chapter 5: Activity Based Costing · medium

Scenario. Aurelia Industrial Systems makes two products. Standard S is high-volume: budgeted 24,000 units; direct material ₹180 per unit; direct labour ₹120 per unit; machine time 1.5 hours per unit. Custom C is low-volume: budgeted 1,200 units; direct material ₹650 per unit; direct labour ₹480 per unit; machine time 6 hours per unit. Production overhead budget is ₹18,00,000, analysed as: machine setup ₹4,80,000 (60 setups for S; 180 for C); material handling ₹3,60,000 (400 moves for S; 800 for C); quality inspection ₹2,40,000 (300 inspections for S; 500 for C); machine operation ₹7,20,000 (driven by machine hours). The existing system absorbs all overheads on machine hours. The cost team proposes ABC using the four pools and drivers. There is no opening or closing WIP; all output is sold. Selling prices are S ₹520 and C ₹2,300. Management is concerned that the custom product may be cross-subsidised by the standard product. Direct labour is not included in overhead pools; machine operation excludes setup time; inspections occur at batch level; material moves are logged per production run. The company currently uses a single plant-wide machine-hour rate.

What is the plant-wide traditional overhead absorption rate per machine hour?

1. ₹38.50 per machine hour
2. ₹40.00 per machine hour
3. ₹41.67 per machine hour (correct answer)
4. ₹43.20 per machine hour

Answer: C — ₹41.67 per machine hour

Working. S hours = 24,000 × 1.5 = 36,000. C hours = 1,200 × 6 = 7,200. Total = 43,200. Rate = 18,00,000/43,200 = 41.6667.

Explanation. Total machine hours are 24,000 × 1.5 + 1,200 × 6 = 36,000 + 7,200 = 43,200 hours. Plant-wide rate = ₹18,00,000 ÷ 43,200 = ₹41.6667, rounded to ₹41.67 per machine hour. The rate uses total overhead and total machine hours, not separate pools.

Where it goes wrong. Using only standard-product machine hours or adding setup hours into the denominator changes the rate.

Authority. ICAI Study Material, Paper 4: Cost and Management Accounting, Module relevant for Overheads; Chapter 5: Activity Based Costing

Question 12 · 2 marks · Activity Based Costing · hard

What is the ABC overhead cost per unit of Custom C?

1. ₹650.00 per unit
2. ₹700.00 per unit
3. ₹710.00 per unit
4. ₹725.00 per unit (correct answer)

Answer: D — ₹725.00 per unit

Working. Setup rate = 4,80,000/240 = 2,000. Move rate = 3,60,000/1,200 = 300. Inspection rate = 2,40,000/800 = 300. Machine rate = 7,20,000/43,200 = 16.6667. C overhead = 3,60,000 + 2,40,000 + 1,50,000 + 1,20,000 = 8,70,000; per unit = 725.

Explanation. Custom C overhead under ABC: setups 180 × ₹2,000 = ₹3,60,000; moves 800 × ₹300 = ₹2,40,000; inspections 500 × ₹300 = ₹1,50,000; machine operation 7,200 × ₹16.6667 = ₹1,20,000. Total = ₹8,70,000; per unit = ₹8,70,000 ÷ 1,200 = ₹725.00.

Where it goes wrong. Using the plant-wide machine-hour rate gives ₹250 per unit and hides the batch-level overhead.

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

Question 13 · 2 marks · Activity Based Costing · hard

What is the ABC unit cost of Standard S?

1. ₹338.75 (correct answer)
2. ₹342.50
3. ₹350.00
4. ₹362.50

Answer: A — ₹338.75

Working. S overhead = 1,20,000 + 1,20,000 + 90,000 + 6,00,000 = 9,30,000. Per unit = 9,30,000/24,000 = 38.75. Unit cost = 180 + 120 + 38.75 = 338.75.

Explanation. Standard S ABC overhead: setups 60 × ₹2,000 = ₹1,20,000; moves 400 × ₹300 = ₹1,20,000; inspections 300 × ₹300 = ₹90,000; machine operation 36,000 × ₹16.6667 = ₹6,00,000. Total = ₹9,30,000; per unit = ₹38.75. Add material ₹180 and labour ₹120 to get ₹338.75.

Where it goes wrong. Adding traditional overhead of ₹62.50 gives ₹362.50, which is not the ABC unit cost.

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

Question 14 · 2 marks · Overheads; Chapter 5: Activity Based Costing · hard

Under traditional machine-hour costing, compared with ABC, which product is under-costed and by how much per unit?

1. Product S under-costed by ₹23.75 per unit
2. Product C under-costed by ₹475.00 per unit (correct answer)
3. Product C over-costed by ₹475.00 per unit
4. Product S over-costed by ₹23.75 per unit

Answer: B — Product C under-costed by ₹475.00 per unit

Working. Traditional C = 650 + 480 + 6×41.6667 = 1,380. ABC C = 1,855. Difference = 475 under-costed. Traditional S = 180+120+1.5×41.6667 = 362.50; ABC S = 338.75; S over by 23.75.

Explanation. Traditional cost for C is material ₹650 + labour ₹480 + overhead 6 × ₹41.6667 = ₹1,380. ABC cost is ₹1,855. Traditional costing under-costs C by ₹475 per unit. For S, traditional ₹362.50 exceeds ABC ₹338.75, so S is over-costed by ₹23.75.

Where it goes wrong. Reading the sign in reverse treats C as over-costed, when its batch-level overhead is hidden by machine hours.

Authority. ICAI Study Material, Paper 4: Cost and Management Accounting, Module relevant for Overheads; Chapter 5: Activity Based Costing

Question 15 · 2 marks · Standard Costing · medium

Scenario. Renu Components has budgeted fixed production overhead of ₹6,00,000 for 25 working days. Actual working days were 27. Standard fixed overhead rate per day is based on budgeted fixed overhead and budgeted working days. No capacity or efficiency adjustment is required for the calendar variance.

What is the fixed overhead calendar variance?

1. ₹24,000 F
2. ₹48,000 A
3. ₹48,000 F (correct answer)
4. ₹72,000 F

Answer: C — ₹48,000 F

Working. Rate per day = 6,00,000/25 = 24,000. Calendar variance = (27−25)×24,000 = 48,000 F.

Explanation. Budgeted fixed overhead rate per day = ₹6,00,000 ÷ 25 = ₹24,000. Calendar variance = (27 − 25) × ₹24,000 = ₹48,000 favourable, because two more working days were available than budgeted. It is isolated before the revised capacity variance.

Where it goes wrong. Using actual days in the denominator or reversing the sign gives an adverse or different amount.

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