Test 3: answer key

Question 1 · 2 marks · Chapter 10 — Process & Operation Costing · hard

Scenario. Kestrel Polymers Ltd. manufactures PX-41 polymer beads in Process M before transferring them to a pelletising line. Reactor R-12 handles a uniform batch, and the material charge is introduced at the beginning of the process. The cost accountant is preparing the October production cost report under FIFO. Opening WIP comprised 400 units, with materials fully introducedy introducedy introduced and conversion work 50% complete; 3,600 fresh units entered during October. Cost table (₹):\nCost element | Opening WIP | October cost\nMaterials | 24,000 | 1,80,000\nConversion | 8,000 | 1,26,000. The process transferred 3,200 completed units to the next line. Closing work-in-process was 500 units, with materials fully introducedy introducedy introduced and conversion work 40% complete. Normal process loss is 5% of total input, including opening work-in-process. The normal loss occurs after the material charge but before conversion work begins; each normal-loss unit has a scrap value of ₹15. For this report, scrap proceeds are credited against the material-cost pool. Any remaining output shortfall is abnormal loss, assumed to have received full material and conversion work. There are no other losses, returns or disposal costs. The production supervisor has asked for the equivalent production by cost element, current-period cost per equivalent unit, the value of units transferred and the closing work-in-process value. All quantities relate to the same PX-41 grade, and there is no inter-process profit or opening abnormal loss.

Under FIFO, what are the equivalent production units for materials and conversion, respectively, for October?

1. 3,300 material EU; 3,400 conversion EU
2. 3,400 material EU; 3,300 conversion EU (correct answer)
3. 3,600 material EU; 3,500 conversion EU
4. 3,200 material EU; 3,200 conversion EU

Answer: B — 3,400 material EU; 3,300 conversion EU

Working. Total input = 400 opening WIP + 3,600 fresh units = 4,000 units. Normal loss = 4,000 × 5% = 200 units. Started and completed = 3,200 transferred − 400 opening WIP = 2,800 units. Abnormal loss = 4,000 − 3,200 − 500 closing WIP − 200 normal loss = 100 units. Materials EU = 2,800 + (500 × 1.00) + (100 × 1.00) = 3,400. Conversion EU = (400 × 50% remaining) + 2,800 + (500 × 40%) + 100 = 200 + 2,800 + 200 + 100 = 3,300. Normal loss is excluded from equivalent units.

Explanation. FIFO separates the work needed to complete opening WIP from units started and completed. Materials already present in opening WIP require no current-period equivalent units, while the remaining conversion work does. Closing WIP and abnormal loss are included according to their completion stages. The tempting 3,600/3,500-style totals count raw input or physical output instead of element-wise work; normal loss is not included in equivalent production here.

Where it goes wrong. Counting all fresh input or all physical output as equivalent production and overlooking the remaining work on opening WIP.

Authority. ICAI Study Material, Paper 4: Cost and Management Accounting, Module relevant for Chapter 10 — Process & Operation Costing

Question 2 · 2 marks · Chapter 10 — Process & Operation Costing · hard

After allowing for normal-loss scrap recovery, what are the current-period costs per equivalent unit for materials and conversion, respectively?

1. ₹52.94 per material EU; ₹38.18 per conversion EU
2. ₹44.25 per material EU; ₹38.18 per conversion EU
3. ₹52.06 per material EU; ₹38.18 per conversion EU (correct answer)
4. ₹52.06 per material EU; ₹42.00 per conversion EU

Answer: C — ₹52.06 per material EU; ₹38.18 per conversion EU

Working. Normal-loss scrap recovery = 200 units × ₹15 = ₹3,000. Net material cost = ₹1,80,000 − ₹3,000 = ₹1,77,000. Material cost per EU = ₹1,77,000 ÷ 3,400 = ₹52.0588235, rounded to ₹52.06. Conversion cost per EU = ₹1,26,000 ÷ 3,300 = ₹38.1818182, rounded to ₹38.18. Cross-check: gross current costs ₹3,06,000 less scrap recovery ₹3,000 = ₹3,03,000, equal to the total current cost represented by the two cost pools after the stipulated credit.

Explanation. The 200 normal-loss units generate scrap proceeds of ₹3,000, which the case assigns to the material-cost pool because the loss occurs before conversion work. Net material cost is therefore divided by material equivalent units, while conversion cost is divided by conversion equivalent units. Option a is the closest trap: it divides gross material cost by equivalent units and omits the normal-loss scrap credit.

Where it goes wrong. Omitting the scrap credit from material cost, or dividing material cost by physical input rather than material equivalent units.

Authority. ICAI Study Material, Paper 4: Cost and Management Accounting, Module relevant for Chapter 10 — Process & Operation Costing

Question 3 · 2 marks · Chapter 10 — Process & Operation Costing · hard

What is the total FIFO value of the 3,200 units transferred to the next process, including the carried cost of opening WIP?

1. ₹2,92,310 (correct answer)
2. ₹2,88,770
3. ₹2,76,310
4. ₹3,00,000

Answer: A — ₹2,92,310

Working. Opening WIP completion cost = carried cost ₹24,000 + ₹8,000 + (200 remaining conversion EU × ₹38.1818182) = ₹32,000 + ₹7,636.3636 = ₹39,636.3636. Started-and-completed units = 3,200 − 400 = 2,800. Their cost = 2,800 × (₹52.0588235 + ₹38.1818182) = 2,800 × ₹90.2406417 = ₹2,52,673.7968. Total transferred value = ₹39,636.3636 + ₹2,52,673.7968 = ₹2,92,310.1604, rounded to ₹2,92,310.

Explanation. Under FIFO, the opening WIP is completed by adding only the current-period conversion work still required to its carried cost. The remaining 2,800 transferred units are started and completed in the current period and receive both current-period cost elements. Option b is a tempting shortcut because it prices all 3,200 transferred units at the current combined rate, thereby losing the opening WIP cost distinction.

Where it goes wrong. Applying the current-period combined rate to every transferred unit and ignoring the separate opening-WIP cost layer.

Authority. ICAI Study Material, Paper 4: Cost and Management Accounting, Module relevant for Chapter 10 — Process & Operation Costing

Question 4 · 2 marks · Chapter 10 — Process & Operation Costing · hard

What is the FIFO value of closing work-in-process at the end of October?

1. ₹28,425
2. ₹26,029
3. ₹36,000
4. ₹33,666 (correct answer)

Answer: D — ₹33,666

Working. Closing-WIP material EU = 500 × 1.00 = 500; material value = 500 × ₹52.0588235 = ₹26,029.4118. Closing-WIP conversion EU = 500 × 40% = 200; conversion value = 200 × ₹38.1818182 = ₹7,636.3636. Total closing WIP = ₹26,029.4118 + ₹7,636.3636 = ₹33,665.7754, rounded to ₹33,666. Reconciliation: transferred ₹2,92,310.1604 + closing WIP ₹33,665.7754 + abnormal loss (100 × ₹90.2406417 = ₹9,024.0642) = ₹3,35,000, equal to opening cost ₹32,000 + current cost ₹3,06,000 − scrap ₹3,000.

Explanation. Closing WIP is valued at current-period cost under FIFO. Materials are fully introduced for all 500 units, while conversion work is only 40% complete. The material and conversion equivalent units must therefore be valued separately. Option b captures only the material component and omits conversion; option a uses an incorrect denominator and understates the material rate.

Where it goes wrong. Valuing closing WIP only for materials, or applying the conversion completion percentage to material cost as well.

Authority. ICAI Study Material, Paper 4: Cost and Management Accounting, Module relevant for Chapter 10 — Process & Operation Costing

Question 5 · 2 marks · Chapter 2 — Material Cost · medium

Scenario. Vector Circuits Ltd. had 100 units of component VC-8 in stores on 1 March at ₹40 each. On 8 March, it received another 100 units at ₹50 each. A single material requisition on 10 March withdrew 120 units for production. At the month-end count, 20 of the 80 units remaining in stores were found obsolete because the product design had been discontinued; they have no resale or scrap proceeds. The store ledger is to be evaluated under both the weighted-average price method and FIFO. Determine the issue values under both methods and the appropriate cost-accounting treatment of the obsolete balance.

Which statement correctly reports the issue values and the treatment of obsolete units under the two methods?

1. WAvg issue ₹5,400; FIFO issue ₹5,000; obsolete losses ₹900/₹1,000 are abnormal. (correct answer)
2. WAvg issue ₹5,000; FIFO issue ₹5,400; obsolete losses ₹900/₹1,000 are abnormal.
3. WAvg issue ₹5,400; FIFO issue ₹5,000; obsolete losses ₹900/₹1,000 enter production cost.
4. WAvg issue ₹5,400; FIFO issue ₹5,000; obsolete losses ₹1,000/₹900 are abnormal.

Answer: A — WAvg issue ₹5,400; FIFO issue ₹5,000; obsolete losses ₹900/₹1,000 are abnormal.

Working. Weighted average rate = ((100 × ₹40) + (100 × ₹50)) ÷ 200 = ₹9,000 ÷ 200 = ₹45. Weighted-average issue = 120 × ₹45 = ₹5,400; balance = 80 × ₹45 = ₹3,600; obsolete loss = 20 × ₹45 = ₹900. FIFO issue = (100 × ₹40) + (20 × ₹50) = ₹5,000; balance = 80 × ₹50 = ₹4,000; obsolete loss = 20 × ₹50 = ₹1,000. In both cases, the obsolete stock value is an abnormal loss and is excluded from cost of manufacture.

Explanation. Weighted average smooths the two purchase prices by quantity, giving ₹45 per unit, while FIFO issues the older ₹40 layer before using the newer ₹50 layer. The obsolete balance is an abnormal loss and does not form part of manufacturing cost. Option c gets the issue figures right but wrongly absorbs the obsolete stock value into production instead of treating it separately.

Where it goes wrong. Reversing FIFO and weighted-average issue costs, or treating obsolete inventory as an ordinary production cost.

Authority. ICAI Study Material, Paper 4: Cost and Management Accounting, Module relevant for Chapter 2 — Material Cost

Question 6 · 2 marks · Chapter 15 — Budgets & Budgetary Control · hard

Scenario. Rivermark Packaging Ltd. manufactures tray T-60 on production line L-3. The line's rated monthly output is 10,000 trays and it requires 8,000 machine-hours at that level; machine-hours vary in direct proportion to output. Management wants flexible budgets at 60%, 75% and 90% capacity. Production cost table: direct material ₹42 per tray; direct labour ₹20 per tray; variable factory overhead ₹8 per tray; other fixed factory overhead ₹1,20,000 per month. Maintenance observations: 4,000 machine-hours — ₹72,000; 6,000 machine-hours — ₹96,000. Assume a linear cost pattern throughout the relevant range. Cash-budget table (₹): October sales ₹10,00,000; November sales ₹12,00,000; October material purchases ₹4,00,000; November material purchases ₹5,00,000. Thirty per cent of each month's sales are cash sales collected in that month; the remaining 70% are collected in the following month. Seventy-five per cent of material purchases is paid in the month of purchase and 25% in the next month. November administrative staff payroll of ₹1,20,000, selling and administrative cash expenses of ₹50,000, and a machine instalment of ₹1,20,000 are paid in November. Direct labour for November production is paid in December; the stated purchase schedule covers all material purchases, and no other opening receivables or payables exist. Other fixed factory overhead of ₹1,20,000 includes monthly depreciation of ₹25,000, so only the balance is paid in cash. Maintenance is paid in the month incurred. November production is budgeted at 90% capacity, and the opening cash balance on 1 November is ₹3,40,000. Ignore taxes, interest and other receipts or payments. Prepare the capacity-wise cost figures and the November cash position using the stated collection and payment lags.

Which sequence gives the total flexible-budget production cost at 60%, 75% and 90% capacity, respectively?

1. 60% ₹6,21,600; 75% ₹7,40,000; 90% ₹8,60,400
2. 60% ₹6,21,600; 75% ₹7,41,000; 90% ₹8,60,400 (correct answer)
3. 60% ₹6,81,600; 75% ₹7,41,000; 90% ₹8,96,400
4. 60% ₹6,21,600; 75% ₹7,71,000; 90% ₹8,60,400

Answer: B — 60% ₹6,21,600; 75% ₹7,41,000; 90% ₹8,60,400

Working. Variable cost per tray = ₹42 + ₹20 + ₹8 = ₹70. Maintenance split: variable rate = (₹96,000 − ₹72,000) ÷ (6,000 − 4,000) = ₹12 per machine-hour; fixed part = ₹72,000 − (4,000 × ₹12) = ₹24,000. At 60%: output 6,000 trays; hours 4,800; cost = (6,000 × ₹70) + ₹24,000 + (4,800 × ₹12) + ₹1,20,000 = ₹6,21,600. At 75%: output 7,500; hours 6,000; cost = ₹5,25,000 + ₹24,000 + ₹72,000 + ₹1,20,000 = ₹7,41,000. At 90%: output 9,000; hours 7,200; cost = ₹6,30,000 + ₹24,000 + ₹86,400 + ₹1,20,000 = ₹8,60,400.

Explanation. The three budgets scale the per-tray variable costs with output, retain fixed factory overhead, and flex the variable part of maintenance with machine-hours while retaining its fixed part. Option a is a close distractor because it understates the 75% budget by ₹1,000 after failing to carry the maintenance calculation consistently. Fixed overhead must not be scaled with capacity.

Where it goes wrong. Scaling fixed costs with output or treating the entire semi-variable maintenance charge as fixed or fully variable.

Authority. ICAI Study Material, Paper 4: Cost and Management Accounting, Module relevant for Chapter 15 — Budgets & Budgetary Control

Question 7 · 2 marks · Chapter 15 — Budgets & Budgetary Control · medium

What are the fixed component and variable rate of the maintenance overhead, respectively?

1. ₹24,000 fixed; ₹10 per machine-hour variable
2. ₹48,000 fixed; ₹6 per machine-hour variable
3. ₹24,000 fixed; ₹12 per machine-hour variable (correct answer)
4. ₹72,000 fixed; ₹0 per machine-hour variable

Answer: C — ₹24,000 fixed; ₹12 per machine-hour variable

Working. Change in cost = ₹96,000 − ₹72,000 = ₹24,000. Change in machine-hours = 6,000 − 4,000 = 2,000 hours. Variable rate = ₹24,000 ÷ 2,000 = ₹12 per machine-hour. Fixed component = ₹72,000 − (4,000 × ₹12) = ₹24,000. Check: ₹96,000 − (6,000 × ₹12) = ₹24,000.

Explanation. The increase of ₹24,000 in maintenance cost accompanies an increase of 2,000 machine-hours, so the variable element is ₹12 per hour. Subtracting that variable amount from either observed total leaves the same fixed charge of ₹24,000. Option b halves the variable rate and consequently overstates the fixed component; it does not reconcile to both observations.

Where it goes wrong. Dividing the high-period total by high-period hours instead of using the change in cost divided by the change in activity.

Authority. ICAI Study Material, Paper 4: Cost and Management Accounting, Module relevant for Chapter 15 — Budgets & Budgetary Control

Question 8 · 2 marks · Chapter 15 — Budgets & Budgetary Control · medium

How much cash will Rivermark collect from sales during November under the stated collection pattern?

1. ₹11,40,000
2. ₹7,00,000
3. ₹3,60,000
4. ₹10,60,000 (correct answer)

Answer: D — ₹10,60,000

Working. November cash sales collected in November = ₹12,00,000 × 30% = ₹3,60,000. October credit sales collected in November = ₹10,00,000 × 70% = ₹7,00,000. Total November sales receipts = ₹3,60,000 + ₹7,00,000 = ₹10,60,000. November credit sales of ₹8,40,000 are collected in the following month and are excluded from November receipts.

Explanation. November receipts include the current month's cash sales and the collection of October's credit sales. The lag means that November credit sales are not collected until the next month. Option a reverses the collection percentages between the current and preceding month. Option b includes only October's credit collection, while option c includes only November cash sales; each omits one required receipt stream.

Where it goes wrong. Collecting all November sales in November, or omitting one of the two receipt streams created by the one-month credit lag.

Authority. ICAI Study Material, Paper 4: Cost and Management Accounting, Module relevant for Chapter 15 — Budgets & Budgetary Control

Question 9 · 2 marks · Chapter 15 — Budgets & Budgetary Control · hard

After including all stated November receipts and cash payments, what is the closing cash balance on 30 November?

1. ₹4,29,600 (correct answer)
2. ₹5,40,000
3. ₹5,49,600
4. ₹3,09,600

Answer: A — ₹4,29,600

Working. Receipts = November cash sales (₹12,00,000 × 30% = ₹3,60,000) + October credit collections (₹10,00,000 × 70% = ₹7,00,000) = ₹10,60,000. Material payments = October purchases (₹4,00,000 × 25% = ₹1,00,000) + November purchases (₹5,00,000 × 75% = ₹3,75,000) = ₹4,75,000. Other payments: wages ₹1,20,000; maintenance at 90% capacity = ₹24,000 + (7,200 machine-hours × ₹12) = ₹1,10,400; other factory overhead cash = ₹1,20,000 − ₹25,000 depreciation = ₹95,000; selling and administration ₹50,000; machine instalment ₹1,20,000. Total payments = ₹4,75,000 + ₹1,20,000 + ₹1,10,400 + ₹95,000 + ₹50,000 + ₹1,20,000 = ₹9,70,400. Closing cash = ₹3,40,000 + ₹10,60,000 − ₹9,70,400 = ₹4,29,600.

Explanation. The closing balance starts with opening cash, adds November collections, and deducts all November cash payments. November direct-production labour is not paid until December under the stated terms. The purchase-payment lag brings in 25% of October purchases as well as 75% of November purchases. The fixed factory-overhead cash payment excludes depreciation, while maintenance and the machine instalment remain cash outflows. Option c omits the machine instalment; option b omits the maintenance payment.

Where it goes wrong. Ignoring the lagged payment on October purchases, treating depreciation as a cash payment, or leaving out the machine instalment or maintenance payment.

Authority. ICAI Study Material, Paper 4: Cost and Management Accounting, Module relevant for Chapter 15 — Budgets & Budgetary Control

Question 10 · 2 marks · Chapter 3 — Employee Cost and Direct Expenses · medium

Scenario. At Norvale Components Ltd., an operator receives ₹480 for an eight-hour shift. A normal, unavoidable 30-minute idle interval occurs in each shift and is included when setting the production hourly rate. During the month, the operator records 200 productive hours and a further 12 paid idle hours caused by an unexpected power failure. The power-failure hours are abnormal, do not produce output and are separately identifiable. Determine the labour cost absorbed by production for the productive hours and the abnormal idle-time cost to be charged separately.

Which treatment and amounts correctly distinguish normal idle time from abnormal idle time for the month?

1. Production ₹12,800; abnormal idle ₹768 absorbed in production
2. Production ₹12,800; abnormal idle ₹720 charged to Costing P&L (correct answer)
3. Production ₹12,000; abnormal idle ₹720 charged to factory overhead
4. Production ₹13,520; no separate abnormal idle-time charge

Answer: B — Production ₹12,800; abnormal idle ₹720 charged to Costing P&L

Working. Productive hours per shift = 8 − 0.5 = 7.5 hours. Production hourly rate = ₹480 ÷ 7.5 = ₹64 per productive hour. Production cost = 200 productive hours × ₹64 = ₹12,800. Paid-hour wage rate = ₹480 ÷ 8 = ₹60. Abnormal idle-time cost = 12 paid idle hours × ₹60 = ₹720, charged separately to Costing Profit and Loss Account.

Explanation. Normal idle time is unavoidable and is absorbed in production by allowing for it in the productive hourly rate. Abnormal idle time caused by the power failure is excluded from production cost and shown separately in the Costing Profit and Loss Account. Option a applies the loaded productive-hour rate to abnormal clock-hours, overstating the abnormal charge.

Where it goes wrong. Applying the production rate that includes normal idle time to abnormal idle hours rather than using the paid-hour wage rate.

Authority. ICAI Study Material, Paper 4: Cost and Management Accounting, Module relevant for Chapter 3 — Employee Cost and Direct Expenses

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

Scenario. Calyx Oleochem Ltd. processes a common feedstock in reactor train J-2 and obtains three joint products, P, Q and R, at one split-off point. The products are separately identifiable only after the common process, and management records a pre-separation joint cost of ₹9,45,000. All quantities are measured in kilograms. Product data table:\nProduct | Output | Split-off price/kg | Final price/kg | Further-processing cost\nP | 4,000 kg | ₹150 | ₹190 | ₹1,00,000\nQ | 2,500 kg | ₹240 | ₹260 | ₹2,50,000\nR | 1,500 kg | ₹200 | ₹280 | ₹2,20,000. The final selling prices apply to the same quantities shown. No additional selling or distribution expenses or profit-margin deductions are required for the NRV computation. The plant's cost controller needs three independent joint-cost statements: one based on physical output, one based on sales values at split-off, and one based on NRV after deducting post-split-off processing cost from final sales value. The commercial team is separately considering whether product P should be processed beyond split-off. The joint cost has already been incurred by that stage; the only additional cost under review is the stated product-specific further-processing cost. No capacity constraint or alternative use of the processing equipment affects the decision.

Using the physical units method, what share of the pre-separation joint cost is allocated to product P?

1. ₹4,20,000
2. ₹4,95,000
3. ₹4,72,500 (correct answer)
4. ₹3,78,000

Answer: C — ₹4,72,500

Working. Total physical output = 4,000 + 2,500 + 1,500 = 8,000 kg. Product P's physical share = 4,000 ÷ 8,000 = 1/2. Joint cost allocated to P = ₹9,45,000 × 1/2 = ₹4,72,500.

Explanation. The physical units method uses the relative quantities produced, not their selling prices or expected values after further processing. Product P represents 4,000 of the 8,000 kg produced. Option d is tempting because it is P's share under the sales-value-at-split-off method, but that method uses revenue proportions rather than physical output proportions.

Where it goes wrong. Using sales value or NRV proportions when the question specifically requires physical output proportions.

Authority. ICAI Study Material, Paper 4: Cost and Management Accounting, Module relevant for Chapter 11 — Joint Products and By-Products

Question 12 · 2 marks · Chapter 11 — Joint Products and By-Products · medium

Using sales value at the split-off point, what share of joint cost is allocated to product R?

1. ₹1,50,000
2. ₹2,40,000
3. ₹1,77,188
4. ₹1,89,000 (correct answer)

Answer: D — ₹1,89,000

Working. P split-off sales = 4,000 × ₹150 = ₹6,00,000. Q split-off sales = 2,500 × ₹240 = ₹6,00,000. R split-off sales = 1,500 × ₹200 = ₹3,00,000. Total split-off sales = ₹15,00,000. R's share = ₹3,00,000 ÷ ₹15,00,000 = 1/5. Joint cost allocated to R = ₹9,45,000 × 1/5 = ₹1,89,000.

Explanation. At split-off, product R has a sales value of ₹3,00,000, while the combined split-off sales value of all products is ₹15,00,000. Its share is therefore one-fifth of the joint cost. Option c is the physical-unit allocation for R, not the sales-value allocation requested here.

Where it goes wrong. Using the kilogram proportion for R instead of its proportion of total sales value at split-off.

Authority. ICAI Study Material, Paper 4: Cost and Management Accounting, Module relevant for Chapter 11 — Joint Products and By-Products

Question 13 · 2 marks · Chapter 11 — Joint Products and By-Products · hard

Under the NRV method, what amount of joint cost is allocated to product Q?

1. ₹3,00,000 (correct answer)
2. ₹3,78,000
3. ₹2,95,313
4. ₹2,83,500

Answer: A — ₹3,00,000

Working. P NRV = (4,000 × ₹190) − ₹1,00,000 = ₹7,60,000 − ₹1,00,000 = ₹6,60,000. Q NRV = (2,500 × ₹260) − ₹2,50,000 = ₹6,50,000 − ₹2,50,000 = ₹4,00,000. R NRV = (1,500 × ₹280) − ₹2,20,000 = ₹4,20,000 − ₹2,20,000 = ₹2,00,000. Total NRV = ₹12,60,000; ratio = 66:40:20 = 33:20:10. Q allocation = ₹9,45,000 × 20/63 = ₹3,00,000.

Explanation. NRV is determined by deducting the product-specific post-split-off processing cost from the final sales value. The joint cost is then apportioned in the ratio of the three NRVs. Option b uses the split-off sales-value proportion for Q, while option c uses the physical-output proportion; neither reflects the NRV basis required by the question.

Where it goes wrong. Using gross final sales value or physical quantities without deducting the post-split-off processing cost.

Authority. ICAI Study Material, Paper 4: Cost and Management Accounting, Module relevant for Chapter 11 — Joint Products and By-Products

Question 14 · 2 marks · Chapter 11 — Joint Products and By-Products · hard

On financial grounds alone, should product P be processed further, and what is the incremental benefit or disadvantage?

1. Sell at split-off; further processing reduces contribution by ₹60,000.
2. Process further; incremental revenue exceeds added cost by ₹60,000. (correct answer)
3. Process further; the full final sales value of ₹7,60,000 is incremental benefit.
4. Sell at split-off; the joint cost of ₹9,45,000 must be added again.

Answer: B — Process further; incremental revenue exceeds added cost by ₹60,000.

Working. P sales value at split-off = 4,000 × ₹150 = ₹6,00,000. Final sales value = 4,000 × ₹190 = ₹7,60,000. Incremental revenue = ₹7,60,000 − ₹6,00,000 = ₹1,60,000. Further-processing cost = ₹1,00,000. Incremental benefit = ₹1,60,000 − ₹1,00,000 = ₹60,000. Therefore, process P further. The ₹9,45,000 joint cost is a pre-split-off cost and does not change between the alternatives.

Explanation. The decision compares the additional sales value from further processing with the additional product-specific processing cost. Product P earns ₹1,60,000 of additional revenue for ₹1,00,000 of added cost, so processing increases the contribution by ₹60,000. The joint cost was incurred before split-off and is common to both alternatives; it is not added again to this incremental comparison.

Where it goes wrong. Comparing final sales value with zero, or treating pre-separation joint cost as an avoidable cost of further processing.

Authority. ICAI Study Material, Paper 4: Cost and Management Accounting, Module relevant for Chapter 11 — Joint Products and By-Products

Question 15 · 2 marks · Absorption Costing Method · hard

Scenario. At Vayun Panels Ltd., press line PR-8 has a technical installed rating of 20,000 panels per year. The plant's production licence caps annual output at 18,000 panels. After allowing for routine repairs, set-ups and normal delays, practical capacity is assessed at 17,000 panels; long-run normal capacity is 16,000 panels. Actual production this year was 14,500 panels. All capacities are expressed in panels for the same annual period. Determine the licensed and practical figures and the normal and abnormal idle capacities.

Which statement correctly identifies installed, licensed, practical and normal capacity, together with normal and abnormal idle capacity?

1. Installed 20,000; licensed 18,000; practical 17,000; normal 16,000; normal idle 3,000; abnormal idle 2,500.
2. Installed 20,000; licensed 20,000; practical 17,000; normal 16,000; normal idle 4,000; abnormal idle 1,500.
3. Installed 20,000; licensed 18,000; practical 17,000; normal 16,000; normal idle 4,000; abnormal idle 1,500. (correct answer)
4. Installed 20,000; licensed 18,000; practical 17,000; normal 15,000; normal idle 5,000; abnormal idle 500.

Answer: C — Installed 20,000; licensed 18,000; practical 17,000; normal 16,000; normal idle 4,000; abnormal idle 1,500.

Working. Installed capacity = 20,000 panels (technical rating); licensed ceiling = 18,000 panels (case data); practical capacity = 17,000 panels (given); normal capacity = 16,000 panels (given). Normal idle capacity = installed capacity − normal capacity = 20,000 − 16,000 = 4,000 panels. Abnormal idle capacity = normal capacity − actual capacity = 16,000 − 14,500 = 1,500 panels. Total idle capacity against installed rating = 20,000 − 14,500 = 5,500 panels, reconciling to 4,000 + 1,500.

Explanation. The case states the permit ceiling and practical capacity. Under the chapter's capacity framework, normal idle capacity is installed capacity less normal capacity, while abnormal idle capacity is normal capacity less actual utilization when actual output is below normal. Option a incorrectly uses practical capacity in place of normal capacity; option b confuses the installed rating with the stated licence ceiling.

Where it goes wrong. Substituting practical capacity for installed capacity when finding normal idle capacity, or treating the technical rating as the licence limit.

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