Test 4: answer key

Question 1 · 2 marks · Chapter 14 - Marginal Costing · medium

Scenario. Asterion Precision Components Ltd. makes three interchangeable product families—Mica couplings, Nexo sleeves and Orin collars—in a single CNC cell. The monthly production plan is being reset after a new export order increased demand. The CNC cell is the only constrained resource: it has 6,000 productive machine hours available for the month after planned maintenance. Assembly labour, skilled operators outside the CNC cell, material supply, power and working capital are sufficient for the maximum demand shown below. There is no opening inventory, all units produced can be sold in the month, and no finished-goods stock is intended to be carried forward.\n\nFor Mica, selling price is ₹390 per unit, variable cost is ₹270 per unit, CNC time is 3 hours per unit and maximum monthly demand is 1,000 units. For Nexo, the corresponding figures are ₹460, ₹280, 5 hours and 1,000 units. For Orin, they are ₹330, ₹225, 2 hours and 900 units. Variable cost includes direct material, direct labour and variable production and selling overheads; all are avoidable in the short run. The company incurs monthly fixed production and administration costs of ₹2,10,000, which remain unchanged throughout the stated production range. There are no contractual minimum quantities, setup restrictions, quality differences or product-interdependence effects. Management wants to deploy the CNC hours to maximize monthly operating profit rather than maximize sales value or physical output. It will consider contribution generated by each product and the amount of scarce CNC time each unit consumes, then satisfy demand in priority order until the available hours are exhausted. Determine the product priority, feasible monthly mix and resulting profit using marginal costing.

What is the contribution per CNC machine hour generated by Orin collars?

1. Orin: ₹52.50 contribution per CNC hour (correct answer)
2. Mica: ₹40.00 contribution per CNC hour
3. Nexo: ₹36.00 contribution per CNC hour
4. Orin: ₹105.00 contribution per CNC hour

Answer: A — Orin: ₹52.50 contribution per CNC hour

Working. Orin contribution per unit = Selling price − Variable cost = ₹330 − ₹225 = ₹105. CNC hours per unit = 2. Contribution per CNC hour = ₹105 ÷ 2 = ₹52.50. For comparison: Mica = (₹390 − ₹270) ÷ 3 = ₹40; Nexo = (₹460 − ₹280) ÷ 5 = ₹36.

Explanation. Orin earns contribution of ₹330 − ₹225 = ₹105 per unit. Since each unit uses 2 CNC hours, contribution per scarce hour is ₹105 ÷ 2 = ₹52.50. This exceeds Mica's ₹40 and Nexo's ₹36, so Orin provides the highest return from the constrained machine. The tempting ₹105 figure is contribution per unit, not contribution per machine hour; using it would ignore different machine-time requirements.

Where it goes wrong. Using contribution per unit instead of contribution per unit of the scarce machine resource.

Authority. ICAI Study Material, Paper 4: Cost and Management Accounting, Module relevant for Chapter 14 - Marginal Costing

Question 2 · 2 marks · Chapter 14 - Marginal Costing · hard

Based on contribution per CNC machine hour, which production priority should Asterion Precision Components Ltd. adopt?

1. Mica → Orin → Nexo
2. Orin → Mica → Nexo (correct answer)
3. Nexo → Mica → Orin
4. Mica → Nexo → Orin

Answer: B — Orin → Mica → Nexo

Working. Mica contribution = ₹390 − ₹270 = ₹120; contribution per CNC hour = ₹120 ÷ 3 = ₹40. Nexo contribution = ₹460 − ₹280 = ₹180; contribution per CNC hour = ₹180 ÷ 5 = ₹36. Orin contribution = ₹330 − ₹225 = ₹105; contribution per CNC hour = ₹105 ÷ 2 = ₹52.50. Descending order: Orin, Mica, Nexo.

Explanation. Contribution per unit is ₹120 for Mica, ₹180 for Nexo and ₹105 for Orin. Dividing by CNC hours gives ₹40, ₹36 and ₹52.50 respectively. Priority is therefore Orin, Mica and Nexo. Ranking by contribution per unit alone would place Nexo first because its per-unit contribution is ₹180, but it consumes five scarce hours and yields the lowest contribution per constrained hour.

Where it goes wrong. Ranking products by contribution per unit rather than contribution per unit of the limiting factor.

Authority. ICAI Study Material, Paper 4: Cost and Management Accounting, Module relevant for Chapter 14 - Marginal Costing

Question 3 · 2 marks · Chapter 14 - Marginal Costing · hard

What is the profit-maximising monthly production mix, considering the 6,000 available CNC machine hours and the maximum market demand for each product?

1. Orin 900; Mica 800; Nexo 360 units
2. Orin 900; Mica 1,000; Nexo 200 units
3. Orin 900; Mica 1,000; Nexo 240 units (correct answer)
4. Orin 800; Mica 1,000; Nexo 280 units

Answer: C — Orin 900; Mica 1,000; Nexo 240 units

Working. Priority: Orin, Mica, Nexo. Orin: 900 units × 2 hours = 1,800 hours. Remaining hours = 6,000 − 1,800 = 4,200. Mica: 1,000 units × 3 hours = 3,000 hours. Remaining hours = 4,200 − 3,000 = 1,200. Nexo: 1,200 ÷ 5 = 240 units. Total machine hours = 1,800 + 3,000 + 1,200 = 6,000.

Explanation. Allocate the 6,000 hours first to Orin's demand of 900 units (1,800 hours), then Mica's 1,000 units (3,000 hours). The 1,200 hours left produce 240 Nexo units. The alternative with 200 Nexo units leaves 200 hours unused despite unmet Nexo demand; the option with 360 Nexo units displaces higher-return Mica output.

Where it goes wrong. Failing to allocate the remaining machine hours to the next product in contribution-per-limiting-factor order.

Authority. ICAI Study Material, Paper 4: Cost and Management Accounting, Module relevant for Chapter 14 - Marginal Costing

Question 4 · 2 marks · Chapter 14 - Marginal Costing · hard

What is the maximum monthly operating profit at the production mix determined using the limiting factor?

1. ₹42,300 monthly profit after fixed costs
2. ₹47,700 monthly contribution before fixed costs
3. ₹2,57,700 monthly profit after fixed costs
4. ₹47,700 monthly profit after fixed costs (correct answer)

Answer: D — ₹47,700 monthly profit after fixed costs

Working. Orin contribution = 900 × ₹105 = ₹94,500. Mica contribution = 1,000 × ₹120 = ₹1,20,000. Nexo contribution = 240 × ₹180 = ₹43,200. Total contribution = ₹94,500 + ₹1,20,000 + ₹43,200 = ₹2,57,700. Operating profit = Total contribution − Fixed costs = ₹2,57,700 − ₹2,10,000 = ₹47,700.

Explanation. At the selected mix, contribution is Orin ₹94,500 (900 × ₹105), Mica ₹1,20,000 (1,000 × ₹120), and Nexo ₹43,200 (240 × ₹180), totalling ₹2,57,700. Deduct monthly fixed costs of ₹2,10,000 to obtain ₹47,700 profit. The ₹2,57,700 figure is contribution before fixed costs, not operating profit.

Where it goes wrong. Reporting total contribution as operating profit without deducting fixed costs.

Authority. ICAI Study Material, Paper 4: Cost and Management Accounting, Module relevant for Chapter 14 - Marginal Costing

Question 5 · 2 marks · Chapter 5 - Activity Based Costing · medium

Scenario. Vardhan Appliances Ltd. uses ABC to classify four overhead activities for its air-cooler range. Activity I is attaching one serial label to every finished unit; total label-handling effort changes with units produced. Activity II is resetting the moulding machine whenever a new production batch begins, regardless of batch size. Activity III is revising engineering drawings and maintaining part specifications for each model in the product family. Activity IV is operating gate security and maintaining common factory premises for the entire plant. The cost accountant must assign each activity to the appropriate cost hierarchy before selecting activity drivers.

Which option correctly classifies Activities I, II, III and IV, respectively, under the ABC cost hierarchy?

1. I unit; II batch; III product; IV facility (correct answer)
2. I unit; II product; III batch; IV facility
3. I unit; II batch; III facility; IV product
4. I batch; II unit; III product; IV facility

Answer: A — I unit; II batch; III product; IV facility

Working. Activity I: attaching a label to every unit → unit-level. Activity II: resetting a machine for each batch → batch-level. Activity III: maintaining drawings and specifications for a product model → product-level/product-sustaining. Activity IV: factory security and common premises → facility-level/facility-sustaining.

Explanation. The per-unit label use varies with the number of units and is unit-level. Set-up is repeated for each batch, so it is batch-level. Technical drawings support a product line regardless of individual units, making them product-sustaining. Factory security supports the facility as a whole and is facility-sustaining. Assigning set-up to unit level wrongly treats a batch-triggered cost as unit-driven.

Where it goes wrong. Classifying an activity according to the number of units produced rather than the event that causes the activity cost.

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

Question 6 · 2 marks · Chapter 13 - Standard Costing · hard

Scenario. Meridian Motion Systems Ltd. manufactures precision actuator assemblies on a standardized line. For October, actual good output was 4,000 units. The approved labour standard for one unit is 2 skilled hours at ₹24 per hour and 3 semi-skilled hours at ₹16 per hour. Thus, standard time and cost for the achieved output must be determined separately for each grade of labour. The production report records 8,400 skilled hours paid, including 400 idle hours, and 11,000 semi-skilled hours paid, including 500 idle hours. All idle hours were paid at the regular actual rates and arose from a temporary power interruption; no overtime premium or bonus was paid.\n\nActual wage rates were ₹25 per skilled hour and ₹15 per semi-skilled hour. These rates apply to all hours paid, including idle hours. Actual hours worked therefore exclude the idle hours. The planned gang mix for the standard task is based on the standard skilled-to-semi-skilled hour ratio for one unit; management wants the impact of the actual grade mix distinguished from the overall productivity effect. There were no other labour grades, transfers between departments, or labour-related direct expenses. The payroll department asks for labour cost and rate variances using paid hours, while the production manager requires efficiency and mix measures using hours actually worked. The cost controller also wants idle time stated separately so that the component variances reconcile to total labour cost variance. Compute the requested labour variances for October under the standard costing approach.

Which pair correctly states the Labour Cost Variance and Labour Rate Variance for October?

1. LCV ₹9,000 A; LRV ₹2,600 A
2. LCV ₹9,000 F; LRV ₹2,600 F (correct answer)
3. LCV ₹17,600 A; LRV ₹2,600 F
4. LCV ₹9,000 F; LRV ₹17,600 A

Answer: B — LCV ₹9,000 F; LRV ₹2,600 F

Working. Standard skilled hours = 4,000 × 2 = 8,000; standard semi-skilled hours = 4,000 × 3 = 12,000. Standard labour cost = (8,000 × ₹24) + (12,000 × ₹16) = ₹3,84,000. Actual labour cost = (8,400 × ₹25) + (11,000 × ₹15) = ₹2,10,000 + ₹1,65,000 = ₹3,75,000. LCV = ₹3,84,000 − ₹3,75,000 = ₹9,000 F. LRV = 8,400(₹24−₹25) + 11,000(₹16−₹15) = ₹2,600 F.

Explanation. Standard labour cost is 8,000 × ₹24 + 12,000 × ₹16 = ₹3,84,000, while actual wages are 8,400 × ₹25 + 11,000 × ₹15 = ₹3,75,000, giving ₹9,000 favourable. Rate variance is 8,400(24−25)+11,000(16−15)=₹2,600 favourable. A common error is to apply actual rates only to hours worked, omitting paid idle hours from labour cost and rate variances.

Where it goes wrong. Excluding paid idle hours while calculating actual labour cost or labour rate variance.

Authority. ICAI Study Material, Paper 4: Cost and Management Accounting, Module relevant for Chapter 13 - Standard Costing

Question 7 · 2 marks · Chapter 13 - Standard Costing · medium

What is the Labour Efficiency Variance for October?

1. ₹24,000 adverse
2. ₹17,600 adverse
3. ₹24,000 favourable (correct answer)
4. ₹8,000 favourable

Answer: C — ₹24,000 favourable

Working. Skilled standard hours = 4,000 × 2 = 8,000; skilled hours worked = 8,400 − 400 = 8,000. Semi-skilled standard hours = 4,000 × 3 = 12,000; semi-skilled hours worked = 11,000 − 500 = 10,500. Labour Efficiency Variance = (SH − AH worked) × SR. Skilled = (8,000 − 8,000) × ₹24 = Nil. Semi-skilled = (12,000 − 10,500) × ₹16 = ₹24,000 F. Total = ₹24,000 F.

Explanation. Efficiency variance uses hours worked, not hours paid. Skilled hours worked are 8,400−400=8,000, equal to standard hours of 8,000. Semi-skilled hours worked are 11,000−500=10,500 against 12,000 standard hours. Thus (0 × ₹24)+(1,500 × ₹16)=₹24,000 favourable. The ₹17,600 adverse amount is idle-time variance, not efficiency variance.

Where it goes wrong. Using hours paid instead of actual hours worked when determining labour efficiency variance.

Authority. ICAI Study Material, Paper 4: Cost and Management Accounting, Module relevant for Chapter 13 - Standard Costing

Question 8 · 2 marks · Chapter 13 - Standard Costing · hard

What is the total Labour Idle Time Variance for the two categories of workers?

1. ₹17,600 favourable
2. ₹14,400 adverse
3. ₹24,000 adverse
4. ₹17,600 adverse (correct answer)

Answer: D — ₹17,600 adverse

Working. Skilled idle time variance = 400 hours × ₹24 = ₹9,600 A. Semi-skilled idle time variance = 500 hours × ₹16 = ₹8,000 A. Total Labour Idle Time Variance = ₹9,600 A + ₹8,000 A = ₹17,600 A.

Explanation. Idle time is the difference between hours paid and hours worked. The variance is 400 skilled hours × ₹24 plus 500 semi-skilled hours × ₹16, amounting to ₹17,600 adverse. The common error is to treat idle hours as an efficiency shortfall and apply only one wage rate; the two labour categories must be valued at their respective standard rates.

Where it goes wrong. Applying one standard hourly rate to all idle hours instead of using the separate rates for skilled and semi-skilled labour.

Authority. ICAI Study Material, Paper 4: Cost and Management Accounting, Module relevant for Chapter 13 - Standard Costing

Question 9 · 2 marks · Chapter 13 - Standard Costing · hard

What is the Labour Mix Variance (Gang Variance) for October?

1. ₹4,800 adverse labour mix (correct answer)
2. ₹4,800 favourable labour mix
3. ₹28,800 favourable labour mix
4. ₹17,600 adverse idle time

Answer: A — ₹4,800 adverse labour mix

Working. Actual skilled hours worked = 8,400 − 400 = 8,000. Actual semi-skilled hours worked = 11,000 − 500 = 10,500. Total actual hours worked = 18,500. Standard labour mix = 2:3, or 40% skilled and 60% semi-skilled. Revised standard skilled hours = 18,500 × 40% = 7,400. Revised standard semi-skilled hours = 18,500 × 60% = 11,100. Labour Mix Variance = (7,400 − 8,000) × ₹24 + (11,100 − 10,500) × ₹16 = ₹14,400 A + ₹9,600 F = ₹4,800 A.

Explanation. Actual hours worked are 18,500. At the standard 40:60 gang proportion, revised standard hours are 7,400 skilled and 11,100 semi-skilled. Mix variance is (7,400−8,000)×₹24 + (11,100−10,500)×₹16 = ₹4,800 adverse. The ₹28,800 favourable amount reflects yield variance; it compares standard hours with revised standard hours, not revised mix with actual mix.

Where it goes wrong. Confusing Labour Mix Variance with Labour Yield Variance or using paid hours instead of worked hours.

Authority. ICAI Study Material, Paper 4: Cost and Management Accounting, Module relevant for Chapter 13 - Standard Costing

Question 10 · 2 marks · Chapter 6 - Cost Sheet · medium

Scenario. Rivermark Metals Ltd. is preparing the prime cost for a production batch. Opening raw material stock was ₹3,40,000 and closing raw material stock was ₹2,90,000, both at the amounts recorded in the stores ledger. Purchases during the period were ₹17,80,000, net of returns and excluding inward charges. Carriage inward of ₹80,000 and non-creditable customs duty of ₹1,20,000 relate solely to materials consumed during the period and are not included in either stock balance. Direct production wages were ₹4,60,000. No other direct expenses were incurred. Determine prime cost, treating procurement charges directly attributable to consumed materials as part of direct material cost.

What is the Prime Cost of the production batch?

1. ₹24,10,000
2. ₹24,90,000 (correct answer)
3. ₹22,90,000
4. ₹25,70,000

Answer: B — ₹24,90,000

Working. Direct material consumed = Opening stock + Purchases + Carriage inward + Customs duty − Closing stock. = ₹3,40,000 + ₹17,80,000 + ₹80,000 + ₹1,20,000 − ₹2,90,000 = ₹20,30,000. Prime Cost = Direct material consumed + Direct wages + Direct expenses. = ₹20,30,000 + ₹4,60,000 + ₹0 = ₹24,90,000.

Explanation. Direct material consumed is ₹3,40,000 + ₹17,80,000 + ₹80,000 + ₹1,20,000 − ₹2,90,000 = ₹20,30,000. Adding direct wages of ₹4,60,000 gives prime cost of ₹24,90,000. Freight inward and non-creditable customs duty are directly attributable procurement costs. Omitting them understates prime cost; adding them again to stock values would double count, which the scenario explicitly rules out.

Where it goes wrong. Omitting carriage inward or non-creditable customs duty from direct material cost, or deducting closing stock incorrectly.

Authority. ICAI Study Material, Paper 4: Cost and Management Accounting, Module relevant for Chapter 6 - Cost Sheet

Question 11 · 2 marks · Chapter 12 - Service Costing · medium

Scenario. Bluecrest Retreats Ltd. operates a hotel with 100 single rooms, 40 double rooms and 20 triple rooms. The year contains 360 days, divided into six season months and six off-season months of 30 days each. Season occupancy is 75% for every room category; off-season occupancy is 50%. Double-room tariff is fixed at 2.5 times the single-room tariff, while the triple-room tariff is twice the double-room tariff. During the off-season, each category is charged at one-half of its full-season tariff. The hotel uses single-room equivalents to compare the services provided by different room grades.\n\nAnnual costs, excluding room attendants, comprise staff salaries of ₹25,20,000, building repairs of ₹1,80,000 and laundry/utilities of ₹2,46,000. The building investment is ₹60,00,000 and is depreciated on a straight-line basis at 5% per year; furniture and equipment costing ₹14,00,000 are depreciated at 15% per year on the same basis. Room attendants are paid ₹24 for each actual occupied room-day, irrespective of room category. All listed costs relate to the hotel operation for this year, and no costs are shared with other departments. Management requires a profit of 25% on total cost. For tariff calculation, season room-equivalents earn the full single-room tariff, whereas off-season equivalents earn only half that amount. Compute actual occupied room-days, equivalent single-room days and attendants' wages before determining the full-season single-room rate. No tax or financing charge is to be added.

What is the total number of actual occupied room-days for the hotel during the year?

1. 33,300 occupied room-days
2. 36,000 occupied room-days (correct answer)
3. 40,500 occupied room-days
4. 54,000 occupied room-days

Answer: B — 36,000 occupied room-days

Working. Season room-days: Single = 100 × 180 × 75% = 13,500; Double = 40 × 180 × 75% = 5,400; Triple = 20 × 180 × 75% = 2,700. Season total = 21,600. Off-season room-days: Single = 100 × 180 × 50% = 9,000; Double = 40 × 180 × 50% = 3,600; Triple = 20 × 180 × 50% = 1,800. Off-season total = 14,400. Annual actual occupied room-days = 21,600 + 14,400 = 36,000.

Explanation. Season occupancy produces 13,500 single, 5,400 double and 2,700 triple room-days, totalling 21,600. Off-season occupancy adds 9,000, 3,600 and 1,800 room-days, totalling 14,400. Annual actual occupied room-days are 36,000. The 54,000 figure is a tariff-weighted equivalent, not actual occupied room-days, so it should not be used for attendant wages.

Where it goes wrong. Applying single-room conversion weights when the question requires actual occupied room-days.

Authority. ICAI Study Material, Paper 4: Cost and Management Accounting, Module relevant for Chapter 12 - Service Costing

Question 12 · 2 marks · Chapter 12 - Service Costing · hard

What is the annual total of equivalent single-room days before applying the off-season tariff concession?

1. 54,000 single-room equivalent days
2. 63,000 single-room equivalent days
3. 72,000 single-room equivalent days
4. 67,500 single-room equivalent days (correct answer)

Answer: D — 67,500 single-room equivalent days

Working. Single occupied room-days = 13,500 + 9,000 = 22,500; equivalent days = 22,500 × 1 = 22,500. Double occupied room-days = 5,400 + 3,600 = 9,000; equivalent days = 9,000 × 2.5 = 22,500. Triple occupied room-days = 2,700 + 1,800 = 4,500; equivalent days = 4,500 × 5 = 22,500. Total equivalent single-room days = 22,500 + 22,500 + 22,500 = 67,500.

Explanation. Annual occupied room-days are 22,500 single, 9,000 double and 4,500 triple. At weights of 1, 2.5 and 5, the equivalent total is 22,500 + 22,500 + 22,500 = 67,500 single-room equivalents. The 54,000 alternative deducts the off-season half-tariff adjustment; that adjustment is relevant to revenue equivalents for tariff setting, not to the requested room conversion before concession.

Where it goes wrong. Applying the half-tariff concession while calculating equivalent single-room days, although the question asks for the conversion before that concession.

Authority. ICAI Study Material, Paper 4: Cost and Management Accounting, Module relevant for Chapter 12 - Service Costing

Question 13 · 2 marks · Chapter 12 - Service Costing · medium

What is the annual cost of room attendants' wages?

1. ₹8,64,000 (correct answer)
2. ₹7,20,000
3. ₹9,00,000
4. ₹10,80,000

Answer: A — ₹8,64,000

Working. Actual occupied room-days = Season 21,600 + Off-season 14,400 = 36,000. Room attendants' wages per occupied room-day = ₹24. Total annual room attendants' wages = 36,000 × ₹24 = ₹8,64,000.

Explanation. Room attendants are paid for actual occupied room-days, regardless of the tariff multiple attached to double and triple rooms. Annual actual occupied room-days are 36,000, so wages are 36,000 × ₹24 = ₹8,64,000. Multiplying by the weighted 54,000 or the unadjusted 67,500 equivalent units incorrectly applies room equivalence to labour cost even though attendants are paid per occupied room-day.

Where it goes wrong. Applying equivalent single-room weights to wages that are paid per actual occupied room-day.

Authority. ICAI Study Material, Paper 4: Cost and Management Accounting, Module relevant for Chapter 12 - Service Costing

Question 14 · 2 marks · Chapter 12 - Service Costing · hard

What full-season tariff should be charged for one single room per day to earn a profit of 25% on total cost?

1. ₹90 per single room per day
2. ₹100 per single room per day (correct answer)
3. ₹80 per single room per day
4. ₹125 per single room per day

Answer: B — ₹100 per single room per day

Working. Building depreciation = ₹60,00,000 × 5% = ₹3,00,000. Furniture and equipment depreciation = ₹14,00,000 × 15% = ₹2,10,000. Other fixed costs = ₹25,20,000 + ₹1,80,000 + ₹2,46,000 + ₹3,00,000 + ₹2,10,000 = ₹34,56,000. Room attendants' wages = ₹8,64,000. Total cost = ₹34,56,000 + ₹8,64,000 = ₹43,20,000. Required takings = ₹43,20,000 × 125% = ₹54,00,000. Season equivalent days = 13,500 + (5,400 × 2.5) + (2,700 × 5) = 40,500. Off-season equivalent days = 9,000 + (3,600 × 2.5) + (1,800 × 5) = 27,000. Revenue-equivalent days = 40,500 + (27,000 × 50%) = 54,000. Full-season single-room tariff = ₹54,00,000 ÷ 54,000 = ₹100 per day.

Explanation. Fixed costs total ₹34,56,000: salaries ₹25,20,000, repairs ₹1,80,000, laundry/utilities ₹2,46,000 and depreciation ₹3,00,000 + ₹2,10,000. Attendants add ₹8,64,000, making cost ₹43,20,000; 25% profit on cost requires takings of ₹54,00,000. Revenue-equivalent days are 40,500 season plus half of 27,000 off-season = 54,000. Thus full single tariff is ₹100.

Where it goes wrong. Ignoring the half-tariff concession in the off-season or treating a profit percentage on cost as a profit margin on sales.

Authority. ICAI Study Material, Paper 4: Cost and Management Accounting, Module relevant for Chapter 12 - Service Costing

Question 15 · 2 marks · Chapter 7 - Cost Accounting Systems · hard

Scenario. At Suryanet Industrial Tools Ltd., cost and financial books are kept separately. During the month, raw materials of ₹7,80,000 are purchased on credit and recorded directly through Stores Ledger Control Account; the Material Control Account is not used. Direct materials worth ₹5,40,000 are issued from stores to production. Direct wages of ₹2,70,000 are paid and then charged entirely to production; assume there are no indirect wages or abnormal idle-time amounts. The company uses General Ledger Adjustment Account as the counterpart for expenditure in its cost ledger. Identify the correct sequence of entries for the purchase, material issue, wage payment and transfer of direct wages to Work-in-Process Control Account.

Which sequence of entries correctly records all four transactions under the non-integrated accounting system?

1. Stores Ledger Control Dr ₹7,80,000; To General Ledger Adjustment ₹7,80,000. WIP Control Dr ₹5,40,000; To Stores Ledger Control ₹5,40,000. General Ledger Adjustment Dr ₹2,70,000; To Wages Control ₹2,70,000. Wages Control Dr ₹2,70,000; To WIP Control ₹2,70,000.
2. Stores Ledger Control Dr ₹7,80,000; To General Ledger Adjustment ₹7,80,000. WIP Control Dr ₹5,40,000; To Stores Ledger Control ₹5,40,000. Wages Control Dr ₹2,70,000; To General Ledger Adjustment ₹2,70,000. General Ledger Adjustment Dr ₹2,70,000; To WIP Control ₹2,70,000.
3. Stores Ledger Control Dr ₹7,80,000; To General Ledger Adjustment ₹7,80,000. WIP Control Dr ₹5,40,000; To Stores Ledger Control ₹5,40,000. Wages Control Dr ₹2,70,000; To General Ledger Adjustment ₹2,70,000. WIP Control Dr ₹2,70,000; To Wages Control ₹2,70,000. (correct answer)
4. General Ledger Adjustment Dr ₹7,80,000; To Stores Ledger Control ₹7,80,000. Stores Ledger Control Dr ₹5,40,000; To WIP Control ₹5,40,000. Wages Control Dr ₹2,70,000; To General Ledger Adjustment ₹2,70,000. WIP Control Dr ₹2,70,000; To Wages Control ₹2,70,000.

Answer: C — Stores Ledger Control Dr ₹7,80,000; To General Ledger Adjustment ₹7,80,000. WIP Control Dr ₹5,40,000; To Stores Ledger Control ₹5,40,000. Wages Control Dr ₹2,70,000; To General Ledger Adjustment ₹2,70,000. WIP Control Dr ₹2,70,000; To Wages Control ₹2,70,000.

Working. 1. Raw material purchased: Stores Ledger Control A/c Dr ₹7,80,000; To General Ledger Adjustment A/c ₹7,80,000. 2. Direct material issued: Work-in-Process Control A/c Dr ₹5,40,000; To Stores Ledger Control A/c ₹5,40,000. 3. Direct wages paid: Wages Control A/c Dr ₹2,70,000; To General Ledger Adjustment A/c ₹2,70,000. 4. Direct wages transferred to production: Work-in-Process Control A/c Dr ₹2,70,000; To Wages Control A/c ₹2,70,000.

Explanation. Under the non-integrated system, a direct purchase debits Stores Ledger Control and credits General Ledger Adjustment; an issue to production debits WIP and credits Stores Ledger Control. Wages paid are debited to Wages Control and credited to General Ledger Adjustment, then direct wages are transferred by debiting WIP and crediting Wages Control. Crediting WIP for materials or debiting the adjustment account reverses the cost flow.

Where it goes wrong. Reversing the debit and credit treatment when transferring direct materials or direct wages to Work-in-Process Control Account.

Authority. ICAI Study Material, Paper 4: Cost and Management Accounting, Module relevant for Chapter 7 - Cost Accounting Systems