Test 7: answer key

Question 1 · 2 marks · Standard Costing · medium

Scenario. Veyra Components Ltd. produces product RX-40 in batches. The standard material content for 1,000 units is Material P 600 kg at Rs.45 per kg and Material Q 400 kg at Rs.80 per kg. The standard labour content for 1,000 units is Skilled 200 hours at Rs.90 per hour and Semi-skilled 300 hours at Rs.55 per hour. During the period, actual output was 960 units. Actual material usage was P 590 kg at Rs.46 per kg and Q 390 kg at Rs.78 per kg. Material purchased equaled material used. Actual labour paid was Skilled 210 hours at Rs.94 per hour, including 10 idle hours, and Semi-skilled 280 hours at Rs.52 per hour, including 5 idle hours. There was no opening or closing work-in-process. The production manager wants a variance report covering material price, usage, mix and yield, along with labour cost, rate, efficiency and idle time variances, before discussing accountability with the purchase and production departments.

What is the total material price variance for RX-40 in the period?

1. Rs.190 (A)
2. Rs.190 (F) (correct answer)
3. Rs.260 (F)
4. Rs.1,110 (A)

Answer: B — Rs.190 (F)

Working. MPV P = 590 x (45 - 46) = -590 A; MPV Q = 390 x (80 - 78) = +780 F; Total MPV = 190 F.

Explanation. Material price variance is actual quantity multiplied by the difference between standard price and actual price. P gives 590 x (45 - 46) = Rs.590 adverse; Q gives 390 x (80 - 78) = Rs.780 favourable. The net is Rs.190 favourable. Option d is material usage variance, not price variance.

Where it goes wrong. Adding price and usage variances, or reversing the favourable and adverse signs.

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 mix variance?

1. Rs.70 (A)
2. Rs.1,110 (A)
3. Rs.70 (F) (correct answer)
4. Rs.1,180 (A)

Answer: C — Rs.70 (F)

Working. RSQ P = 980 x 60% = 588 kg; RSQ Q = 980 x 40% = 392 kg. MMV P = 45 x (588 - 590) = 90 A; MMV Q = 80 x (392 - 390) = 160 F; Total = 70 F.

Explanation. Revised standard quantity is actual total input 980 kg in standard proportion: P 588 kg and Q 392 kg. Mix variance is standard price x (revised standard quantity - actual quantity). P gives 45 x (588 - 590) = Rs.90 adverse; Q gives 80 x (392 - 390) = Rs.160 favourable. Net is Rs.70 favourable. Option b is usage variance.

Where it goes wrong. Using standard quantity for actual output instead of revised standard quantity based on actual total input.

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

Question 3 · 2 marks · Standard Costing · hard

The total labour rate variance and total labour efficiency variance are:

1. Rs.0 and Rs.5 (A) (correct answer)
2. Rs.0 and Rs.5 (F)
3. Rs.1,175 (A) and Rs.5 (A)
4. Rs.840 (F) and Rs.840 (A)

Answer: A — Rs.0 and Rs.5 (A)

Working. LRV = 210 x (90-94) + 280 x (55-52) = -840 + 840 = 0. LEV Skilled = 90 x (192-200) = -720 A; Semi = 55 x (288-275) = +715 F; Total LEV = 5 A.

Explanation. Rate variance uses hours paid: Skilled 210 x (90 - 94) = Rs.840 adverse; Semi-skilled 280 x (55 - 52) = Rs.840 favourable, net zero. Efficiency variance uses hours worked after idle time: Skilled 90 x (192 - 200) = Rs.720 adverse; Semi-skilled 55 x (288 - 275) = Rs.715 favourable, net Rs.5 adverse. Option c mixes idle time with efficiency.

Where it goes wrong. Using hours paid instead of hours worked for efficiency variance, or including idle hours in efficiency.

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

Question 4 · 2 marks · Standard Costing · hard

What is the total labour idle time variance?

1. Rs.900 (A)
2. Rs.1,175 (F)
3. Rs.275 (A)
4. Rs.1,175 (A) (correct answer)

Answer: D — Rs.1,175 (A)

Working. Idle time variance = (10 x 90) + (5 x 55) = 900 A + 275 A = 1,175 A.

Explanation. Idle time variance is idle hours multiplied by the standard rate, and it is adverse. Skilled idle is 10 x 90 = Rs.900 adverse; Semi-skilled idle is 5 x 55 = Rs.275 adverse. Total is Rs.1,175 adverse. Option b has the correct amount but wrong sign; option a covers only skilled labour.

Where it goes wrong. Taking a favourable sign or considering only one labour category.

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

Question 5 · 2 marks · Service Costing · medium

Scenario. Nirmal Path Tollways operates a 48 km toll road. Annual fixed operating cost is Rs.1,08,00,000. Variable operating cost is Rs.12 per passenger-car-unit (PCU). The average toll charge is Rs.85 per PCU. The plaza remains open for 360 days in a year. The management is examining the traffic level at which toll revenue just covers fixed and variable operating costs, before finalising a revised toll notification for passenger vehicles, buses and heavy commercial vehicles.

The break-even toll traffic is closest to:

1. 403 PCU per day
2. 407 PCU per day
3. 411 PCU per day (correct answer)
4. 417 PCU per day

Answer: C — 411 PCU per day

Working. Contribution = 85 - 12 = 73; Annual BE = 1,08,00,000 / 73 = 1,47,945.21; Per day = 1,47,945.21 / 360 = 410.96 ~ 411 PCU.

Explanation. Contribution per PCU is toll less variable cost, Rs.85 - Rs.12 = Rs.73. Annual break-even traffic is fixed cost divided by contribution, Rs.1,08,00,000 / 73 = 1,47,945.21 PCU. Divided by 360 days, this is about 411 PCU per day. Option b may arise from using a rounded contribution or wrong day count.

Where it goes wrong. Dividing annual fixed cost by toll alone, or using 365 days instead of 360 days.

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

Question 6 · 2 marks · Process & Operation Costing · medium

Scenario. Neridha Chemicals processes a solvent through Process 1 and Process 2. In Process 1, 10,000 units were introduced. Materials were Rs.1,20,000, labour Rs.40,000 and overheads Rs.25,000. Normal loss was 10% of input, with scrap realising Rs.5 per unit. Actual output transferred to Process 2 was 8,800 units. In Process 2, additional materials were Rs.35,200, labour Rs.26,400 and overheads Rs.17,600. Normal loss was 5% of input received from Process 1, with scrap realising Rs.10 per unit. Actual output transferred to finished stock was 8,500 units. There was no opening or closing work-in-process in either process. The cost clerk must prepare the process accounts, identify any abnormal loss or abnormal gain, and value transfers between processes and to finished stock.

For Process 1, the abnormal loss is:

1. 200 units valued Rs.4,000 (correct answer)
2. 200 units valued Rs.5,000
3. 240 units valued Rs.4,800
4. 160 units valued Rs.3,200

Answer: A — 200 units valued Rs.4,000

Working. Normal loss = 1,000 units; scrap = 1,000 x 5 = 5,000; cost per good unit = (1,85,000 - 5,000)/(10,000 - 1,000) = 1,80,000/9,000 = 20; abnormal loss = 9,000 - 8,800 = 200 units; value = 200 x 20 = 4,000.

Explanation. Process 1 normal loss is 10% of 10,000 = 1,000 units, so expected good output is 9,000 units. Actual output is 8,800, hence abnormal loss is 200 units. Cost per good unit is (Rs.1,85,000 - Rs.5,000 scrap) / 9,000 = Rs.20. Abnormal loss value is 200 x 20 = Rs.4,000. Option b ignores scrap deduction.

Where it goes wrong. Valuing abnormal loss before deducting scrap value of normal loss, or treating normal loss units as output.

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

Question 7 · 2 marks · Process & Operation Costing · hard

For Process 2, the abnormal gain is:

1. 140 units valued Rs.4,400
2. 140 units valued Rs.4,200 (correct answer)
3. 100 units valued Rs.3,000
4. 440 units valued Rs.4,400

Answer: B — 140 units valued Rs.4,200

Working. Process 2 total cost before scrap = 1,76,000 + 79,200 = 2,55,200; normal scrap = 440 x 10 = 4,400; cost per good unit = (2,55,200 - 4,400)/(8,800 - 440) = 2,50,800/8,360 = 30; abnormal gain = 8,500 - 8,360 = 140 units; value = 140 x 30 = 4,200.

Explanation. Process 2 receives 8,800 units. Normal loss is 5% = 440 units, so expected good output is 8,360 units. Actual output is 8,500, giving abnormal gain of 140 units. Cost per good unit is (Rs.1,76,000 + Rs.79,200 - Rs.4,400) / 8,360 = Rs.30. Abnormal gain is 140 x 30 = Rs.4,200. Option a uses scrap value per unit wrongly.

Where it goes wrong. Using actual output instead of expected good output to find abnormal gain, or using scrap rate for valuation.

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

Question 8 · 2 marks · Process & Operation Costing · hard

The cost per completed unit transferred from Process 1 to Process 2 is:

1. Rs.18.50
2. Rs.19.00
3. Rs.20.50
4. Rs.20.00 (correct answer)

Answer: D — Rs.20.00

Working. Cost per good unit = (1,85,000 - 5,000)/(10,000 - 1,000) = 1,80,000/9,000 = 20.

Explanation. The cost of good units in Process 1 is total process cost less realisable value of normal loss, divided by input less normal loss units. This gives (Rs.1,85,000 - Rs.5,000) / (10,000 - 1,000) = Rs.20 per unit. Option c may arise from dividing by actual output or ignoring scrap value.

Where it goes wrong. Dividing by actual output or raw input instead of normal good units.

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

Question 9 · 2 marks · Process & Operation Costing · hard

The amount transferred from Process 2 to finished stock is:

1. Rs.2,51,680
2. Rs.2,55,200
3. Rs.2,55,000 (correct answer)
4. Rs.2,59,400

Answer: C — Rs.2,55,000

Working. Transfer to finished stock = 8,500 x 30 = 2,55,000. Process 2 debit = 1,76,000 + 79,200 + 4,200 = 2,59,400; credit normal loss 4,400 + finished 2,55,000 = 2,59,400.

Explanation. Process 2 cost per good unit is Rs.30. Actual good output transferred is 8,500 units, so transfer value is 8,500 x 30 = Rs.2,55,000. Option b is total debit before abnormal gain, while option d is the gross process account total including abnormal gain.

Where it goes wrong. Transferring the full process account debit or including abnormal gain value in finished stock.

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

Question 10 · 2 marks · Overheads- Absorption Costing Method · medium

Scenario. Arka Fabrication has two production departments, P1 and P2, and two service departments, S1 and S2. Service department costs before reapportionment are S1 Rs.90,000 and S2 Rs.60,000. S1 services are apportioned 50% to P1, 30% to P2 and 20% to S2. S2 services are apportioned 40% to P1 and 60% to P2. The company is comparing the direct allocation method with the step-down method, starting with S1 because it serves S2. The accounts team needs the total service cost apportioned to P2 under the step-down method.

Under the step-down method, the total service cost apportioned to production department P2 is:

1. Rs.73,800 (correct answer)
2. Rs.69,750
3. Rs.78,000
4. Rs.72,000

Answer: A — Rs.73,800

Working. S1 to P2 = 90,000 x 30% = 27,000; S1 to S2 = 90,000 x 20% = 18,000; S2 total = 60,000 + 18,000 = 78,000; S2 to P2 = 78,000 x 60% = 46,800; P2 total = 27,000 + 46,800 = 73,800.

Explanation. Under step-down, S1 is apportioned first: Rs.45,000 to P1, Rs.27,000 to P2 and Rs.18,000 to S2. S2 then has Rs.78,000 and is apportioned Rs.31,200 to P1 and Rs.46,800 to P2. P2 receives Rs.27,000 + Rs.46,800 = Rs.73,800. Option b is the direct allocation result.

Where it goes wrong. Ignoring the S1 share received by S2 before apportioning S2 to production departments.

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

Question 11 · 2 marks · Employee Cost and Direct Expenses · medium

Scenario. Dhanvi Precision had 1,850 employees on roll at the beginning of the year and 2,150 at the end. During the year, 180 employees separated, 120 were replaced, and 80 new employees were appointed only because of expansion. Preventive costs included medical and welfare benefits of Rs.84,000. Replacement costs included recruitment Rs.45,000, selection Rs.25,000, training of new recruits Rs.96,000, abnormal scrap due to new workers Rs.18,000 and extra wages due to initial inefficiency Rs.31,000. The HR manager wants labour turnover rates under the separation, replacement and flux methods, including accessions for expansion, and the total labour turnover cost for management review.

The labour turnover rate under the separation method is:

1. 6.0%
2. 9.0% (correct answer)
3. 15.0%
4. 19.0%

Answer: B — 9.0%

Working. Average = (1,850 + 2,150)/2 = 2,000; Separation rate = 180/2,000 x 100 = 9%.

Explanation. Average employees are (1,850 + 2,150) / 2 = 2,000. Separation method uses separations divided by average employees: 180 / 2,000 x 100 = 9%. Option a is replacement rate and option c is flux method without expansion joinings.

Where it goes wrong. Using replacements or accessions in the numerator for separation method.

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

Question 12 · 2 marks · Employee Cost and Direct Expenses · hard

Under the replacement method, the labour turnover rate is:

1. 9.0%
2. 15.0%
3. 19.0%
4. 6.0% (correct answer)

Answer: D — 6.0%

Working. Replacement rate = 120/2,000 x 100 = 6%.

Explanation. Replacement method uses only replacements divided by average employees. Replacements are 120, so 120 / 2,000 x 100 = 6%. Expansion joinings are excluded from replacements. Option b is flux without expansion and option c includes expansion accessions.

Where it goes wrong. Including new expansion joinings in replacements.

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

Question 13 · 2 marks · Employee Cost and Direct Expenses · hard

Using the flux method with accessions, including expansion joinings, the labour turnover rate is:

1. 19.0% (correct answer)
2. 15.0%
3. 9.0%
4. 6.0%

Answer: A — 19.0%

Working. Accessions = 120 + 80 = 200; Flux rate = (180 + 200)/2,000 x 100 = 19%.

Explanation. Accessions include replacements 120 plus expansion joinings 80, total 200. Flux with accessions is (separations + accessions) / average employees = (180 + 200) / 2,000 x 100 = 19%. Option b uses replacements only and ignores expansion joinings.

Where it goes wrong. Using only separations plus replacements and omitting expansion joinings from accessions.

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

Question 14 · 2 marks · Employee Cost and Direct Expenses · hard

The total labour turnover cost, including preventive and replacement costs, is:

1. Rs.2,15,000
2. Rs.2,64,000
3. Rs.2,99,000 (correct answer)
4. Rs.3,14,000

Answer: C — Rs.2,99,000

Working. Replacement costs = 45,000 + 25,000 + 96,000 + 18,000 + 31,000 = 2,15,000; Preventive = 84,000; Total = 2,99,000.

Explanation. Preventive cost is Rs.84,000. Replacement costs are recruitment Rs.45,000 + selection Rs.25,000 + training Rs.96,000 + abnormal scrap Rs.18,000 + extra wages Rs.31,000 = Rs.2,15,000. Total is Rs.84,000 + Rs.2,15,000 = Rs.2,99,000. Option a omits preventive costs.

Where it goes wrong. Reporting only replacement costs or omitting one of the replacement cost elements.

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

Question 15 · 2 marks · Cost Sheet · medium

Scenario. Meghna Foods incurred the following administration costs: salary of production planning staff Rs.60,000; general office salaries Rs.90,000; audit fees Rs.20,000; and legal fees relating to general management Rs.10,000. The cost accountant is preparing a cost sheet and must decide the amount to be included in cost of production as administration overhead relating to production activity, rather than as general administration overhead in cost of sales.

The amount to be included in cost of production as administration overhead relating to production activity is:

1. Rs.90,000
2. Rs.60,000 (correct answer)
3. Rs.1,10,000
4. Rs.1,80,000

Answer: B — Rs.60,000

Working. Production-related administration = Rs.60,000. General administration = 90,000 + 20,000 + 10,000 = 1,20,000, included in cost of sales.

Explanation. Only administration cost related to production activity is included in cost of production. The production planning staff salary of Rs.60,000 qualifies. General office salaries, audit fees and general legal fees are general administration overheads and are added in cost of sales. Option c includes general office and audit costs improperly.

Where it goes wrong. Adding all administration costs to cost of production instead of separating production-related administration.

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