This practice test covers Cost and Management Accounting for CA Intermediate Group 2 students preparing for the January 2027 examination attempt. It carries 30 marks across 15 questions in 6 case scenarios with a time limit of 60 minutes and no negative marking.
15 questions across 6 chapters, 30 marks and 60 minutes in the timed paper. Every answer below is shown with the working behind it and the authority it rests on.
Law and standards used: ICAI Study Material for Paper 4 Cost and Management Accounting (relevant for the January 2027 examination attempt), Cost Accounting Standards (CAS) issued by ICMAI, and Guidance Notes.
Questions
15
Marks
30
Time limit
60 minutes
Attempt
January 2027
Group
Group 2
Law basis
ICAI Study Material for Paper 4 Cost and Management Accounting (relevant for the January 2027 examination attempt), Cost Accounting Standards (CAS) issued by ICMAI, and Guidance Notes
Content as of
2026-11-03
Chapters covered
Material Cost (4 Q)
Cost Accounting Systems (1 Q)
Overheads - Absorption Costing Method (4 Q)
Introduction to Cost and Management Accounting (1 Q)
Marginal Costing (4 Q)
Budgets & Budgetary Control (1 Q)
Questions, answers and explanations
Question 1 · 2 marks · Material Cost · hard
Scenario. Northvale Precision Ltd manufactures a sub-assembly requiring component NP-42. Annual demand is 48,000 units and consumption is uniform. The purchasing manager has three supplier offers. Supplier A: price ₹200 per unit for orders below 4,000; ₹190 for 4,000 to 7,999; ₹180 for 8,000 and above. Ordering cost ₹2,400 per order; inventory carrying cost 15% per annum of purchase price. Supplier B: price ₹195 for orders below 6,000; ₹185 for 6,000 and above. Ordering cost ₹1,500 per order; carrying cost 20% per annum. Supplier C: price ₹188 per unit; minimum order 5,000 units; ordering cost ₹3,000; carrying cost 12% per annum. No safety stock is held. The company evaluates each supplier by selecting a feasible order quantity that minimizes purchase cost plus ordering cost plus carrying cost, considering price-break thresholds. All suppliers meet quality and delivery norms. The production plan requires 4,000 units per month evenly. Ignore GST and transportation.
What is the total annual cost (purchase + ordering + carrying) for Supplier A at its optimal feasible order quantity?
Explanation. At ₹180 the unconstrained EOQ is about 2,921 units, below the 8,000-unit threshold, so Q=8,000 is evaluated. Purchase cost is 48,000 × ₹180 = ₹86,40,000; ordering is 6 × ₹2,400 = ₹14,400; carrying is 4,000 × ₹27 = ₹1,08,000. Total is ₹87,62,400. The ₹92,05,800 figure arises at Q=4,000 under the ₹190 tier.
Where it goes wrong. Using the unconstrained EOQ at the lowest price without applying the price-break threshold.
Authority. ICAI Study Material, Paper 4: Cost and Management Accounting, Module relevant for Material Cost
Question 2 · 2 marks · Material Cost · hard
Which supplier and order quantity gives the lowest total annual cost?
Supplier A, 8,000 units (correct answer)
Supplier B, 6,000 units
Supplier C, 5,000 units
Supplier B, 1,922 units
Answer: A — Supplier A, 8,000 units
Working. A: 86,40,000+14,400+1,08,000=87,62,400. B at 6,000: 48,000×185=88,80,000; ordering=8×1,500=12,000; carrying=3,000×37=1,11,000; total=90,03,000. C at 5,000: 48,000×188=90,24,000; ordering=9.6×3,000=28,800; carrying=2,500×22.56=56,400; total=91,09,200. B at 1,922: purchase=93,60,000; ordering≈37,470; carrying≈37,469; total≈94,34,939.
Explanation. Supplier A at 8,000 units costs ₹87,62,400. Supplier B at 6,000 units costs ₹90,03,000. Supplier C at 5,000 units costs ₹91,09,200. Supplier B at 1,922 units is in the ₹195 tier and costs ₹94,34,939. The lowest total is Supplier A at 8,000 units after respecting the price-break threshold.
Where it goes wrong. Selecting Supplier B for its lower ordering cost or Supplier C for its lower carrying rate without comparing total annual cost.
Authority. ICAI Study Material, Paper 4: Cost and Management Accounting, Module relevant for Material Cost
Question 3 · 2 marks · Material Cost · medium
What is the annual inventory carrying cost for Supplier B at the order quantity that gives its lowest total annual cost?
Explanation. Supplier B reaches its lowest total at Q=6,000 in the ₹185 tier. Carrying cost per unit is 20% × ₹185 = ₹37. Average stock is 3,000 units, so annual carrying cost is 3,000 × ₹37 = ₹1,11,000. The ₹37,469 figure belongs to the infeasible lower-price EOQ calculation.
Where it goes wrong. Using Q=1,922 from the ₹195 tier and ignoring the price-break threshold at 6,000 units.
Authority. ICAI Study Material, Paper 4: Cost and Management Accounting, Module relevant for Material Cost
Question 4 · 2 marks · Material Cost · hard
If Supplier A is selected at 8,000 units, how much lower is its total annual cost than the next-lowest supplier option?
₹2,04,600
₹2,60,400
₹3,46,800
₹2,40,600 (correct answer)
Answer: D — ₹2,40,600
Working. Next-lowest total=Supplier B Q=6,000=90,03,000. Difference=90,03,000−87,62,400=2,40,600.
Explanation. Supplier A costs ₹87,62,400. The next-lowest is Supplier B at 6,000 units, costing ₹90,03,000. The saving is ₹90,03,000 − ₹87,62,400 = ₹2,40,600. Comparing with Supplier C or comparing purchase cost alone gives different figures.
Where it goes wrong. Comparing with Supplier C, or comparing only purchase cost and omitting ordering and carrying costs.
Authority. ICAI Study Material, Paper 4: Cost and Management Accounting, Module relevant for Material Cost
Question 5 · 2 marks · Cost Accounting Systems · medium
Scenario. During reconciliation of cost and financial accounts of Orbit Tools Ltd for 2026-27, the cost records exclude interest on debentures ₹42,000, loss on sale of fixed asset ₹15,000 and penalty for delayed municipal compliance ₹9,000. All three amounts are debited in the financial accounts. No other difference exists. The reconciliation starts with profit as per cost accounts and ends at profit as per financial accounts.
Starting from profit as per cost accounts, what adjustment is required for the three financial-only charges?
Explanation. Interest on debentures, loss on sale of fixed asset and penalty are pure financial charges excluded from cost records. They reduce financial profit but not costing profit. While moving from costing profit to financial profit, the total ₹42,000 + ₹15,000 + ₹9,000 = ₹66,000 is deducted.
Where it goes wrong. Omitting the penalty, or adding the charges instead of deducting them.
Authority. ICAI Study Material, Paper 4: Cost and Management Accounting, Module relevant for Cost Accounting Systems
Question 6 · 2 marks · Overheads - Absorption Costing Method · hard
Scenario. Aster Industrial Works has two production departments, Machining and Assembly, and two service departments, Maintenance and Quality Control. Primary overheads are Machining ₹6,40,000, Assembly ₹4,80,000, Maintenance ₹2,20,000, Quality Control ₹1,60,000. Maintenance costs are reapportioned: 40% to Machining, 30% to Assembly, 30% to Quality Control. Quality Control costs are reapportioned: 20% to Machining, 50% to Assembly, 30% to Maintenance. The two service departments render reciprocal services; the company uses the simultaneous equation method. After redistribution, overheads are recovered on machine hours in Machining and direct labour hours in Assembly. Budgeted machine hours are 32,000 and budgeted direct labour hours are 25,000. A customer job J-77 requires 120 machine hours in Machining and 80 direct labour hours in Assembly. No other allocation bases are used. The company wants departmental recovery rates rounded to two decimal places and job overhead rounded to the nearest rupee.
Using simultaneous equations, what is the total Maintenance (S1) cost after reciprocal apportionment?
Explanation. Let S1 be Maintenance and S2 be Quality Control. S1 = ₹2,20,000 + 0.30S2 and S2 = ₹1,60,000 + 0.30S1. Substitution gives S1 = ₹2,68,000 + 0.09S1, so 0.91S1 = ₹2,68,000 and S1 = ₹2,94,505. The ₹2,48,352 figure is the reciprocal total of Quality Control.
Where it goes wrong. Ignoring reciprocal services and using the primary cost ₹2,20,000, or solving for the other service department.
Authority. ICAI Study Material, Paper 4: Cost and Management Accounting, Module relevant for Overheads - Absorption Costing Method
Question 7 · 2 marks · Overheads - Absorption Costing Method · hard
What is the total overhead of the Machining department after reciprocal redistribution?
Explanation. Machining receives 40% of Maintenance ₹2,94,505 and 20% of Quality Control ₹2,48,352. The receipts are ₹1,17,802 and ₹49,670. Adding primary overhead ₹6,40,000 gives ₹8,07,473. The ₹7,57,473 figure understates one reciprocal share.
Where it goes wrong. Allocating only Maintenance to Machining, or using primary service department costs without reciprocal totals.
Authority. ICAI Study Material, Paper 4: Cost and Management Accounting, Module relevant for Overheads - Absorption Costing Method
Question 8 · 2 marks · Overheads - Absorption Costing Method · medium
What is the overhead recovery rate for the Assembly department (rounded to two decimal places)?
Explanation. Assembly receives 30% of Maintenance ₹2,94,505 and 50% of Quality Control ₹2,48,352. Total overhead is ₹4,80,000 + ₹88,352 + ₹1,24,176 = ₹6,92,527. Dividing by 25,000 direct labour hours gives ₹27.70 per labour hour.
Where it goes wrong. Using Machining total overhead or omitting the reciprocal share from Quality Control.
Authority. ICAI Study Material, Paper 4: Cost and Management Accounting, Module relevant for Overheads - Absorption Costing Method
Question 9 · 2 marks · Overheads - Absorption Costing Method · hard
Explanation. Machining recovery is ₹8,07,473 ÷ 32,000 = ₹25.23 per machine hour; Assembly recovery is ₹27.70 per labour hour. Job J-77 absorbs 120 × ₹25.2335 = ₹3,028 and 80 × ₹27.7011 = ₹2,216. Total is ₹5,244 after rounding.
Where it goes wrong. Charging only one department, or using primary overhead rates before reciprocal redistribution.
Authority. ICAI Study Material, Paper 4: Cost and Management Accounting, Module relevant for Overheads - Absorption Costing Method
Question 10 · 2 marks · Introduction to Cost and Management Accounting · medium
Scenario. A proprietor runs a small fabrication unit in a building owned by him. Market rent of the building is ₹36,000 per annum. He has invested own funds ₹5,00,000 in the business; the bank deposit rate is 9% per annum. He pays insurance ₹18,000 and electricity ₹12,000 during the year. Cost records include notional rent and notional interest on own funds, but record actual insurance and electricity as expenses.
What is the total implicit (notional) cost included in cost records?
Explanation. Implicit costs are notional costs with no cash outlay. Notional rent is ₹36,000; notional interest on own funds is ₹5,00,000 × 9% = ₹45,000. Total implicit cost is ₹81,000. Insurance and electricity are explicit costs and are not added.
Where it goes wrong. Adding explicit insurance and electricity, or counting only notional interest.
Authority. ICAI Study Material, Paper 4: Cost and Management Accounting, Module relevant for Introduction to Cost and Management Accounting
Question 11 · 2 marks · Marginal Costing · medium
Scenario. Sapphire Ceramics Ltd has annual capacity 1,20,000 units. Domestic sales are 90,000 units at ₹480 per unit. Variable manufacturing cost is ₹260 per unit; domestic variable selling and distribution cost is ₹40 per unit. Annual fixed manufacturing overhead is ₹1,08,00,000 and fixed administration and selling overhead is ₹36,00,000. An overseas buyer offers to purchase 24,000 units at ₹360 per unit. The export order will incur additional freight ₹18 per unit, special packaging ₹12 per unit, and export commission 5% of export price. Domestic selling variable cost is not incurred on exports. The order can be met from spare capacity and will not affect domestic sales or fixed costs. The sales director also asks what happens if the buyer raises the order to 32,000 units; the extra 2,000 units beyond spare capacity would displace domestic sales at the same domestic contribution. A minimum export price is also to be examined for the 24,000-unit order.
What is the contribution per unit on the export order of 24,000 units?
Explanation. The order uses spare capacity and fixed costs are unchanged. Export contribution is ₹52 per unit. Incremental profit is 24,000 × ₹52 = ₹12,48,000. The ₹16,80,000 figure would arise by using ₹70 contribution and omitting commission and packaging.
Where it goes wrong. Using domestic contribution, subtracting fixed costs, or omitting export commission and special packaging.
Authority. ICAI Study Material, Paper 4: Cost and Management Accounting, Module relevant for Marginal Costing
Question 13 · 2 marks · Marginal Costing · hard
What is the minimum export price per unit for the 24,000-unit order to avoid incremental loss?
Explanation. Let P be the export price. Contribution is P − ₹260 − ₹18 − ₹12 − 0.05P. Setting contribution to zero gives 0.95P = ₹290, so P = ₹305.26. The ₹290 figure ignores export commission and would produce a loss.
Where it goes wrong. Setting price equal to variable manufacturing plus freight and packaging only, and omitting commission.
Authority. ICAI Study Material, Paper 4: Cost and Management Accounting, Module relevant for Marginal Costing
Question 14 · 2 marks · Marginal Costing · hard
If the buyer raises the order to 32,000 units, requiring 2,000 units to displace domestic sales, what is the net incremental profit?
Explanation. Export contribution is 32,000 × ₹52 = ₹16,64,000. Displacing 2,000 domestic units sacrifices domestic contribution of 2,000 × (₹480 − ₹260 − ₹40) = ₹3,60,000. Net incremental profit is ₹16,64,000 − ₹3,60,000 = ₹13,04,000.
Where it goes wrong. Ignoring the lost domestic contribution, or using export contribution for 24,000 units only.
Authority. ICAI Study Material, Paper 4: Cost and Management Accounting, Module relevant for Marginal Costing
Question 15 · 2 marks · Budgets & Budgetary Control · medium
Scenario. Dunesh Packaging Ltd can sell 55,000 units in the budget year. Machine capacity is 60,000 units, skilled labour availability is 65,000 units, and raw material supply is 70,000 units. Sales demand is the principal budget factor. The company prepares a master budget using the normal functional sequence after the sales budget.
Given sales demand is the principal budget factor, which budget is prepared immediately after the sales budget in the functional sequence?
Production budget (correct answer)
Cash flow budget
Direct labour budget
Finished goods budget
Answer: A — Production budget
Working. Sequence: sales budget → production budget → material usage and purchase → direct labour → overheads → closing inventory → cost of goods sold → selling and administration → cash budget.
Explanation. When sales demand is the principal budget factor, the sales budget is prepared first. The production budget follows because output must meet budgeted sales and planned closing stock. Direct labour and finished goods budgets are derived later, and the cash budget is prepared after operating budgets.
Where it goes wrong. Preparing the cash budget early, or placing direct labour before the production budget.
Authority. ICAI Study Material, Paper 4: Cost and Management Accounting, Module relevant for Budgets & Budgetary Control
Authorities cited in this paper
ICAI Study Material, Paper 4: Cost and Management Accounting, Module relevant for Material Cost · ICAI Study Material, Paper 4: Cost and Management Accounting, Module relevant for Cost Accounting Systems · ICAI Study Material, Paper 4: Cost and Management Accounting, Module relevant for Overheads - Absorption Costing Method · ICAI Study Material, Paper 4: Cost and Management Accounting, Module relevant for Introduction to Cost and Management Accounting · ICAI Study Material, Paper 4: Cost and Management Accounting, Module relevant for Marginal Costing · ICAI Study Material, Paper 4: Cost and Management Accounting, Module relevant for Budgets & Budgetary Control
Questions people ask
What does this Cost and Management Accounting test cover?
This practice paper carries 30 marks across 15 questions arranged in 6 case scenarios covering Chapter 2: Material Cost, Chapter 7: Cost Accounting Systems, Chapter 4: Overheads - Absorption Costing Method, Chapter 1: Introduction to Cost and Management Accounting, Chapter 14: Marginal Costing, Chapter 15: Budgets & Budgetary Control. Each scenario presents realistic manufacturing and commercial operational data requiring practical cost computations, variance analysis, and managerial decision criteria.
How many questions are there and what is the time limit?
There are 15 questions carrying 2 marks each, giving a maximum score of 30 marks. The time limit is 60 minutes. There is no negative marking, so an incorrect answer costs nothing.
Which study material applies to these questions?
The questions follow the ICAI Study Material for Paper 4 Cost and Management Accounting (relevant for the January 2027 examination attempt) and Cost Accounting Standards (CAS) issued by ICMAI.
Which specific chapters are included in this paper?
The questions are drawn from Chapter 2: Material Cost, Chapter 7: Cost Accounting Systems, Chapter 4: Overheads - Absorption Costing Method, Chapter 1: Introduction to Cost and Management Accounting, Chapter 14: Marginal Costing, Chapter 15: Budgets & Budgetary Control. They evaluate cost accumulation, overhead apportionment, unit/batch costing, variance analysis, and relevant costing principles.
Is this test affiliated with ICAI?
No. This is an independent practice paper prepared for CA Intermediate students. It is not issued by or affiliated with ICAI. Questions are prepared with AI tools and cross-checked by independent solvers; they are not reviewed by a Chartered Accountant.
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In exam mode the test is timed and marked upon final submission, providing your score, tier, and a performance certificate. In practice mode you can review answers, working steps, and citations as you work through the questions.
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