Question bank

Q. Question
no
1. The following data relate to the overhead expenditure of a contract cleaners at two activity
levels.
Square metres cleaned 13,500 15,950
Overheads $84,865 $97,850
What is the estimate of the overheads if 18,300 square metres are to be cleaned?
Ans. Worked in class room
2. A company has recorded the following data in the two most recent periods.
Total costs Volume of
of production
$ Units
13,500 700
18,300 1,100
What is the best estimate of the company’s fixed costs per period?
Ans. Worked in class room
3. A company incurs the following costs at various activity levels:
Total cost Activity level
$ Units
250,000 5,000
312,500 7,500
400,000 10,000
Using the high-low method what is the variable cost per unit?
Ans. Worked in class room
4. An 5ecognizes5n manufactures a single product. The total cost of making 4,000 units is $20,000 and
the total cost of making 20,000 units is $40,000. Within this range of activity the total fixed costs
remain unchanged.
What is the variable cost per unit of the product?
Ans Worked in class room
5. The total cost of production for two levels of activity is as follows:

Level 1 Level 2
Production (units) 3,000 5,000
Total cost ($) 6,750 9,250
The variable production cost per unit and the total fixed production cost both remain constant in
the range of activity shown.
What is the level of fixed costs?
Ans Worked in class room
6. A factory consists of two production cost centres (P and Q) and two service cost centres (X and
Y). The total allocated and apportioned overhead for each is as follows:
P Q X Y
$95,000 $82,000 $46,000 $30,000
It has been estimated that each service cost centre does work for the other cost centres in the
following proportions:
P Q X Y
 Percentage of service cost center X to 40 40 – 20
Percentage of service cost center Y to 30 60 10 –
After the reapportionment of service cost center costs has been carried out using a method that
fully recognizes the reciprocal service arrangements in the factory, what is the total overhead for
production cost center P?
Ans. Worked in class room (similar problem)
7. The overhead absorption rate for product T is $4 per machine hour. Each unit of T requires 3
machine hours. Inventories of product T last period were:
Units
Opening inventory 2,400
Closing inventory 2,700
Compared with the marginal costing profit for the period, the absorption costing profit for
product T.
Ans. Worked in class room
8. Cost and selling price details for product Z are as follows.
$ per unit
Direct materials 6.00
Direct labour 7.50
Variable overhead 2.50
Fixed overhead absorption rate 5.00
Total cost 21.00
Profit 9.00
Selling price 30.00
Budgeted production for the month was 5,000 units although the company managed to produce
5,800 units, selling 5,200 of them and incurring fixed overhead costs of $27,400.
What is the marginal costing profit for the month?
Ans. Worked in class room
9. A company produces and sells a single product whose variable cost is $6 per unit.
Fixed costs have been absorbed over the normal level of activity of 200,000 units and have been
calculated as $2 per unit.
The current selling price is $10 per unit.
How much profit is made under marginal costing if the company sells 250,000 units?
Ans. Worked in class room
10. A company has the following budgeted costs and revenues:
$ per unit
Sales price 50
Variable production cost 18
Fixed production cost 10
In the most recent period, 2,000 units were produced and 1,000 units were sold. Actual sales
price, variable production cost per unit and total fixed production costs were all as budgeted.
Fixed production costs were over-absorbed by $4,000. There was no opening inventory for the
period.
What would be the reduction in profit for the period if the company has used marginal costing
rather than absorption costing?
Ans. Worked in class room
11. A company operates a job costing system.
The estimated costs for job 173 are as follows.
 Direct materials 5 metres @ $20 per metre
Direct labour 14 hours @ $8 per hour
Variable production overheads are recovered at the rate of $3 per direct labour hour.
Fixed production overheads for the year are budgeted to be $200,000 and are to be recovered
on the basis of the total of 40,000 direct labour hours for the year.
Other overheads, in relation to selling, distribution and administration, are recovered at the rate
of $80 per job. What is the total cost of job 173?
Ans. Worked in class room
12. A company operates a job costing system. Job number 1012 requires $45 of direct materials and
$30 of direct labour. Direct labour is paid at the rate of $7.50 per hour. Production overheads are
absorbed at a rate of $12.50 per direct labour hour and non-production overheads are absorbed
at a rate of 60% of prime cost.
What is the total cost of job number 1012?
Ans. Worked in class room
13. In a particular process, the input for the period was 2,000 units. There were no inventories at the
beginning or end of the process. Normal loss is 5% of input. In which of the following
circumstances is there an abnormal gain?
(i) Actual output = 1,800
(ii) units Actual output =
(iii) 1,950 units Actual output
= 2,000 units
Ans. Worked in class room
14. A company needs to produce 340 litres of Chemical X. There is a normal loss of 10% of the
material input into the process. During a given month the company did produce 340 litres of
good production, although there was an abnormal loss of 5% of the material input into the
process.
How many litres of material were input into the process during the month?
Ans. Worked in class room
15. A company uses process costing to establish the cost per unit of its output. The following
information was available for the last month:
Input units 10,000
Output units 9,850
Opening inventory 300 units, 100% complete for materials and 70% complete for conversion
costs
Closing inventory 450 units, 100% complete for materials and 30% complete for conversion costs
The company uses the weighted average method of valuing inventory. What were the equivalent
units for conversion costs?
Ans. Statement of equivalent units
Particulars UNITS Material Conversion cost
% of completion Units % of completion Units
Op WIP 300 -- -- 30% 90
Units 9,550 100% 9,550 100% 9,550
Intr&CO
CL Wip 450 100% 450 30% 135
Equivalent 9,400 10,000 9,505
units
16. A company uses process costing to value its output. The following was recorded for the period:
Input materials 2,000 units at $4.50 per unit
 Conversion costs 13,340
Normal loss 5% of input valued at $3 per unit
Actual loss 150 units
There were no opening or closing inventories.
What was the valuation of one unit of output to one decimal place?
Ans. PROCESS ACCOUNT
Particulars Units Rs. Particulars Units Rs.
To Materials 2,000 9,000 By Normal loss 100 300
To Conversion cost 13,340 By Abnormal loss 50 580
By Next process 1,850 21,460
2,000 22,340 2,000 22,340
Unit cost = total cost – normal loss/units in process-normal loss
22,340-300/2000-100 = 11.60
Value of abnormal loss = 50 x 11.60 = 580
17. A company manufactures two joint products, P and R, in a common process. Data for June are as
follows.
$
Opening inventory 1,000
Direct materials added 10,000
Conversion costs 12,000
Closing inventory 3,000
Production Sales Sales
Units Units price
$ per
4,000 5,000 unit
P 5
R 6,000 5,000 10
If costs are apportioned between joint products on a sales value basis, what was the cost per unit
of product R in June?
Ans. Joint are apportioned between joint products on a sales value basis:
Particulars Rs.
Opening stock 1,000
Direct material 10,000
Conversion cost 12,000
23,000
Closing stock 3,000
Total pre separation cost 20,000
Calculation of sale value:
Product Units Unit cost Sale value
P 5,000 Rs.5 25,000
Q 5,000 Rs.10 50,000
TOTAL SALE VALUE 75,000
Sale value ratio : 25:50 or 1:2
Pre separation cost for ‘P’ Product = 20,000/3 *1 = Rs.6,667
Pre separation cost for ‘Q’ product = 20,000/3 *2= Rs.13,333
18. Each unit of product Alpha requires 3 kg of raw material. Next month’s production budget for
product Alpha is as follows.
 Opening inventories:
Raw materials 15,000 kg
Finished units of Alpha 2,000 units
Budgeted sales of Alpha60,000 units
Planned closing inventories:
Raw materials 7,000 kg
Finished units of Alpha 3,000 units
How many kilograms of raw materials should be purchased next month?
Ans. Units produced = closing stock + units sold – closing stock = 3,000+60,000-2,000 = 61,000
Raw material used = 61,000 x 3kgs = 1,83,000 kgs.
Raw material purchased = closing stock of raw material + raw material used –raw material op.
stock
Raw material purchased = 7,000 kgs + 1,83,000kgs.-15,000 = 1,75,000kgs.
19. A company operates a job costing system. Job number 1012 requires $45 of direct materials and
$30 of direct labour. Direct labour is paid at the rate of $7.50 per hour. Production overheads are
absorbed at a rate of $12.50 per direct labour hour and non-production overheads are absorbed
at a rate of 60% of prime cost.
What is the total cost of job number 1012?
Ans Worked in class room
20. A truck delivered sand to two customers in a week. The following details are available.
Customer Weight of goods delivered (kilograms) Distance covered (kilometres)
X 500 200
Y 180 1,200
680 1,400
The truck cost $3,060 to operate in the week. Each customer delivery was carried out separately,
and the truck made no other deliveries in the week.
What is the cost per kilogram/5ilometer of sand delivered in the week (to the nearest $0.001)?
Ans. Customer – X covered weighted distance = 500 x 200 = 1,00,000
Customer –Y covered weighted distance = 180 x 1,200 = 5,76,000
Total 6,76,000
cost per kilogram/kilometer = 3,060/6,76,000 = 0.0045$
21. A company manufactures Chemical X, in a single process. At the start of the month there was no
work-in- progress. During the month 300 litres of raw material were input into the process at a
total cost of $6,000. Conversion costs during the month amounted to $4,500. At the end of the
month 250 litres of Chemical X were transferred to finished goods inventory. The remaining
work-in-progress was 100% complete with respect to materials and 50% complete with respect
to conversion costs. There were no losses in the process and there is no scrap value available
during months when losses occur.
What are the equivalent units for closing work-in-progress at the end of the month?
Ans. Material cost 300 ltrs Rs.6,000
Conversion cost Rs.4,500
Total cost Rs.10,500
Closing work in progress = 300 ltrs – 250 = 50 ltrs.
Equivalent units of work-in progress:

Units Material Conversion cost

Output Units % of completion Units % of completion Units
 Produced 250 100% 250 100% 250
Closing 50 100% 50 50% 25
Equivalent units 300 275
Total cost 6,000 4,500
Cost per equivalent Rs.20 16.37
units
Cost closing work in progress:
Material cost = Rs.20 x 50 = Rs.1,000
Labour cost = Rs.16.37 x 25 = Rs.409
Total cost Rs.1,409.
22. A company uses process costing to value its output. The following was recorded for the period:
Input materials 2,000 units at $4.50 per unit
Conversion costs 13,340
Normal loss 5% of input valued at $3 per unit
Actual loss 150 units
There were no opening or closing inventories.
What was the valuation of one unit of output to one decimal place?
Ans. Worked in class room
23. The following information relates to a company’s polishing process for the previous period.
Output to finished goods 5,408 units valued at $29,744
Normal loss 276 units
Actual loss 112 units
All losses have a scrap value of $2.50 per unit and there was no opening or closing work in
progress. What was the value of the input during the period?
Ans. PROCESS ACCOUNT
Particulars Units Rs Particulars Units Rs.
.

To Input material 5,520 29,532 By Norma loss 276 690

To Abnormal gain 164 902 By Next process 5,408 29,744

5,684 30,434 5,684 30,434

Unit cost = total cost – normal loss value/input-normal loss = 29,532-690/5520-276= Rs.5.5 (or)
29,744/5,408 =
24. Diamond Ltd has a payback period limit of three years and is considering investing in one of the
following projects. Both projects require an initial investment of $800,000. Cash inflows accrue
evenly throughout the year.
Year Project Alpha Year Project Beta
Cash inflow Cash inflow
$ $
1 250,000 1 250,000
2 250,000 2 350,000
3 400,000 3 400,000
4 300,000 4 200,000
5 200,000 5 150,000
 6 50,000 6 150,000
The company's cost of capital is 10%.
What is the non-discounted payback period of Project Beta?
Ans. Computation payback for project Alpha and Beta
Year Project Alpha cumulative Project Beta Cumulative
Cash inflow cash inflow Cash inflow cash inflow
$ $ $ $
1 250,000 2,50,000 250,000 2,50,000
2 250,000 5,00,000 350,000 6,00,000
3 400,000 9,00,000 400,000 10,00,000
4 300,000 12,00,000 200,000 12,00,000
5 200,000 14,00,000 150,000 13,50,000
6 50,000 14,50,000 150,000 15,00,000
Payback period for Alpha is in between 2 – 3 years
Payback period for beta is in between 2 – 3 years
25. A company operates a job costing system.
The estimated costs for job 173 are as follows.
Direct materials 5 metres @ $20 per metre Direct labour14 hours @ $8 per hour
Variable production overheads are recovered at the rate of $3 per direct labour hour.
Fixed production overheads for the year are budgeted to be $200,000 and are to be recovered
on the basis of the total of 40,000 direct labour hours for the year.
Other overheads, in relation to selling, distribution and administration, are recovered at the rate
of $80 per job. What is the total cost of job 173?
Ans. Worked in class room
26. The following details have been extracted from the receivables collection records of C Co.

Invoices paid in the month after sale 60%

Invoices paid in the second month after 25%
sale
Invoices paid in the third month after sale 12%
Bad debts 3%
Invoices are issued on the last day of each month.
Customers paying in the month after sale are entitled to deduct a 2% settlement
discount. Credit sales values for June to September are budgeted as follows.
June July August September
$35,000 $40,000 $60,000 $45,000

What is the amount budgeted to be received from credit sales in September?

Ans. Amount to be received in the month of September

Particulars Rs.
Received for September sale 27,000
Received for August sale 15,000
Received for July sale 4,800
Total amount received in the month of September 46,800
27. A company manufactures two joint products and one by-product in a single process. Data for November
 are as follows.

$
Raw material input 216,000
Conversion costs 72,000
There were no inventories at the beginning or end of the period.
Output Sales price
Units $ per unit
Joint product E 21,000 15
Joint product Q 18,000 10
By-product X 2,000 2

By-product sales revenue is credited to the process account. Joint costs are apportioned on a sales
value basis. What were the full production costs of product Q in November (to the nearest $)?
Ans. PROCESS ACCOUNT
Particulars Units Rs Particulars Units Rs.
.

Raw materials 2,16,000 By Product x 2,000 x 4,000

2

Conversion cost 72,000 By Joint cost 2,84,000

2,88,000 2,88,000

Output Sales price Sale value

Units $ per unit
Joint product E 21,000 15 3,15,000
Joint product Q 18,000 10 1,80,000
Total cost 4,95,000
Joint cost of E = 2,84,000/495 * 315 = Rs.1,80,727

Joint cost of Q = 2,84,000/495 * 180 = Rs.1,03,273

28. The following data was extracted from the books of VSP Ltd.:
Particulars 50% capacity Total
(Rs.) (Rs.)
Variable overhead:
Direct materials 2,40,000
Direct labor 2,56,000
Direct expenses 38,000 5,34,000
Fixed overhead:
Salaries 84,000
Rent and rates 56,000
Depreciation 70,000
Other administrative 80,000 2,90,000
expenses
 Possible sales at various levels as follows:
Capacity Sales
60 9,50,000
90 13,75,000
100 15,25,000
You are required to draw up a flexible budget at 60%, 90% and 100% capacity.

Ans. Flexible budget for 50%, 60% , 90% and 100%

Particulars 50% capacity 60% capacity 90% capacity 100% capacity
(Rs.) (Rs.) (Rs.) (Rs.)
Variable cost:
Direct material 2,40,000 2,88,000 4,32,000 4,80,000
Direct labour 2,56,000 3,07,200 4,60,800 5,12,000
Direct expenses 38,000 45,600 68,400 76,000
Total variable cost 5,34,000 6,40,800 9,61,200 10,68,000
Fixed cost
Salaries 84,000 84,000 84,000 84,000
Rent and rates 56,000 56,000 56,000 56,000
Depreciation 70,000 70,000 70,000 70,000
Total fixed cost 2,10,000 2,10,000 2,10,000 2,10,000
Total cost 7,44,000 8,50,800 11,71,200 12,78,000
29. Flex Ltd., provides you the following information for the year 2015:
Particulars Product – Product-
A B
Sales (in units): 1st Quarter 1,250 1,600
2nd Quarter 2,950 800
3rd Quarter 2,700 1,000
4th Quarter 3,100 600
Selling price per unit Rs.24 Rs.50
Target for 2016:
Sales quantity increase (20%) 25%
(decrease)
Selling price increase 25% (20%)
(decrease)
You are required to prepare sales budget for the year 2016.
Ans. sales budget for the year 2016 for product A
Particulars Q1 Q2 Q3 Q4 Total
Sales Qty.*0.80 1,000 2,360 2,160 2,480 8,000
Selling price 50*1.25 62.50 62.50 62.50 62.50 62.50
Sale value 62,500 1,47,500 1,35,000 1,55,000 5,00,000
sales budget for the year 2016 for product B
Particulars Q1 Q2 Q3 Q4 Total
Sales Qty.*1.25 2,000 1,000 1,250 750 5,000
Selling price 50*0.80 40 40 40 40 40
Sale value 80,000 40,000 50,000 30,000 2,00,000
TOTAL SALE BUDGET FOR A & B = 7,00,000
30. The following data was extracted from the books of Leo Ltd.,
The above company is considering the purchase of a machine. Two machines are available M and
N. The cost of each machine is Rs.60,000. Each machine has an expired life of 5 years. Net profit
before tax and after depreciation during the expected life of the machines are given below:
Particulars Machine-M Machine-N
2020 15,000 5,000
2021 20,000 15,000
2022 25,000 20,000
2023 15,000 30,000
2024 10,000 20,000
Applicable tax rate is 50%. Cost of capital is 10%. Which of the alternatives will be more
profitable under:
1. Net present value method
2. Pay back method
3. Discounted pay back method
4. Profitability index method.
5. Accounting rate of return method.
ANS Computation of cash flow for Machine –M and Machine – N
Machine-M Machine-N
Year PBT PAT DEP Cash flow PBT PAT DEP Cash flow
2020 15,000 7,500 12,000 19,500 5,000 2,500 12,000 14,500
2021 20,000 10,000 12,000 22,000 15,000 7,500 12,000 19,500
2022 25,000 12,500 12,000 24,500 20,000 10,000 12,000 22,000
2023 15,000 7,500 12,000 19,500 30,000 15,000 12,000 27,000
2024 10,000 5,000 12,000 17,000 20,000 10,000 12,000 22,000
1. Net present value method for machine M:
Particulars Cash flow PV Factor PV of CI
2020 19,500 .909 17,725
2021 22,000 .826 18,172
2022 24,500 .751 18,400
2023 19,500 .683 13,319
2024 17,000 .621 10,557
Present value of cash inflows 78,173
Present value of cash outflow 60,000
Net present value of cash inflow 18,173
2. Net present value method for machine N:
Particulars Cash flow PV Factor PV of CI
2020 14,500 .909 13,181
2021 19,500 .826 16,107
2022 22,000 .751 16,522
2023 27,000 .683 18,441
2024 22,000 .621 13,662
Present value of cash inflows 77,913
Present value of cash outflow 60,000
Net present value of cash inflow 17,913
3. Pay-back period for machine –M
 Particulars Cash flow Cumulative
Cash flow
2020 19,500 19,500
2021 22,000 41,500
2022 24,500 66,000
2023 19,500 85,500
2024 17,000 1,02,500
As investment is Rs.60,000 Pay period in between 2021 to 2022

4. Payback period for machine-N

Particulars Cash flow Cumulative
Cash flow
2020 14,500 14,500
2021 19,500 34,000
2022 22,000 56,000
2023 27,000 83,000
2024 22,000 1,05,000
As investment is Rs.60,000 Payback period in between 2022 to 2023
5. Discounted payback period for M
Particulars PV of cash Cumulative
inflow PV of CI
2020 17,725 17,725
2021 18,172 35,897
2022 18,400 54,297
2023 13,319 67,616
2024 10,557 78,173
As investment is Rs.60,000 Discounted Payback period falling in between 2022 to 2023
6. Discounted payback for N
Particulars PV of cash Cumulative
inflow PV of CI
2020 13,181 13,181
2021 16,107 29,288
2022 16,522 45,810
2023 18,441 64,251
2024 13,662 77.913
As investment is Rs.60,000 discounted payback period falling in between 2022-23
7. Profitability index for M
Particulars Cash flow PV Factor PV of CI
2020 19,500 .909 17,725
2021 22,000 .826 18,172
2022 24,500 .751 18,400
2023 19,500 .683 13,319
2024 17,000 .621 10,557
Present value of cash inflows 78,173
Profitability index = Present value of cash inflow/present value of cash outflow
PI = 78,173/60,000 = 1.30
 8. Profitability index for N
Particulars Cash flow PV Factor PV of CI
2020 14,500 .909 13,181
2021 19,500 .826 16,107
2022 22,000 .751 16,522
2023 27,000 .683 18,441
2024 22,000 .621 13,662
PV of cash inflows 77,913
Profitability index for N = 77,913/60,000 = 1.30

9. Accounting rate of return for M

Machine-M
Year PBT PAT
2020 15,000 7,500
2021 20,000 10,000
2022 25,000 12,500
2023 15,000 7,500
2024 10,000 5,000
Total income 42,500
Average profit = 42,500/5 = 8,500
Average investment = 60,000/2 = 30,000
Average rate of return = 8,500/30,000 *100 = 28.33%
10. Accounting rate of return for N
Machine-M
Year PBT PAT
2020 5,000 2,500
2021 15,000 7,500
2022 20,000 10,000
2023 30,000 15,000
2024 20,000 10,000
Total income 45,000
Average profit = 45,000/5 = 9,000
Average investment = 60,000/2 = 30,000
Average rate of return = 9,000/30,000 *100 = 30%.
Interpretation: By verifying the above analysis it is revealed that Machine – M is better than
Machine-N.
31. Calculate material cost variance from the following information:

Particulars Standard Actual

Output 100 units 200 units
Quantity of material required per unit of output 2kg per unit 3 kg per unit
Price Rs.4 per kg Rs.3 per kg
Ans. Standard quantity for actual output = actual output x std. qty. per unit 200 x 2 = 400kgs.
Standard cost = standard qty. for actual output – actual qty. of actual output
 400x 4 – 600 x 3 = 200(Adverse)

32. Royal company manufacturing chemicals operates a costing system. The standard cost of 100Kgs
of product D is as follows:
Chemical Quantity Standard price per
s Kg
A 30Kg 4.00
B 40Kg 5.00
C 80Kg 6.00
In batch of 500 kg of chemical D were produced from a mix of:
Chemicals Quantit Total cost
y (Rs.)
A 140Kg 588
B 220Kg 1,056
C 440Kg 2,860
You are required to calculate:
1. Material Price
2. Material Usage
3. Material cost variance.
Ans: Standard quantity for actual output of 500kg of chemical D:
Chemicals Quantity Standard price per Total cost
Kg. Kg
A 30x5=150 4.00 600
B 40x5=200 5.00 1,000
C 80x5=400 6.00 2,400
Total standard cost 4,000
Actual quantity for actual output of 500kg of D chemical
Chemicals Quantit Total cost Rate per unit
y (Rs.)
A 140Kg 588 4.2
B 220Kg 1,056 4.8
C 440Kg 2,860 6.5
Total actual cost 4,504
Material cost variance : SC-AC = 4,000-4,504 = 504(Adverse)
Material rate variance : AQ(SR-AR)
For chemical – A = 140(4-4.2) = 28(Adverse)
For chemical – B = 220(5-4.8) = 44(favor)
For chemical – C = 440(6-6.5)= 220(Adverse)
Total rate variance = 204(adverse)
Material usage variances= SR(SQ-AQ)
For chemical – A = 4(150-140) = 40(Favor)
For chemical – B = 5(200-220) = 100(adverse)
For chemical – C = 6(400-440) = 240 (Adverse)
Total usage variance = 300(adverse)
Proof Material cost variance = MRV-MUV = 504(A) = 204(A)+300(A)
33. The following data was extracted from the books of Larsen Ltd., for the year 2016:
1st Quarter 2nd Quarter 3rd Quarter 4th Quarter
 Sale (units) 1,10,000 1,20,000 1,30,000 1,50,000
st
Sales for the 1 quarter of the following year is 1,40,000 units. At the beginning of the
first quarter of the current year, there are 14,000 units of product in stock. At the end of
each quarter, the company plans to have an inventory equal to 1/5 th of size of the next
fiscal quarter. You are required to compute units must be manufactured in each quarter of
the current year.
ANS. Units of production = Sale units + Closing stock – opening stock
Particulars Q1 Q2 Q3 Q4 Total
Sale units 1,10,000 1,20,000 1,30,000 1,50,000 5,10,000
Closing stock 24,000 26,000 30,000 28,000 1,08,000
Opening stock (14,000) (24,000) (26,000) (30,000) (94,000)
Units produced 1,20,000 1,22,000 1,34,000 1,48,000 5,24,000
Production for the year is 5,24,000 units.
34. The following data was extracted from the books of CK Ltd.:
Particulars 80% capacity 60% capacity
(Rs.) (Rs.)
Direct materials 2,00,000 1,50,000
Direct labor 2,00,000 1,50,000
Direct expenses 1,60,000 1,20,000
Manufacturing expenses 4,00,000 3,85,000
Administrative expenses 4,00,000 3,80,000
Selling expenses 4,00,000 3,75,000
Sales 20,00,000 15,00,000
You are required to draw up a flexible budget at 90% and 100% capacity.
Ans. Flexible budget at 90% and 100% capacity
Particulars 90% capacity (Rs.) 100% capacity (Rs.)
Variable expenses:
Direct materials 2,25,000 2,50,000
Direct labor 2,25,000 2,50,000
Direct expenses 1,80,000 2,00,000
Variable Manufacturing expenses 67,500 75,000
Variable administrative expenses 90,000 1,00,000
Variable Selling expenses 1,12,500 1,25,000
Total variable expenses 9,00,000 10,00,000
Fixed expenses:
Fixed manufacturing expenses 3,40,000 3,40,000
Fixed administrative expenses 3,20,000 3,20,000
Fixed selling expenses 3,00,000 3,00,000
Total fixed expenses 9,60,000 9,60,000
Total cost 18,60,000 19,60,000
Variable cost formula = change in cost /change in capacity
Example: cost at 80%-Cost at 60%/80-60 = 2,00,000-1,50,000/80-60 = 2,500
Variable at 90% = 2,500 x 90 = 2,25,000 and at 100% = 2,500 x 100 = 2,50,000
Direct material, direct labour and direct expenses shall be calculated as cited above.
Remaining expenses are semi variable in nature
Variable element in semi variable cost = change in cost/change in capacity
 Example manufacturing expenses are semi variable expenses in this problem
Hence, variable manufacturing expenses at 80% = 15,000/20 * 80 = 60,000
Therefore, fixed expenses at any capacity is = total cost – variable cost
Example fixed cost at 80% = 4,00,000-60,000 = 3,40,000
In the same manner calculate administrative expenses and selling expenses.
35. The following data was obtained from the cost books of Grasim Ltd.,:
Particulars Project-X (Rs.) Project-Y (Rs.)
Initial investment 20,000 30,000
Scarp value 1,000 2,000
Estimated life 5 years 5 years
Profit before depreciation and after taxes for the above two projects as follows:
Project Year-1 Year-2 Year-3 Year-4 Year-5
X 5,000 10,000 10,000 3,000 2,000
Y 20,000 10,000 5,000 3,000 2,000
You are required to calculate Net Present Value for the above two projects and suggest which of the
two projects should be accepted assuming a discount rate is 10%.
Ans. Computation of cash inflow from X and Y project:
Project-X Project-Y
Year PBD & AT PV factor PV of cash flow PBD & AT PV factor PV of cash flow
1 5,000 .909 4,545 20,000 .909 18,180
2 10,000 .826 8,260 10,000 .826 8,260
3 10,000 .751 7,521 5,000 .751 3,755
4 3,000 .683 2,049 3,000 .683 2,049
5 2,000 .621 1,242 2,000 .621 1,242
5(Scrap) 1,000 .621 621 2,000 .621 1,242
PV of cash inflows 24,238 34,728
PV of cash outflow 20,000 30,000
Net present value 4,238 4,728
Project Y is feasible than project X.
36. The following data was extracted from the cost books of Rohit Ltd.,
Material Standard Actual
s Qty Rate Qty Rate
A 200 12 160 13
B 100 10 140 10
Due to shortage of material A, it was decided to reduce consumption of A by 15% and increase
that of material by 30%. You are required to compute material mix variance.
ANS. Computation material mix variance with revised quantity:
Materials Standard Actual
Qty +/(-) Rev. Qty Rate Cost Qty Rate Cost
A 200 (15%) 170 12 2,040 160 13 2,080
B 100 30% 130 10 1,300 140 10 1,400
Total 3,340 3,480
Material mix variance = standard cost (revised standard qty - actual qty.)
For material A = 12(170-160) = 120 (f)
For material B = 10(130-140) = 100 (a)
Therefore, mix variance is 20 (favorable)
37. From the following data compute labor cost, Labor rate and Labor efficiency variances:
Particulars Department -
A
Actual wages Rs.2,05,000
Standard hours produced 8,000
Actual hours worked 8,200
Standard rate per hour Rs.30
Ans. Actual wage rate = actual wages/actual hours worked = 2,05,000/8,200 = 25
Labour cost variance = STD. COST – ACTUAL COST = (8,000 X 30) = 2,05,000 = 35,000 (F)
Labour rate variance = Actual hours (SR-AR) = 8,200 (30-25) = 41,000(F)
Labour efficiency variance = SR(STD HOURS – ACTUAL HOURS) = 30 (8,000-8,200) = 6,000(A)
PROOF: Labour cost variance = labour rate variance + Labour efficiency variance
35,000 (F) = 41,000 (F) + 6,000 (A)
38. Relax Ltd., has prepared the following sales budget for the last five months of the year
2018:
Months August September October November December
Sales units 10,800 15,600 12,200 10,400 9,800
Inventory of finished goods at the end of the every month is to be equal to 25% of sales
estimate for the next month. On 1 st August 2018 there were 2,700 units of product on
hand. Every unit of product requires two types of materials in the following quantities:
Material Kg.
A 4
B 5
Materials equal to one half of the requirement of next months’ production are to be in
hand at the end of every month. This requirement was fulfilled on 1st August 2018.
You are required to prepare production budget and materials budget for the months of
August, September and October of 2018.
Ans. Units of production = Sale units + Closing stock – opening stock
Months August September October November
Sales units 10,800 15,600 12,200 10,400
Closing stock 3,900 3,050 2,600 2,450
Opening stock (2,700) (3,900) (3,050) (2,600)
Budgeted production 12,000 14,750 11,750 10,250
Production for the year is 38,500 units.
Material budget for August, September and October for Material X
Months August September October
Budgeted materials consumed 48,000 59,000 47,000
Closing stock 29,500 23,500 20,500
Opening stock (24,000) (29,500) (23,500)
Budgeted purchases 53,500 53,000 44,000
Material budget for August, September and October for Material Y
Months August September October
Budgeted materials consumed 60,000 73,750 58,750
Closing stock 36,875 29,375 25,625
Opening stock (30,000) (36,875) (29,375)
Budgeted purchases 66,875 66,250 55,000
39. Big Woof Co manufactures a single product, the Bark, details of which are as follows.
Per unit $
Selling price 180.00
Direct materials 40.00
Direct labour 16.00
Variable overheads 10.00
Annual fixed production overheads are budgeted to be $1.6 million and Big Woof expects
to produce 2,80,000 units of the Bark each year. Overheads are absorbed on a per unit
basis. Actual overheads are $1.6 million for the year.
Budgeted fixed selling costs are $320,000 per quarter.
Actual sales and production units for the first quarter of 20X8 are given below.
January-March
Sales 240,000
Production 280,000
There is no opening inventory at the beginning of January.
Prepare statements of profit or loss for the quarter, using:
(a) Marginal costing
(b) Absorption costing
Ans. Worked in class room
40.
The expenses for the production of 5,000 units in a factory are given below:-
particulars Per unit price
Material 50
Labour 20
Variable over head 15
Administrative expenses(5% variable) 10
Fixed overhead(Rs.50,000) 10
Selling expenses(20% fixed) 6
Distribution expenses(10% fixed) 5
Total cost of sales per unit 116
You are required to prepare a budget for the production of 7,000 units.
Ans.
Computation of budget for 7,000 units
particulars Per unit price Total cost
Material (7,000 x 50) 50.00 3.50,000
Labour (7,000 x 20) 20.00 1,40,000
Variable over head (7,000 x 15) 15.00 1,05,000
Variable administrative overhead 5% 0.50 3,500
Variable selling overhead 80% 4.80 33,600
Variable Distribution overhead 90% 4.50 31,500
Total variable overhead 94.80 6,63,600
Fixed production overhead 7.14 50,000
Fixed administrative overhead (10 *95%*5,000) 6.79 47,500
Fixed selling overhead (6*20%*5,000) 0.86 6,000
Fixed dustrubution overhead (5*10%*5,000) 0.36 2,500
Total fixed overhead 15.15 1,06,000
 Total cost 109.95 7,69,600
41. The following data was extracted from the cost books of Xerox Ltd., prepare a production budget for
the six months period ending 31-12-20.
Month Estimated sales
July 1100
August 1100
September 1700
October 1900
November 2500
December 2300
January 2000
Finished units=1/2 sale of next month will be in the stock at the end of each month including
June. You are required to prepare production budget.
You are required to prepare a production budget for the six months period ending 31-12-20.
Ans. Production budget for the six months period ending 31-12-20.
Production= sales + closing stock – opening stock
Months July August September October November December
Sales 1,100 1,100 1,700 1,900 2,500 2,300
Closing stock 550 850 950 ,1250 1,150 1,000
Opening stock 550 550 850 950 1,250 1,150
Production 1,100 1,400 1,800 2,200 2,400 2,150
42. The following data was derived from the books of Rowan Ltd.,

Particulars Cash flows

Initial investment 60,000
1st year cash inflows 15,000
2nd year cash inflows 20,000
3rd year cash inflows 30,000
4th year cash inflows 20,000
If estimated life of the asset is 4 years, calculate Internal rate of return.
Computation of internal rate of return on trial and error:
Present value of cash inflows at 10%
Particulars Cash flows PV @ 10% Disc. Cash
flows
1st year cash inflows 15,000 .909 13,635
2nd year cash inflows 20,000 .826 16,520
rd
3 year cash inflows 30,000 .751 22,530
4th year cash inflows 20,000 .683 13,660
PV of cash inflows 66,345
PV of cash outflows 60,000 1.00 60,000
NPV 6,345
As NPV is showing negative we shall increase the rate of discount and continue the same process
till the NPV becomes zero. At which rate NPV becomes negative that is rate is Internal rate of
return.
Particulars Cash flows PV @ 20% Disc. Cash
flows
st
1 year cash inflows 15,000 .833 12,495
 2nd year cash inflows 20,000 .694 13,880
rd
3 year cash inflows 30,000 .579 17,370
4th year cash inflows 20,000 .482 9,640
PV of cash inflows 53,385
PV of cash outflows 60,000 1.00 60,000
NPV -6,615
As NPV is showing negative we may presume that IRR is lying in between 10% to 20%
The following formula may be applied to find out IRR.
NPV at low rate
Internal Rate of Return = Low rate + (High rate-Low rate)
PV at low rate−PV at high rate
6,345 6,345
10%+ (20-10) = 10%+ (20-10) = 10+4.89 = 14.89%
66,345−53,385 12,960
43. Telco Ltd., provides you the following information:
Budget Actual

Particulars
Output in units 15,000 16,250
Hours 30,000 33,000
Variable overhead Rs.60,000 Rs.68,000
You are required to calculate variable overhead cost variance.
Ans. Budgeted hours for actual output = 15,000 output requires budget hours 30,000
For 16,250 output requires how many hours.
30,000/15,000 = 2 hours ; it means 2 hours required to produce 1 unit
Therefor to produce 16,250 units budgeted hours required is 16,250 x 2 = 32,500 hours
Budgeted variable overhead rate per hour = 60,000/30,000 = Rs.2
Actual variable overhead rate per hour is = 68,000/33,000 =Rs.2.06
Variable overhead cost variance = Standard cost actual output – actual cost
Standard cost actual output is = (32,500 x 2) – 68,000
65,000-68,000 = 3,000 (Adverse)
44. An enterprise can make either of two investments at the beginning of 2020. Assuming required
rate of return is 10% p.a. The following data furnished by the enterprise:
Particulars Project-A Project-B
Cost of investment Rs.20,000 Rs.28,000
Life of the project 4 years 5 years
Scrap value Nil Nil
Net income (after depreciation & taxes) Rs. Rs.
End of 2020 500 Nil
End of 2021 2,000 3,400
End of 2022 3,500 3,400
End of 2023 2,500 3,400
End of 2024 -- 3,400
It is ascertained that each of the alternative projects will require an additional working capital of
Rs.2,000 which will be received back in full after the expiry of each project life. Depreciation is
provided under straight line method.
You are required to calculate:
a. Payback period
b. Net present value
Ans. Computation of cash flow for Machine –M and Machine – N
Project - A Project - B
Year PAT DEP Cash Cumulative PAT DEP Cash Cumulati
flow Cash flow flow ve Cash
flow
2020 500 5,000 5,500 5,500 Nil 5,600 5,600 5,600
2021 2,000 5,000 7,000 12,500 3,400 5,600 9,000 14,600
2022 3,500 5,000 8,500 21,000 3,400 5,600 9,000 23,600
2023 2,500 5,000 7,500 28,500 3,400 5,600 9,000 32,600
2024 --- -- -- -- 3,400 5,600 9,000 41,600
For project A payback period is lying in between 2021 – 2022
For Project B payback period is lying in between 2022 – 2023
Computation of NPV:
Project - A Project - B
Year PAT DEP Cash PVF PV PAT DEP Cash PVF PV
flow flow
2020 500 5,000 5,500 .909 5,000 Nil 5,600 5,600 .909 5,090
2021 2,000 5,000 7,000 .826 5,782 3,400 5,600 9,000 .826 7,484
2022 3,500 5,000 8,500 .751 6,384 3,400 5,600 9,000 .751 6,759
2023 2,500 5,000 7,500 .683 5,123 3,400 5,600 9,000 .683 6,147
2024 W.C -- 2,000 .683 1,366 3,400 5,600 9,000 .621 5,589
2024 W.C -- 2,000 .621 1,242
PV OF CASH INFLOWS 23,655 32,311
PV OF CASH OUTFLOWS 20,000 28,000
NET PRESENT VALUE 3,655 4,311
PROJECT – B is better than project A
45. Pavan Ltd., provides you the following information:
Particulars Budget Actual
Output in units 15,000 16,250
Hours 30,000 33,000
Fixed overhead Rs.45,000 Rs.50,000
You are required to calculate fixed overhead cost variance.
Ans. Budgeted hours for actual output = 15,000 output requires budget hours 30,000
For 16,250 output requires how many hours.
30,000/15,000 = 2 hours ; it means 2 hours required to produce 1 unit
Therefor to produce 16,250 units budgeted hours required is 16,250 x 2 = 32,500 hours
Budgeted variable overhead rate per hour = 45,000/30,000 = Rs.1.5
Actual variable overhead rate per hour is = 50,000/33,000 =Rs.1.52
Variable overhead cost variance = Standard cost actual output – actual cost
Standard cost actual output is = (32,500 x 1.5) – 50,000
48,750-50,000 = 1,250 (Adverse)
46. Distinguish between budgetary control and standard costing
47. State the meaning of standard and variance.
48. State the reasons for difference in profit under marginal costing and absorption costing .

49. Describe the process of performance management.

50. State the objectives of standard costing.
51. Explain variance analysis.
52. Explain value enhancement.
53. Explain discounted payback method.
54. Explain the concept of cost reduction.