Amity Campus

Uttar Pradesh
India 201303

ASSIGNMENTS
PROGRAM: MFC
SEMESTER-II
Subject Name
Study COUNTRY
Roll Number (Reg.No.)
Student Name

: COST ACCOUNTING
: BOTSWANA
: MFC001112014-20160160
: ITSENG LETSHOLO

INSTRUCTIONS
a) Students are required to submit all three assignment sets.
ASSIGNMENT
Assignment A
Assignment B
Assignment C

DETAILS
Five Subjective Questions
Three Subjective Questions + Case Study
Objective or one line Questions

MARKS
10
10
10

b)
c)
d)
e)

Total weightage given to these assignments is 30%. OR 30 Marks

All assignments are to be completed as typed in word/pdf.
All questions are required to be attempted.
All the three assignments are to be completed by due dates and need to be submitted for
evaluation by Amity University.
f) The students have to attached a scan signature in the form.

Signature :
Date
:

04 APRIL 2015

( ) Tick mark in front of the assignments submitted

Assignment
Assignment B
Assignment C
A

Cost Accounting
SECTION A:
Q1 What is cost accounting? What are its objectives?
Cost Accounting is the process of classifying and recording of expenditure incurred during the operations of the
organization in a systematic way, in order to ascertain the cost of a cost center with the intention to control the
cost.
Following are the basic three objectives of Cost Accounting:
1) Ascertainment of Cost and Profitability
2) Cost Control
3) Presentation of information for managerial decision making.
Q2 Briefly explain the different ways of classifying cost.
The classification of costs can be done in the following ways:
1. By Nature of Element
The costs are divided into three categories i.e. Materials, Labor and Overheads. Further subclassification of each element is possible; for example, material can be classified into raw material
components, spare parts, consumable stores, packing material, etc.
(a) Materials: Materials are the principal substances that go into the production process and are
transformed into finished goods. Materials are further classified as direct materials and indirect
materials. Direct materials are that materials that can be directly identified with and easily traced to
finished goods.
(b) Labor: Labor refers to the human effort to produce goods and services. It is a factor of production; the
talents, training, and skills of people which contribute to the production of goods and services. It
involves the physical and mental effort. It can be further classified into direct and indirect labor.
(c) Overheads: Those elements of costs necessary in the production of an article or the performance of a
service which are of such a nature that the amount applicable to the product or service cannot be
determined accurately or readily. Usually they relate to those objects of expenditures which do not
become an integral part of the finished product or service such as rent, heat, light, supplies,
management, supervision, etc. In other words, overheads consist of indirect materials, indirect labor and
other indirect expenses. The overheads can be classified into factory overheads, office and
administration overheads and selling and distribution overheads.
2. By Functions
It leads to grouping of costs according to the broad divisions of functions of a business undertaking or
basic managerial activities, i.e. production, administration, selling and distribution. According to this
classification costs are divided as follows:

(a) Manufacturing and Production Costs

This category includes the total of costs incurred in manufacture, construction and fabrication of units of
production. The manufacturing and production costs comprise of direct materials, direct labor and
factory overheads.
(b) Administrative Costs
This category includes costs incurred on account of planning, directing, controlling and operating a
company. For example, salaries paid to managers and other administrative staff.
(c) Selling and Distribution Costs
Selling costs and distribution costs are most often confused to be one and the same. However, there is a
distinction between the two. Selling costs are defined as the cost of seeking to create and stimulate
demand and of securing orders. Example of selling costs are advertisement, salesman salaries, etc.
Whereas, distribution costs are defined as the cost of sequence of operations which begin with making
the packed product available for dispatch and ends with making the reconditioned, returned empty
packages, if any available for re-use. For example, insurance on goods in transit, warehousing etc. are
distribution costs.
3. By Traceability
According to this classification, total cost is divided into direct costs and indirect costs
Direct costs are those costs which are incurred for and may be conveniently identified with or easily
traced to a particular cost center or cost unit. The common examples of direct costs are materials used
and labor employed in manufacturing an article or in a particular process of production.
Indirect costs are those costs which are incurred for the benefit of a number of cost centers or cost units
and cannot be conveniently identified with a particular cost center or cost unit. Examples of indirect
costs include rent of building, management salaries, machinery depreciation, etc. The nature of the
business and the cost unit chosen will determine the costs as direct and indirect. For example, the hire
charges of a mobile crane used onsite by a contractor would be regarded as a direct cost since it is
identifiable with the project/site on which it is employed, but if the crane is used as a part of the services
of a factory, the hire charges would be regarded as indirect cost because it will probably benefit more
than one cost center or department. The distinction between direct and indirect cost is essential because
the direct costs of a product or activity can be accurately identified with the cost object while the indirect
costs have to be apportioned on the basis of certain assumptions about their incidence.
4. By Variability
The basis for this classification is the behavior of costs in relation to changes in the level of activity or
volume of production. On this basis, costs are classified into three groups viz. fixed, variable and semivariable.
Fixed Costs
Fixed costs are those which remain fixed in total with increase or decrease in the volume of output or
activity for a given period of time or for a given range of output. Fixed costs per unit vary inversely with
the volume of production, i.e. fixed cost per unit decreases as production increases and increases as
production decreases. Examples of fixed costs are rent, insurance of factory building, factory managers
salary, etc. These costs are constant in total amount but fluctuate per unit as production level changes.
These costs are also termed as capacity costs.
Variable Costs
Variable costs are those which vary in total directly in proportion to the volume of output. These costs
per unit remain relatively constant with changes in volume of production or activity. Thus, variable costs

fluctuate in total amount but tend to remain constant per unit as production level changes. Examples:
direct material costs, direct labor costs, power, repairs, etc.
Semi-variable Costs
Semi-variable costs are those which are partly fixed and partly variable. For example, telephone
expenses include a fixed portion of monthly charge plus variable charge according to the number of calls
made; thus total telephone expenses are semi-variable. Other examples of such costs are depreciation,
repairs and maintenance
5. By Controllability
On this basis costs are classified into two categories:
Controllable Costs
If the costs are influenced by the action of a specified member of an undertaking, that is to say, costs
which are at least partly within the control of management they are called controllable costs. An
organization is divided into a number of responsibility centers and controllable costs incurred in a
particular cost center can be influenced by the action of the manager responsible for the center.
Generally speaking, all direct costs including direct material, direct labor and some of the overhead
expenses are controllable by lower level of management.
Uncontrollable Costs
If the costs cannot be influenced by the action of a specified member of an undertaking, that is to say,
which are not within the control of management they are called uncontrollable costs. Most of the fixed
costs are uncontrollable. For example, rent of the building is not controllable and so is managerial
salaries. Overhead cost, which is incurred by one service section or department and is apportioned to
another which receives the service is also not controllable by the latter.
Controllability of costs depends on the level of management (top, middle or lower) and the period of
time (long-term or short-term).
6. By Normality
On this basis, is the costs are classified into two categories.
Normal Cost
It is the cost which is normally incurred at a given level of output in the conditions in which that level of
output is normally attained. It forms a part of production cost.
Abnormal Cost
It is the cost which is not normally incurred at a given level of output in the conditions in which that
level of output is normally attained. It is not considered as a part of production cost, hence it is charged
to Costing Profit and Loss Account.
7. By Capital or Revenue
If the cost is incurred in purchasing assets either to earn income or increasing the earning capacity of the
business it is called capital cost, for example, the cost of a rolling machine in case of steel plant. Though
the cost is incurred at one point of time the benefits accruing from it are spread over a number of
accounting years. Revenue expenditure is any expenditure done in order to maintain the earning capacity
of the concern such as cost of maintaining an asset or running a business. Example, cost of materials
used in production, labor charges paid to convert the material into production, salaries, depreciation,
repairs and maintenance charges, selling and distribution charges, etc. While calculating cost, revenue
items are considered whereas capital items are completely ignored.

8. By Time
Costs can be classified as (i) Historical costs and (ii) Predetermined costs.
Historical Costs
The costs which are ascertained after being incurred are called historical costs. Such costs are available only
when the production of a particular thing has already been done. Such costs are only of historical value and not
at all helpful for cost control purposes.
Predetermined Costs
Such costs are estimated costs, i.e. computed in advance of production taking into consideration the previous
periods costs and the factors affecting such costs. If they are determined on scientific basis they become
standard cost. Such costs when compared with actual costs will give the variances and reasons of variance and
will help the management to fix the responsibility and to take remedial action to avoid its recurrence in future.
Historical costs and predetermined costs are not mutually exclusive. Even in a system when historical costs are
used, predetermined costs have a very important role to play because a figure of historical cost by itself has no
meaning unless it is related to some other standard figure to give meaningful information to the management.
9. By Association with Product
Costs on this basis are classified as Product Costs and Period Costs. This distinction is required for the purpose
of profit determination. This is because product costs are carried forward to the next accounting period in the
form of unsold finished stock. Whereas period costs are written off in the accounting period in which it is
incurred.
Product Cost
Product costs are associated with unit of output. Product costs are the costs absorbed by or attached to the
units produced. These costs go into the determination of inventory valuation (finished goods and partly
completed goods) hence are called Inventoriable costs. This consists of direct materials, direct labor and factory
overheads (partly or fully). The extent of inclusion of factory costs depends on the type of costing system in
force absorption or direct costing. If absorption costing method is adopted, both the fixed and variable factory
overheads are included as part of product costs. If direct costing method is adopted only variable factory
overheads are included as part of inventoriable cost.
Period Costs
Period costs are costs associated with period for which they are incurred, rather than the unit of output or
manufacturing activity. These costs are not treated as part of inventory and hence they are treated as expenses of
the period for which they are incurred. Administrative, Selling and Distribution costs are treated as period costs
and are deducted as an expense for the determination of income and are not regarded as a part of inventory
10. According to Planning and Control
Cost accounting furnishes information to the management which is helpful in discharging the two important
functions of management i.e. planning and control. For the purpose of planning and control, costs are classified
as budgeted costs and standard costs.
Budgeted Costs
Budgeted costs represent an estimate of expenditure for different phases or segments of business operations,
such as manufacturing, administration, sales, research and development, for a period of time in future which
subsequently becomes the written expression of managerial targets to be achieved. Various budgets are prepared
for different phases/segments of business, such as sales budget, raw material cost budget, labor cost budget, cost
of production budget, manufacturing overhead budget, office and administration overhead budget. Continuous
comparison of actual performance (i.e., actual cost) with that of the budgeted cost is made so as to report the
variations from the budgeted cost to the management for corrective action.
Standard Cost
The Institute of Cost and Management Accountants, London defines standard cost as the predetermined cost
based on a technical estimate for materials, labor and overhead for a selected period of time and for a prescribed
set of working conditions. Thus, standard cost is a determination, in advance of production, of what should be
its cost under a set of conditions.

11. For Managerial Decisions

Marginal Cost
Marginal cost is the additional cost to be incurred if an additional unit is produced. In other words, marginal
cost is the total of variable costs, i.e. prime cost plus variable overheads. It is based on the distinction between
fixed and variable costs.
Out of Pocket Costs
This is that portion of the cost which involves payment, i.e. gives rise to cash expenditure as opposed to such
costs as depreciation, which do not involve any cash expenditure. Such costs are relevant for price fixation
during recession or when make or buy decision is to be made.
Differential Costs
If there is a change in costs due to change in the level of activity or pattern or method of production they are
known as differential costs. If the change increases the cost, it will be called incremental cost and if the change
results in the decrease in cost it is known as decremental cost.
Sunk Costs
Sunk cost is another name for historical cost. It is a cost that has already been incurred and is irrelevant to the
decision making process. A good example is depreciation on a fixed asset. Depreciation on a given asset is a
sunk cost because the cost (of purchasing the asset) has already been incurred (when it was purchased) and it
cannot be affected by any future action, though we allocate the depreciation cost to future periods the original
cost of the asset is unavoidable. What is relevant in this context is the salvage value of the asset not the
depreciation. Thus, sunk costs are not relevant for decision making and are not affected by increase or decrease
in volume.
Imputed (or notional) Costs
These costs appear in cost accounts only. For example notional rent charged on business premises owned by the
proprietor, interest on capital for which no interest has been paid. When alternative capital investment projects
are being evaluated it is necessary to consider the imputed interest on capital before a decision is arrived as to
which is the most profitable project.
12. Others.
Future Costs
Are those costs that are expected to be incurred at a later date.
Programmed Cost
Certain decisions reflect the policies of the top management which results in periodic appropriations and these costs
are referred to as programmed cost. For example, the expenditure incurred by the company under the Jawahar Rojgar
Yojana program initiated by the prime minister is a programmed cost which reflects the policy of the top
management.
Joint Cost
Joint cost is the cost of manufacturing joint products up to or prior to the split-off point. Cost incurred after the splitoff point is called separable cost. Joint cost is common to the processing of joint products and by-products till the
point of separation and cannot be traced to a particular product before the point of split-off.
Conversion Cost
Conversion cost is the cost incurred in converting the raw material into finished product. It can be calculated by
deducting the cost of direct materials from the production cost.
Discretionary Costs
Discretionary costs are those costs which do not have obvious relationship to levels of capacity or output activity and
are determined as part of the periodic planning process. In each planning period the management decides on how
much to spend on certain discretionary items such as advertising, research and development, employee
Committed Cost
Committed cost is a fixed cost which results from the decisions of the management in the prior period and is not
subject to the management control in the present on a short run basis. They arise from the possession of production
facilities, equipment, an organization setup, etc.

Some examples of committed costs are: plant and equipment depreciation, taxes, insurance premium and rent
charges.

Q3 What do you mean by ABC analysis? State its advantages.

Usually a firm has to maintain several types of inventories. It is not desirable to keep the same degree of control
on all the items. The firm should pay maximum attention to those items whose value is the highest. The firm
should, therefore, classify inventories to identify which items should receive the most effort in controlling. The
firm should be selective in its approach to control investment in various types of inventories. This analytical
approach is called the ABC analysis and tends to measure the significance of each item of inventories in terms
of its value.
The high-value items are classified as 'A items' and would be under the tightest control.
'C items' represent relatively least value and would be under simple control.
'B items' fall in between these two categories and require reasonable attention of management.
The ABC analysis concentrates on important items and is also known as control by importance and exception
(CIE). As the items are classified in the importance of their relative value, this approach is also known as
proportional value analysis. (PVA). .
The following steps are involved in implementing the ABC analysis:
1. Classify the items of inventories, determining the expected use in units and the price per unit for each item.
2. Determine the total value of each item by multiplying the expected units by its units price
3. Rank the items in accordance with the total value, giving first rank to the item with highest total value and so
on.
4. Compute the ratios (percentage) of number of units of each item to total units of all items and the ratio of
total value of each item to total value of all items.
5. Combine items on the basis of their relative value to form three categories: -A, B and C.
Advantages of A.B.C. method of Inventory Control:
(i) It ensures control over the costly items in which a large amount of capital is invested.
(ii) It helps in developing scientific method of controlling inventories. Clerical costs are considerably reduced
and stock is maintained at optimum level.
(iii) It helps in maintaining stock turnover rate at comparatively higher level through scientific control of
inventories.
(iv) It ensures considerable reduction in the storage expenses. It results in stock carrying stock.
(v) It helps in maintaining enough safety stock for C category of items. The following graph demonstrates ABC
inventory classification.

Q4 What is idle time? What are the causes for idle time? How should idle time wages be treated in cost
Accounts?
There is bound to be some difference between the time booked to different jobs or work orders & gate time. The
difference of this time is known as idle time. Idle time is that time for which the employer pays, but from which
he obtains no production. For example, if out of eight hours that a worker is supposed to put in the factory, the

workers job card shows only seven hours spent on jobs, one hour will be idle time in such a case. Idle time is
of two types:
(a) Normal Idle Time , and
(b) Abnormal Idle Time
a. Normal Idle time:- It is unavoidable, of normal nature and is inherent in production environment. This may be
due to:Time lost in moving from one job to another
Time lost in waiting for materials or instructions
Temporary absence from duty because of minor accidents, personal breaks tea breaks etc.
Time taken in traveling form one dept to another dept.
b. Abnormal Idle Time:- This is not caused by usual production routine. It may be:Time lost through the breakdown of machinery
Time lost through lack of materials
Bottlenecks in production, resulting in a temporary absence of parts for further processing.
Strikes, lockout, fire etc

Treatment of idle time:

Idle time means the amount of time the workers remain idle in a normal working day. The idle time is usually
caused by a sudden fault in machine or equipment, power failure, lack of orders for the product, inefficient work
scheduling, defective materials and shortage of raw materials etc. The cost associated with idle time is treated as
indirect labor cost and should, therefore, be included in manufacturing overhead cost. For example, the normal
weekly working hours of a worker are 48 and he is paid @ $8 per hour. If he remains idle for 6 hours due to
power failure, then the cost of 42 hours would be treated as direct labor cost and the cost of 6 hours (idle time)
would be treated as indirect labor cost and included in manufacturing overhead cost.
Direct labor (42 hours $8)
Manufacturing overhead (6 hours $8)
Total cost

$336
$48 Idle time

$384

Q5 What is cost volume profit analysis? Explain.

CVP analysis involves the analysis of how total costs, total revenues and total profits are related to sales
volume, and is therefore concerned with predicting the effects of changes in costs and sales volume on profit. It
is also known as 'breakeven analysis'.
Cost Volume Profit CVP analysis is applied in the following situations:
Planning and forecasting of profit at various levels of activity.
Useful in developing flexible budgets for cost control purposes.

Helps the management in decision-making in the following typical areas:

Identification of the minimum volume of activity that the enterprise must achieve to avoid incurring loss.
Identification of the minimum volume of activity that the enterprise must achieve to attain its profit objective.
Provision of an estimate of the probable profit or loss at different levels of activity within the range
reasonably expected.
The provision of data on relevant costs for special decisions relating to pricing, keeping or dropping product
lines, accepting or rejecting particular orders, make or buy decision, sales mix planning, altering plant layout,
channels of distribution specification, promotional activities, etc.
Guide in fixation of selling price where the volume has a close relationship with the price level.
Evaluates the impact of cost factors on profit.
SECTIONB:
Q1 What is standard costing? How is it different from Historical costing?
Standard costing refers to the principles and procedure which involve the use of predetermined standard costs
relating to each element of cost, and for each line of product manufactured or service rendered. A standard cost
is an estimated cost which suggests what the cost should be under given conditions. The significance of
standard costing can be understood better if it is viewed in contrast to actual historical costing.
Historical costing has its own usefulness. It provides management with a record of what has happened.
Information regarding actual costs classified by elements are known to management accurately, at frequent
intervals. The cost data can be verified with the help of documents and evidence regarding various transactions.
The result of activities can also be known on the basis of actual performance.
Q2 What is flexible budget. Explain
A flexible budget is defined as a budget which by recognizing the difference between fixed, semi-fixed and
variable costs, is designed to change in relation to the level of activity attained.
A flexible budget is a budget that is prepared for a range, i.e., for more than one level of activity. It is a set of
alternative budgets to different expected levels of activity. Thus, a flexible budget might be developed that
would apply to a relevant range of production, say 8,000 to 12,000 units. Under this approach, if actual
production slips to 9,000 units from a projected 10,000 units, the manager has a specific tool (i.e., the flexible
budget) that can be used to determine budgeted cost at 9,000 units of output. The flexible budget provides a
reliable basis for comparisons because it is automatically geared to changes in production activity.
Q3 What is responsibility Accounting. Explain the responsibility centers.
Responsibility accounting is a management control system based on the principles of delegating and locating
responsibility. The authority is delegated on responsibility centre and accounting for the responsibility centre.
Responsibility accounting is a system under which managers are given decisions making authority and
responsibility for each activity occurring within a specific area of the company. Under this system, managers are
made responsible for the activities of segments. These segments may be called departments, branches or
divisions etc., one of the uses of management accounting is managerial control. Among the control techniques
responsibility accounting has assumed considerable significance. While the other control devices are
applicable to the organization as a whole, responsibility accounting represents a method of measuring the
performance of various divisions of an organization.

RESPONSIBILITY CENTERS
1. Cost Centre or Expense Centre:
An expense centre is a responsibility centre in which inputs, but not outputs, are measured in monetary terms.
Responsibility accounting is based on financial information relating to inputs (costs) and outputs (revenues). In
an expense centre of responsibility, the accounting system records only the cost incurred by the centre but the
revenues earned (outputs) are excluded. An expense centre measures financial performance in terms of cost
incurred by it. In other words, the performance measured in an expense centre is efficiency of operation in that
centre in terms of the quantity of inputs used in producing some given output. The modus operandi is to
compare actual inputs to some predetermined level that represents efficient utilization. The variance between
the actual and budget standard would be indicative of the efficiency of the division.
2. Profit Centre:
A centre in which both the inputs and outputs are measured in monetary terms is called a profit centre. In other
words both costs and revenues of the centre are accounted for. Since the difference of revenues and costs is
termed as profit, this centre is called profit centre. In a centre, there are financial measures of the outputs as well
as of the input, it is possible to measure the effectiveness and efficiency of performance in financial terms.
Profit analysis can be used as a basis for evaluating the performance of divisional manager. A profit centre as
well as additional data regarding revenues. Therefore, management can determine hether the division was
effective in attaining its objectives.
This objective is presumably to earn a satisfactory profit. Profit directly traceable to the division and
voidable if the division were closed down. The concept of divisional profit is referred to as profit contribution
as it is amount of profit contribution directly by the division.
The performance of the managers is measured by profit. In other words managers can be expected to behave as
if they were running their own business. For this reason, the profit centre is good training for general
management responsibility .
Measurement of Expenses :
Another problem with profit centers may relate to the measure of certain type of expenses which have to be
involved in the computation of profit centres. There is a scope for difference of opinion relating to the treatment
of those type of expenses which are not traceable or attributable should be ignored in working out the profit of
the division as a profit centre.
3. Investment Centres
A centre in which assets employed are also measured besides the measurement of inputs and outputs is called an
investment centre. Inputs are accounted for in terms of costs, outputs are calculated on investment centre. Inputs
are accounted for in terms of costs, outputs are accounted for in terms of revenues and assets employed in terms
of values. It is the broadest measurement, in the sense that the performance is measured not only in terms of
profits but also in terms of assets employed to generate profits.
An investment centre differs from a profit centre in that as investment centre is evaluated on the basis of the rate
of return earned on the assets invested in the segment while a profit centre is evaluated on the basis of excess
revenue over expenses for the period.
CASE STUDY:
A retail dealer in garments is currently selling 24000 shirts annually. He supplies the following details for the
year ended 31st December,2007.
Rs
Selling Price per shirt
40
Variable Cost per shirt
25
Fixed cost:
staff salaries for the year
120000
General office cost for the year
80000
Advertising costs for the year
40000

As a cost accountant of the firm, you are required to answer the following each part independently:(i)
Calculate the break-even point and margin of safety in sales revenue and no of shirts sold.
(ii)
Assume that 20000 shirts were sold in a year. Find out the net profit of the firm.
(iii)
If it is decided to introduce selling commission of Rs 3 per shirt, how many shirts would require to
be sold in a year to earn a net income of Rs 15000/-.
Answer:
(i) BREAK-EVEN POINT, MARGIN OF SAFETY IN SALES REVENUE, NUMBER OF SHIRTS SOLD
.
Breakeven point of revenue = Fixed Costs C/S
where
C= selling price per unit variable cost per unit = Rs. (40-25) = Rs. 15
S= selling price per unit = Rs. 40
Fixed costs= Rs. (120,000+80,000+40,000) = Rs. 240,000
Break Even Point revenue = 240,00015/ 40 =Rs. 640,000
Number of shirts at Break Even = Rs. 640 000 Rs. 40 = 16 000 shirts
Margin of Safety in Sales Revenue
= Annual Sales- Break Even point revenue

= Rs. 4024,000 Rs. 640,000

= Rs. 960,000 - Rs. 640,000
= Rs. 320, 000
Number of Shirts associated with Margin of Safety in Sales Revenue
= Rs. 320 000 Rs. 40
= 8 000 shirts
Therefore:
Break even point revenue = Rs. 640,000 (16 000 shirts)
Margin of safety in sales revenue = Rs. 320,000 (8000 shirts)
(ii) NET PROFIT OF THE FIRM ASSUMING 20000SHIRTS WERE SOLD IN A YEAR
Total Sales = 20, 000 x Rs. 40 = Rs. 800, 000
Variable Cost per unit = Rs.25
Total Variable Cost = 20, 000 x Rs. 25 = Rs. 500, 000
Net Profit= Total Sales- (Fixed+ variable Costs)
Net Profit = Rs. 800, 000- Rs. (240, 000+ 500, 000)
Net profit = Rs. (800, 000- 740, 000)
Net Profit = Rs. 60, 000
(iii) SHIRTS REQUIRED TO BE SOLD IN A YEAR TO EARN A NET INCOME OF RS 15,000,IF A
SELLING COMMISSION OF RS 3PER SHIRT IS INTRODUCED
Net Income Profit = Rs. 15, 000
Variable cost = Rs. 25/unit

Sales Commission = Rs. 3/unit

Total Variable costs = Rs. 28/unit
Let the number of shirts be x, then:
Profit = Total Sales (Fixed Costs + Variable Costs)
15, 000 = 40x - (240,000+ 28x)
15, 000 = 40x - 240,000 - 28x
15, 000 = 12x - 240,000
12x= 240, 000+ 15, 000
12x= 255, 000

x= 21250
Thus, at a profit of Rs. 15,000 and selling commission of Rs. 3 per shirt,
the number of shirts to be sold = 21, 250 of 21

SECTION C
Q1
(a)
(b)
(c)
(d)

Which of the following best describes a fixed cost? A cost which:

Represents a fixed proportion of total costs
Remains at the same level up to a particular level of output
Has a direct relationship with output
Remains at the same level when output increases

Answer: D
Q2 A business's telephone bill should be classified into which one of these categories?
(a)
Fixed cost
(b)
Stepped fixed cost
(c)
Semi-variable cost
(d)
Variable cost
ANSWER: C
Q3 The total production cost for making 20,000 units was 21,000 & total production cost for making 50,000
was 34,000. When production goes over 25,000 units, more fixed costs of 4,000 occur. So full production
cost per unit for making 30,000 units is:
(a)
0.30
(b)
0.68
(c)
0.84
(d)
0.93
ANSWER: D
Q4 Which of the following is least likely to be an objective of cost accounting system?
(a) Product Costing
(b) Optimum Sale Mix determination
Maximization of profits
(d) Sales Commission determination
ANSWER: D
Q5 The classification of costs as either direct or indirect depends upon
(a) The timing of the cash outlay for the cost
(b) The cost object to which the cost is being related
(c) The behavior of the cost in response to volume changes
(d) Whether the cost is expensed in the period in which it is incurred
ANSWER: B
Q6 Which of the following is false with regard to the supplementary rate method for accounting of under or
over absorption of overheads?
(a) It facilitates the absorption of actual overhead for production
(b) Correction of costs through supplementary rates is necessary for maintaining data for
comparison
(c) The supplementary rate can be determined only after the end of the accounting period
(d) It requires a lot of clerical work
(e) The value of stock is distorted under this method.

ANSWER : E
Q7 Which of the following factors should not be taken into consideration for determining the basis for
applyingoverheads to products?
(a) Adequacy
(b) Convenience
(c) Time factor
(d) Seasonal fluctuation of overhead costs
(e) Manual or machine work.
ANSWER: D
Q8 Storekeeping expenses are to be apportioned on the basis of
(a) Floor area of the production departments
(b) Direct labor hours of each product
(c) Number of units manufactured of each product
(d) Number of material requisitions
(e) Sales price of each product.
ANSWER: D
Q9 A company has a margin of safety of Rs.40 lakh and earns an annual profit of Rs.10 lakh. If the fixed costs
amount toRs.20 lakh, the annual sales will be
(a) Rs.160 lakh
(b) Rs.140 lakh
(c) Rs.120 lakh
(d)Rs.200 lakh
(e) Rs.180 lak
ANSWER: C
Q10 Which of the following statements is false with respect to the use of predetermined overhead absorption
rates?
(a) Product cost can be worked out promptly
(b) Use of predetermined overhead rate will provide data available for decision making but
not for cost control
(c) Product costs are not affected unnecessarily due to the vagaries of the calendar or
seasonal fluctuations
(d) By using normal capacity as base while determine the overhead rate, losses due to idle
capacity is highlighted and real cost of production is reflected
(e) Product cost can be estimated prior to commencement of production and can help the
management in price quotation and fixing selling price well in advance.
ANSWER: B
Q11 In process costing, equivalent units, using first in first out (FIFO) are a measure of
(a) Work done on the beginning as well as ending work-in-process inventory
(b) Work done on units started in the production process during the period
(c) Work done in the department during the period

(d) Work required to complete the beginning work-in-process inventory

(e) Work performed on the ending work-in-process inventory.
ANSWER: A
Q12 A companys approach to a make or buy decision
(a) Depends on whether the company is operating at or below break-even level
(b) Depends on whether the company is operating at or below normal volume
(c) Depends on whether the company is operating at practical capacity level
(d) Involves an analysis of avoidable costs
(e) Requires use of absorption costing.
ANSWER: D
Q13 Which of the following statements is false?
(a) Historical costs are useful solely for estimating costs that lie ahead
(b) Abnormal cost is controllable
(c) Conversion cost is the production cost minus direct material cost
(d) Administrative expenses are mostly fixed
(e) Notional costs are not included while ascertaining costs.
ANSWER: B
Q14 Ramesha Ltd. manufactures product DN for last seven years. The company maintains a margin of safety of
37.5%with an overall contribution to sales ratio of 40%. If fixed cost is Rs.5 lakh, the profit of the company is
(a) Rs.12.50 lakh
(b) Rs. 4.25 lakh
(c) Rs. 3.00 lakh
(d) Rs.24.00 lakh
(e) Rs.20.00 lakh.
ANSWER: C
Q15 Which of the following statements is true for a firm that uses variable costing?
(a) Profits fluctuate with sales
(b) An idle facility variation is calculated
(c) Product costs include variable administrative costs
(d) Product costs include variable selling costs
(e)The cost of a unit of product changes because of changes in number of units
manufactured.
ANSWER: A
Q16 If the price rises, which of the following methods of valuing stock will give the highest profit?
(a) LIFO method
(b) Replacement cost method
(c) FIFO method
(d) Simple average method
(e) Specific order method.
ANSWER: A

Q17 An accounting system that collects financial and operating data on the basis of underlying nature and
extent to the costdrivers is
(a) Direct costing
(b) Target costing
(c) Activity based costing
(d) Variable costing
(e) Cycle-time costing.
ANSWER: C
Q18 In allocating factory service department costs to producing departments, which of the following items
would mostlikely be used as an activity base?
(a) Salary of service department employees
(b) Units of electric power consumed
(c) Direct materials usage
(d) Units of finished goods shipped to customers
(e) Units of product sold.
ANSWER: B
Q19 Apportionment of overhead cost may be defined as
(a) Charge to a cost center of an overhead cost item with no estimation
(b) Charge to cost center for the use of an overhead cost
(c) Charge to cost units for the use of an overhead cost
(d) Classification of overhead cost as fixed or variable
(e) Charge each cost center with a share of an overhead cost using an apportionment basis
to estimate the benefit extracted by each cost center.
ANSWER: E
Q20 An increase in variable costs where selling price and fixed cost remain constant will result in which of the
following?
(a) An increase in margin of safety
(b) No change in margin of safety
(c) A fall in the sales level at which break even point will occur
(d) A rise in the sales level at which break even point will occur
(e) No change in the sales level at which break even point will occur.
ANSWER: D
Q21 Which of the following is a cause of materials usage variance?
(a) Emergency buying in smaller quantities
(b) Carriage, freight and other charges absorbed instead of being charged to suppliers
(c) Cash discount not taken
(d) Rectification required when many components do not pass through inspection
(e) Claims not made on suppliers for substandard materials or short receipt of materials.
ANSWER:
Q22 The following are the causes of labour efficiency variance except
(a) Bad working condition
(b) Defective tools, equipment and materials

(c) Defective supervision

(d) Bad workmanship due to dissatisfaction among the workers
(e) Employing people of different grades than planned.
Q23 Which of the following transfer pricing methods will preserve the sub-unit autonomy?
(a) Cost-based pricing
(b) Negotiated pricing
(c) Variable-cost pricing
(d) Full-cost pricing
(e) Marginal cost pricing.
ANSWER: C
Q24 The most fundamental responsibility center affected by the use of market-based transfer prices is
(a) Revenue center
(b) Cost center
(c) Profit center
(d) Investment center
(e) Production center.
Q25 Target pricing
(a) Is a pricing strategy used to create competitive advantage
(b) Considers the variable costs and excludes fixed costs
(c) Is often used when costs are difficult to control
(d) Is more appropriate when applied to mature and long-established products
(e) Is well suited for complex products that require many sub-assemblies.
Q26 A segment of an organization is referred to as a profit center if it has
(a) Responsibility for developing markets and selling the output of the organization
(b) Responsibility for combining materials, labor and other factors of production into a final output
(c) Authority to provide specialized support to other units within the organization
(d) Authority to make decisions affecting the major determinants of profit, including the power to choose its
markets and sources of supply
(e) Authority to make decisions affecting the major determinants of profit, including the power to choose its
markets and sources of supply and significant control over the amount of invested capital.
Q27 Which of the following is false about standard costing system?
(a) It is based on a cost control concept
(b) It assumes stability in the current manufacturing process
(c) The goal is to meet cost performance standards
(d) It assumes production workers have the best knowledge to reduce costs
(e) It motivates employees to try to reach target established.
Q28 Which of the following service departments costs is apportioned on the basis of rate of labor turnover?
(a) Payroll department
(b) Personnel department
(c) Canteen service
(d) Store-keeping department
(e) Maintenance department.
Q29 Which of the following bases is appropriate to apportion the cost incurred on supervision of machine?
(a) Floor area occupied by each machine

(b) Equitable basis

(c) Value of each machine
(d) On the basis of past experience
(e) Estimated time devoted.
Q30 Which of the following bases is used for apportionment of overtime premium of workers engaged in a
particular department?
(a) Direct allocation
(b) Direct labor hours
(c) Number of workers
(d) Technical estimates
(e) Relative areas of departments.
Q31 The rate used in addition to the original rates for ascertaining the true profit for adjusting the under or over
absorption of
overheads is known as
(a) Predetermined rate
(b) Blanket rate
(c) Moving average rate
(d) Supplementary overhead rate
(e) Multiple overhead rate.
Q32 Any activity for which a separate measurement of costs is desired is known as
(a) Cost unit
(b) Cost center
(c) Cost object
(d) Cost pool
(e) Cost allocation.
Q33 Which of the following is true regarding the difference between marginal costing and absorption costing?
(a)Under marginal costing, fixed costs are treated as product costs while it is excluded under absorption costing
(b)Under absorption costing, under absorption or over absorption of overhead occurs but it does not occur under
marginal costing
(c)The net income under absorption costing is always more than the net income under marginal costing
(d)If production is equal to sales, net income under absorption costing is greater than net income under marginal
costing
(e)In case of decreased inventory, the net income under marginal costing is less than the net income under
absorption costing.
Q34 Which of the following statements is false?
(a) The aggregate of indirect material, indirect wages and indirect expenses is overhead costs
(b)Direct costs are never treated as overhead costs even in cases where efforts involved in identifying and
accounting are disproportionately large
(c)The overheads can be apportioned to a cost center in accordance with the principles of benefit and/or
responsibilities
(d) Capital expenditure should be excluded from costs and should not be treated as overhead
(e) Expenditure that does not relate to production shall not be treated as overhead.
Q35 An increase in variable costs where selling price and fixed cost remain constant will result in which of the
following?
(a) An increase in margin of safety
(b) A fall in the sales level at which break even point will occur

(c) A rise in the sales level at which break even point will occur
(d) No change in the sales level at which break even point will occur
(e)No change in angle of incidence.
Q36 Which of the following statements is true for a firm that uses variable costing?
(a) Product costs include variable selling costs
(b) An idle facility variation is calculated
(c) The cost of a unit of product changes because of changes in number of units manufactured
(d) Profits fluctuate with sales
(e) Product costs include variable administrative costs.
Q37 Which of the following can improve break-even point?
(a) Increase in variable cost
(b) Increase in fixed cost
(c) Increase in sale price
(d) Increase in sales volume
(e) Increase in production volume.
Q38 Which of the following statements is/are true?
I. A cost unit is a unit of output in the production of which costs are incurred.
II. A cost center is the smallest segment of activity or area of responsibility for which costs are accumulated.
III. Typically departments are cost centers and there may be many departments in a cost center.
(a) Only (I) above
(b) Only (II) above
(c) Both (I) and (III) above
(d) Both (I) and (II) above
(e) Both (II) and (III) above.
Q39 The Rowan Plan
(a)
Is the best for efficient workers
(b)
Pays lower bonus that that of Halsey beyond 50% saving in time.
(c)
Pays increased bonus at an increasing rate as the efficiency
(d)
None of the above
Q40 A written request to a supplier for specified goods at an agreed upon price is called a
(a) Receiving Report
(b) Purchase order
(c) Material requisition form
(d) Purchase requisition
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