Amity Campus Uttar Pradesh India 201303

ASSIGNMENTS
PROGRAM: BFIA SEMESTER-III
Subject Name Study COUNTRY Roll Number (Reg. No.) Student Name :Cost and Management Accounting :Malawi :BFIA01172009-2012041 :Francis Odala Mtambo

ASSIGNMENT Assignment A Assignment B Assignment C

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

MARKS 10 10 10

Signature : Date : 16th December 2010

Assignments submitted Assignment A Assignment B Assignment C

Cost and Management Accounting

SECTION A:
Q1. What is Activity Based costing? How is it different from Traditional costing system? Answer:

ACTIVITY BASED COSTING

Activity Based costing is the allocation of manufacturing overhead costs to products manufactured on the basis of many cost drivers that are the root/true contributors to overhead costs.
ACTIVITY BASED COSTING CONTRASTED FROM TRADITIONAL COSTING SYSTEM

While Traditional costing system assumes (implies) manufacturing overhead costs for products as only proportional to some aspect related to the volume produced i.e. number of units produced, labour hours or machine hours, Activity Based costing understands that the manufacturing overhead costs are driven or caused by many other factors such as machine setups, unique inspections, special handling, special storage, etc. instead of only assuming one factor. Under Traditional costing method, the costs of performance of all the activities are contained in one cost pool and will be divided by an aspect of volume produced like machine-hours which results in one average rate that is applied to all products regardless of the number of activities involved with the production of particular products and the complexity of those activities. Thus in the Traditional method, the cost of many of the diverse activities do not correlate at all with the number of production machine hours or volume only, and therefore the resulting cost allocations are misleading.
Q2. Briefly explain the different ways of classifying cost. Answer:

CLASSIFICATION OF COST Classification of costs is the process of grouping costs according to their common characteristics. The following are criteria that are employed in the classification of cost. By The Nature of Element Under criterion the cost are divided into three categories of materials, labour and overheads. Materials are the principal substances that go into the production process. These can further be classified into direct materials and indirect materials. Labour is the human effort to produce goods and services by application of talent, training and skills. This can also be subdivided into direct and indirect labour. Overheads are elements of cost that are incurred in the production of an item or provision of a service which are not directly linked to the item/service output and as such can not be

determined accurately or readily. They result from objects of expenditure that can not be traced into the finished product or end service. They do not form an integral part of finished product. By Functions This is the classification of cost according to the division that exist due to the various functions carried out in a business entity, or according to the basic managerial activities of administration , production /operations, selling and distribution Administration costs are costs incurred for planning, directing, controlling and operating a company. Such costs include salaries of managers or directors and other administrative staff. Production costs are all those costs that constitute the process that is called production which includes manufacturing and construction or fabrication of units of production. This may also constitute operations for a service oriented business. Selling costs are costs incurred during the process of seeking to create and stimulate demand for product and securing orders. These include advertisement, salespersons salaries, etc. Distribution costs are the costs of a sequence of operations which begin with making the final and ready product available for dispatch, through making it available to the customer, and return of empty packages if any available for re-use, depending on the case. Examples are insurance on goods in transit, warehousing and transportation. By Traceability Classification by traceability divides total cost into direct and indirect costs. Direct costs are those incurred for, and may be conveniently identified with a particular cost centre or cost unit. Examples include materials used or labour employed in manufacturing an item or in a particular process of production. Indirect costs are those costs that are incurred for the benefit of a number of cost units or cost centres and can not be conveniently traced to a particular cost centre or cost unit. Examples include rent of a building, managerial/administrative costs and electricity bills. By Variability The basis for this classification is the behaviour of costs in response or in relation to changes in the level of activity or volume of production. Fixed Costs are costs that remain the same in total regardless of the level of activity or volume of production for a given period of time or for a given range of output. Fixed costs per unit vary inversely with volume of production, since the more produced the less the portion of fixed cost attributed to a single unit of output. Examples include rent, salaries of permanent employees. Variable costs are costs whose total varies directly with volume of output. The cost per unit remains relatively constant with changes in volume of production or level of activity but the

total varies directly with output. Examples include direct material costs, direct labour cost, and power consumption costs. Semi-variable costs are costs that are partly fixed and partly vary with the volume of production or level of activity. Examples include post paid phone bills which are made up of a minimum charge and another part calculated from the calls made. By Controllability Under this criterion for classification are controllable and uncontrollable costs. Controllable costs are costs that can be influenced by the action of a specified member of an undertaking, i.e. they are at least partly or in full under managements control. Uncontrollable costs are costs that can not be influenced by the action of a specified member of an undertaking, i.e. they are not within the control of management, e.g. licensing costs. By Normality This mode of classification brings out normal and abnormal costs. Normal costs are costs that are normally incurred at a given level of output in the conditions in which that level of output is normally attained, and therefore form part of production cost. Abnormal Costs are costs that are not normally incurred at a given level of output in the conditions in which that level of output is normally attained, and are therefore not considered part of production cost and are charged to the costing profit and loss account. By Financial Accounting (Capital or Revenue) This classification groups costs into capital costs and revenue costs. Capital costs or capital expenditure are costs incurred in purchasing assets either to earn income or increasing the earning capacity of a business, e.g. cost of a processing machine in a manufacturing plant. Capital costs are not included when computing total cost. Revenue costs or revenue expenditure are expenditure arising from the maintenance of the earning capacity of the business e.g. cost of maintenance of an asset or cost of material used in production, labour costs, etc. These are included when computing total cost. By Time Under this classification are historical costs and predetermined costs Historical costs are costs which are only ascertained after being incurred and therefore can not be used for cost control purposes. Predetermined costs are cost estimates, computed before being incurred basing upon previous periods costs and factors affecting such costs. These can be used for cost planning and controlling purposes.

By Association with Product Under this classification are product costs and period costs Product costs are costs associated with units of output the ones absorbed by or attached to units produced. These include direct material costs, direct labour and factory overheads (either partly or fully depending on the type of costing system). These costs are carried forward to the next accounting period in the form of unsold finished stock. Period costs are costs associated with the period for which they are incurred, rather than the units of output or level of manufacturing activity. They are treated as expenses for the period for which they are incurred. Examples include administrative, selling and distribution costs. According to Planning and Control For purposes of the two important functions of management i.e. planning and control, costs are classified as budgeted costs and standard costs. Budgeted costs represent an estimate of expenditure for different phases or segments of business operations, such as administration, production, sales, research and development, for a period of time in future - which become managerial targets to be achieved. They are projections from financial accounting data adjusted to future trends. Standard costs are predetermined costs asked on a technical estimation of materials, labour and overhead for a selected period of time and for a prescribed set of working conditions. They are projections of cost accounts made on the basis of scientifically predetermining costs under a set of conditions. For Managerial decisions For purposes of managerial decision making, costs are classified as follows: Marginal Cost: The additional cost to be incurred if an additional unit is produced. Out of Pocket Cost: Portion of cost that gives rise to cash expenditure. Differential Cost: The change in cost due to change in the level of activity or pattern cost, it is called incremental costs and if it reduces the costs it is called detrimental cost. Sunk Cost/Historical Cost: A cost that has already been incurred and is therefore irrelevant to the decision making process e.g. depreciation of a fixed asset. Imputed/Notional Costs: These costs appear in cost accounts only e.g. notional rent charged for business premises owned by proprietor. Opportunity Cost: This is made up of the maximum possible alternative earnings that will be foregone if the productive capacity or services are put to some alternative use.

Replacement Cost: The cost at which there could be purchase of an asset or material identical to that which is being replaced or devalued thus it is the cost of replacement at current market price. Avoidable Cost: Cost which can be eliminated if a particular product or department with which they are directly related to is discontinued, e.g. salaries of clerks in the department. Other Types of Costs These are costs that are a class of their own as contrasted from the above classifications. Future Costs: Costs expected to be incurred at a later date. Programmed Costs: Costs that are incurred due to certain decisions that reflect the policies of top management, which result in periodical appropriation. Joint Cost: The cost of manufacturing joint products up to or prior to the split-off point. These can not be traced to a particular product. Conversation Cost: The cost of converting raw material into finished product. Discretionary Costs: Costs that do not have obvious relationship to the capacity of output or levels of activity, and are determined as part of the periodic planning process. Examples include advertising, research and development. Committed Cost: Fixed cost which results from the decisions of management in the prior period and is not subjected to managements control in the present on a short run basis e.g. plant & machinery depreciation, taxes insurance premium, rent charges.

Q3 What do you mean by EOQ analysis? State its advantages. Answer:

ECONOMIC ORDER QUANTITY ANALYSIS Economic Order Quantity analysis is the determination of the level of inventory to be held or maintained such that the total of ordering and carrying costs is minimized. This helps in deciding how much inventory to be added when inventory is replenished. EOQ analysis has the following advantages: a. b. c. d. e. Cuts off unnecessary carrying costs. Minimises the costs arising due to having too many orders. Minimises the total of carrying and ordering costs. Helps to decide schedules for order of raw-materials. Helps in having efficient production runs.

Q4. What is idle time? What are the causes for idle time? How should idle time wages be treated in cost accounts? Answer:

IDLE TIME Idle time is that time for which there is cost incurred in terms of labour and other costs but there is no production. It is that time for which the employer pays, but from which he obtains no production.
CAUSES FOR IDLE TIME

The following are the causes of idle time: a. Time used while moving from one job to another. b. Time for waiting for materials or instructions. c. Time for temporary absence from duty due to minor accidents, sickness, tea breaks, personal breaks, etc. d. Time taken in travelling from one department to another. e. Idle time due to breakdown of machinery. f. Time lost due to shortage of materials. g. Halts due to temporary absence of parts necessary for further processing. h. Strikes, lockout, etc. TREATMENT OF IDLE TIME WAGES IN COST ACCOUNTS Wages paid for normal idle time are treated as production overheads and are absorbed into cost of product by adopting an absorption rate.

Normal idle time of direct workers, such as time taken for machine setting, change over, or tool setting can be added to the product cost as direct wages by inflating the hourly rate of wages. Normal idle time hours are subtracted from the total working hours per annum to determine the effective working hours per annum. From this labour cost per hour is determined by dividing the total labour cost per annum by the effective working hours per annum. For example, considering daily total working hours, if idle time is normally 5 percent of total hours and wages paid for 8 hours ( 1 days working hours) is Rs. 760, then direct labour cost hourly rate will be Rs. 760 divided by 7.6 hours (i.e. 8 hours minus 0.4 hours, i.e. 5%) = Rs. 100 per hour. The cost of abnormal idle time should not be included in product cost but should be debited to costing profit and loss account direct as an extra ordinary cost. The rate determined above is multiplied by the abnormal idle time to determine loss due to idle time. This is loss is the idle time wages which should be charged to the costing profit and loss account. In case abnormal idle time is frequent, as in frequent power failure, such costs are incurred often and may be debited to idle time wages under factory overheads as a normal cost.

Q5. What is Marginal costing? Explain and how is it different from Absorption costing? Answer:

MARGINAL COSTING This is the determination of the cost of producing an additional unit of output which would not be incurred if the additional product was not produced, and also the ascertainment of profit that would be associated with the additional product. In marginal costing, fixed costs are not included in product costing and are entirely considered to be periodic costs. Direct/variable costs of products are assigned to the products and matched with revenues when revenues from the products are realized, while period costs are matched with revenues of the period in which the costs were incurred i.e. they are written off against profit. DIFFERENCE BETWEEN MARGINAL COSTING AND ABSORPTION COSTING In Absorption costing, fixed costs are also treated as part of product cost and inventory valuation. The manufacturing costs are thus fully absorbed into the finished goods. From the above descriptions of marginal and absorption costing, the following differences can be pointed out:

1. Treatment of costs: In absorption costing, both variable and fixed costs are charged to the cost of production, whereas in marginal costing, only variable costs are charged to the cost of production fixed costs are recovered from contribution. 2. Valuation of Stock: In absorption costing, stock of work in progress and finished goods are valued at both fixed and variable costs, whereas in marginal costing, stocks are valued at variable cost only. 3. Under/over absorption of overheads: In absorption costing, there is arbitrarily apportionment of fixed costs over the products such that there is under absorption or over absorption of such costs. 4. Profitability measurement: Under Absorption costing, relative profitability is judged by profit figures and managerial decisions are based upon this profit - which is the excess of sales value over total cost. In contrast, under marginal costing, relative profitability of products is based upon relative contribution and managerial decisions are based on this contribution - which is the excess of sales value over variable cost. Managerial decisions are thus guided by profit in absorption costing, and by contribution in marginal costing. 5. Application: Absorption costing is more suitable for decision making for long-term pricing policy, while marginal costing is more useful for short-term managerial decision making. 6. Emphasis: Absorption costing lays emphasis on production, while marginal costing stresses on sales and takes significance of production only in terms of sales volume and its variable costs.

SECTIONB:
Q1. What is Job costing? How is it different from Contract costing? Explain. Answer:

JOB COSTING Job Costing is a type of specific order costing where work is undertaken as an identifiable unit and manufactured according to customers specific requirements. DIFFERENCE BETWEEN JOB COSTING AND CONTRACT COSTING While job costing deals with an identifiable unit to be manufactured contract costing is a type specific order costing that is used for works constructional nature such as civil engineering works. In job costing, each job is a unit of work while in contract costing, the whole constructional work or project is the unit of cost and has its separate account. The following are the significant distinctive attributes of Job costing and Contract costing. 1. In contract costing, the work involved is big and therefore takes a long time to complete and heavy investment and expenses take place, whereas in the case of job costing the work involved is relatively small and takes lesser time and relatively little investment and expenses. In job costing, numerous jobs may be done at a time because they are all small jobs. In contract costing, relatively few contracts are undertaken at a time. Accumulation and allocation of costs is simpler in contract costing than in job costing because most of the costs are of direct nature whereas under job costing, direct allocation of cost to such an extent is not possible. As jobs are completed within a year, the question of incomplete jobs and estimating profit on them does not arise. In the case of contract costing, the problem of estimating profit on incomplete contracts at the end of the accounting year has to be tackled. Contract work is generally done at the customers work site outside the factory while in the case of a job, the work is carried on in the manufacturers premises. Contracts are generally related to construction and engineering work while jobs are usually related to processing or manufacturing works. In contract costing, each contract is a cost unit and its cost is ascertained accordingly. In the case of job costing, a batch, or an order, etc. is considered to be the cost unit.

2.

3.

4.

5.

6.

7.

8.

The cost of each contract is ascertained by charging to each contract the expenses attributable to it. Major expenses are of direct nature and only general and administrative overheads have to be apportioned. In the case of job costing, cost is initially allocated to respective cost centres and thereafter they are charged to respective jobs and direct and indirect costs are equally important. In the case of contract, profit is generally recognized on an annual basis as work progresses. In the case of a job, profit is recognized only when the job is fully complete. Prices of contracts are generally determined through bidding and are influenced by market forces, whereas in job costing the pricing is done on the basis of the companys pricing policy.

9.

10.

Q2. What is to be considered in developing an information and reporting system? Explain. Answer:

CONSIDERATIONS IN DEVELOPING AN INFORMATION

AND REPORTING SYSTEM

When developing an information and reporting system, the following considerations have to be taken into account: i. Hierarchy The various levels of management have different information needs. There are basically three distinguishable levels of management in an organisation (corporate, executive and operating/functional) and they have different information needs. The information and reporting system should be such that at successively higher levels of management the information reported should be broader in scope, but more summarized in nature. This is because these managerial levels have different responsibilities; the top corporate level is concerned with strategic decisions, the middle or executive management levels are concerned with control decisions and the functional/operational level of management is concerned with operations or activities in those operations. ii. Contents In development of information and reporting system, the contents must be considered in terms of comprehensiveness, exception, and materiality. In terms of comprehensiveness, the system should reflect both the financial and the nonfinancial (operating) performances so as to meet the overall information needs of management for easy monitoring and evaluation. In terms of exception, the reporting system must operate on the principle of exception which means that it should only highlight those matters which require managerial attention since the time available to managers is limited. In terms of materiality, the reporting system should provide information that is materially significant for the users depending on the responsibility level of the user.

iii. Frequency Reporting must be done timely, critically considering the frequency with respect to the period of time needed for management to take corrective action on the reports. iv. Format The reporting formats should be in such a way that: a. They highlight the actual achievement or performance in relation do the original plan or budgets for respective items. b. They facilitate quick and easy identification of primary causes of shortfalls. c. They indicate the nature of detailed reports that might be required for further analysis of the particular activity or operation resulting in the shortfall. v. Readability The size and unit of measurement adopted for reporting should be as to make the report readable. vi. Conciseness Reports are not to exceed two pages on length, whenever possible. Unduly long reports create information overload which diminishes effectiveness. vii. Significance of Unit of measure The unit of measure chosen for reporting must be intelligible to the reader, so as to enable him to reach proper conclusions and formulate appropriate courses of action.
Q3. What is Responsibility Accounting? Explain the responsibility centers. Answer:

RESPONSIBILITY ACCOUNTING Responsibility accounting is a management control system based on the principles of delegating and locating responsibility. Under responsibility accounting, managers are made responsible for the activities, and given decision making authority, within specific areas or segments referred to as departments, branches, etc. RESPONSIBILITY CENTRES A responsibility centre is an area of responsibility which is controlled by an individual. In responsibility accounting, responsibility centres are categorized into cost centres, profit centres and investment centres, for purposes of control. Cost Centre In a cost centre of responsibility, the accounting system records only the cost incurred by the centre while excluding the revenues earned. A cost centre thus measures financial

performance in terms of efficiency of operation in that centre, by quantity of inputs used in producing some given output. Actual inputs are compared with predetermined/budgeted levels to give efficiency. Profit Centre In a profit centre, both the inputs and outputs are measured in monetary terms. Accounting is done for both cost incurred and revenue collected. The difference between revenue and cost is termed profit, hence the name profit centre. Investment Centre These are centres of responsibility where assets employed are also measured and accounted for in terms of value besides inputs and outputs. Performance is measured not only in terms of profit but also in terms of the assets employed to generate profit.

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 20000 SHIRTS 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 3 PER 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

SECTION C (40 MCQs) Q1 The prime function of management accounting is to (a) Assist tax authorities (b) Assist the management in performing its functions effectively. (c) Interpret the financial data (d) Record business transactions Q2 P/v Ratio is an indicator of a) The rate at which goods are sold b) The volume of sales c) The volume of profit d) The rate of profit Q3 (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

Q4 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 Q5 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 Q6 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 Q7 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

Q8 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. Q9 Which of the following factors should not be taken into consideration for determining the basis for applying overheads to products? (a) Adequacy (b) Convenience (c) Time factor (d) Seasonal fluctuation of overhead costs (e) Manual or machine work. Q10 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. Q11 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 Q12 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. Q13 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. Q14 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. Q15 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. Q16 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. Q17 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. Q18 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. Q19 An accounting system that collects financial and operating data on the basis of underlying nature and extent to the cost drivers is (a) Direct costing (b) Target costing (c) Activity based costing (d) Variable costing

(e) Cycle-time costing. Q20 In allocating factory service department costs to producing departments, which of the following items would most likely 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. Q21 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. Q22 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. 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. 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 All of the following statements are correct except that a. activity-based costing has been widely adopted in service industries. b. the objective of installing ABC in service firms is different than it is in a manufacturing firm. c. A larger proportion of overhead costs are company-wide costs in service industries. d. the general approach to identifying activities and activity cost pools is the same in a service company as in a manufacturing company.

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. Activity-based costing has been found to be useful in each of the following service industries except a. banks. b. hospitals. c. telephone companies. d. ABC has been useful in any of these industries 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 than 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. Which of the following is a limitation of activity-based costing? a. More cost pools b. Less control over overhead costs c. Poorer management decisions d. Some arbitrary allocations continue