Mock Test Paper - Series II: April, 2024

Date of Paper: 16 April, 2024

Time of Paper: 10 A.M. to 1 P.M.

INTERMEDIATE: GROUP – II
PAPER – 4: COST AND MANAGEMENT ACCOUNTING
Suggested Answers/ Solution
PART I – Case Scenario based MCQs

Revised FixedCost + Expected Profit

1. i. A Revised Sale =
P / V Ratio

= {`115 + (20+10)} ÷ 45% = ` 322.22 crores

Fixed Cost
ii. D Revised Break – even Point =
P / V Ratio

= `115 Crore ÷ 45% = `255.56 Crore (Refer working notes)

iii. D Revised Margin of Safety = Revised Sales – Revised Break–
even Sales
= ` 322.22Crores – ` 255.56Crores = ` 66.66 Crores.
iv. C ` 20 Crore & `30 Crore respectively (Refer working note)
v. A Total cost in last year = `230 Crore
Total cost in coming year = Variable Cost + Fixed Cost
Revised sales × 55% + 115 Crore
= ` 322.22 Crore × 55% + ` 115 Crore = ` 292.22 Crore
Working Note
Present Sales and Profit
Total Sales = Break – even Sales + Margin of Safety
= ` 200 Crores + ` 50 Crores
= ` 250 Crores
P/V Ratio = 40%
Variable Cost = 60% of Sales
= ` 250 Crores × 60%
= ` 150 Crores
Fixed Cost = Break – even Sales × P/V Ratio
= ` 200 Crores × 40%
= ` 80 Crores
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 Total Cost = ` 150 Crores + ` 80 Crores
= ` 230 Crores
Profit = Total Sales – Total Cost
= ` 250 Crores – ` 230 Crores
= ` 20 Cores
Revised Sales (` in Crores)
Present Fixed Cost 80.00
Increase in Fixed Cost 20.00
Interest at 15 per cent on Additional Capital (`100Crores × 15%) 15.00
Total Revised Fixed Cost (in crore) 115.00
Assuming that the Present Selling Price is `100
Revised Selling Price will be (8% Less) 92.00
New Variable Cost (Reduced from 60% to 55%) of Sales 50.60
(` 92 × 55%)
Contribution (`92.00 – ` 50.60) 41.40
` 41.40
New P / V Ratio = x 100
` 92.00
= 45%
2. i. D Variable Overhead Cost = Standard Variable Overheads for
Production – Actual
Variance Variable Overheads
= ` 44,800 – ` 55,680
= ` 10,880 (A)
ii. C Fixed Overhead Volume = Absorbed Fixed Overheads –
Budgeted Fixed Overheads
Variance
= ` 87,200 – ` 1,09,000
=` 21,800 (A)
iii. A Fixed Overhead Expenditure = Budgeted Fixed Overheads –
Actual Fixed Overheads
Variance
= ` 10.9 × 10,000 units – ` 1,30,520
= ` 21,520 (A)
iv. B Calendar Variance = Possible Fixed Overheads – Budgeted
Fixed Overheads
= ` 1,03,550 – ` 1,09,000

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 = ` 5,450 (A)
v. A Fixed Overhead Cost Variance = Absorbed Fixed Overheads –
Actual Fixed Overheads
= ` 87,200 – ` 1,30,520
= ` 43,320 (A)
WORKING NOTE
Budgeted Fixed Overheads ` 10.00
Fixed Overheads =
Budgeted Output
= 12,00,000÷1,20,000
Fixed Overheads element in Semi-Variable Overheads ` 1,08,000
i.e. 60% of ` 1,80,000
Budgeted Fixed Overheads ` 0.90
Fixed Overheads =
Budgeted Output
` 1,08,000/120,000
Standard Rate of Absorption of Fixed Overheads per ` 10.90
unit (` 10.00 + ` 0.90)
Fixed Overheads Absorbed on 8,000 units @ `10.90 ` 87,200
Budgeted Variable Overheads ` 6,00,000
Add: Variable element in Semi-Variable Overheads 40% ` 72,000
of ` 1,80,000
Total Budgeted Variable Overheads ` 6,72,000
Standard Variable Cost per unit `5.60
Budgeted Variable Overheads
=
Budgeted Output
Standard Variable Overheads for 8,000 units @ `5.60 ` 44,800
Budgeted Annual Fixed Overheads (` 12,00,000 + 60% ` 13,08,000
of ` 1,80,000)
Possible Fixed Overheads ` 1,03,550
Budgeted Fixed Overheads
= x Actual Days
Budgeted Days
= 1,09,000/20 days ×19 days
Actual Fixed Overheads (` 1,19,000 + 60% of ` 19,200) ` 1,30,520
Actual Variable Overheads (` 48,000 + 40% of ` 19,200) ` 55,680
3. A (TT x 60) + [0.50 x (8-TT) x 60] = 420 TT* = 6 hours
Time saved = 8-6 = 2
* TT=Total Time Taken
4. C Ordering Cost = 4,00,000/320 = 1,250
Delivery Cost = 1,35,000/270 = 500
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 A = 1,250 x 100 + 500 x 70 = 1,60,000
B = 1,250 x 220 + 500 x 200 = 3,75,000
5. B Direct labour : ` 45,000
Direct expenses : ` 15,000
Direct materials consumed : ` 67,500
Prime Cost ` 1,27,500
6. A Abnormal gain units = 7600 - [8000 - 800] = 400 Abnormal gain
= [40,000 - (800 x 5)]/ 7200 units x 400 units = 2,000
7. B Total cost = ` 5,25,000
Tonnes Km carried = 6,55,000
Unit Cost = ` 525000/655000 Km = ` 0.801
PART-II– Descriptive Questions
1. (a) Process A Account
Dr Cr.
` `
To Materials 40,000 By Transfer to 1,20,000
Process B A/c
To Labour 40,000
To Overheads 16,000
96,000
To Profit (20% of transfer
price, i.e., 25% of cost) 24,000
1,20,000 1,20,000
Process B Account
Dr Cr.
` `
To Transferred from 1,20,000 By Transfer to Finished
Process A A/c Stock A/c 2,88,000
To Labour 56,000
To Overhead 40,000
2,16,000
To Profit (25% of 72,000
transfer price i.e.,
33.33% of cost)
2,88,000 2,88,000

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 Statement of Total Profit
`
Profit from Process A 24,000
Profit from Process B 72,000
Profit on Sales (` 4,00,000 – ` 2,88,000) 1,12,000
Total Profit 2,08,000
(b) (i) Calculation of Economic Order Quantity
2  Annual Demand  OrderingCost
EOQ =
Carrying cost per unit per annum

2 × 12,000 units × `1,200

= = 371 units (Approx)
` 1,740 × 0.12

(ii) Evaluation of Profitability of Different Options of Order Quantity

(a) When EOQ is ordered
(`)
Purchase Cost (12,000 units  ` 1,740) 2,08,80,000.00

Ordering Cost* [(12,000 units ÷ 371 units) i.e. 33 39,600.00

 ` 1,200]
Carrying Cost** (371 units  ` 1,740  ½ 38,732.40
 12/100)
Total Cost 2,09,58,332.40
(b) When Quantity Discount of 5% is offered.
(`)
Purchase Cost (12,000 units  ` 1,740 × 1,98,36,000.00
0.95)
Ordering Cost* [(12,000 units ÷ 6,000 2,400.00
units)  `1,200]
Carrying Cost** (6,000 units  `1,653  ½ 5,95,080.00
 12/100)
Total Cost 2,04,33,480.00
Advise – The total cost of inventory is lower if quantity discount offer
is accepted. Hence, the company is advised to accept the quantity
discount.
AnnualDemand
* Ordering Cost = × Cost of placing an order
Order Quantity

Cost per unit×Quantity ordered×CarryingCost

** Carrying Cost =
2

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 (c) Let T hours be the total time worked in hours by the skilled worker
(machine-man Sam); ` 30/- is the rate per hour; standard time is 4 hours
per unit and effective hourly earning rate is ` 37.50 then
Earning = Hours worked × Rate per hour
Time saved
+ × Time taken × Rate per hour
Time allowed
(Under Rowan incentive plan)
(4 - T)
` 37.5 T = (T × ` 30) + × T × ` 30
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` 37.5 = ` 30 + (4 – T) × ` 7.5
Or ` 7.5 T = ` 22.5
Or T= 3 hours
Total earnings and effective hourly rate of skilled worker (machine
man Sam) under Halsey Incentive Scheme (50%)
Total earnings = (Hours worked × Rate per hour) + (½ Time saved ×
Rate per hour)
(under 50% Halsey Incentive Scheme)
= (3 hours × ` 30) + (½ × 1 hour × ` 30)
Total earnings ` 105
Effective hourly rate = = = ` 35
Hours taken 3 hours

2. (a) Computation of Machine Hour Rate

Basis of Total Machines

apportionme P Q R
nt (`) (`) (`) (`)
(A) Standing
Charges
Insurance Depreciation
8,000 3,000 3,000 2,000
Basis
Indirect Direct
24,000 6,000 9,000 9,000
Labour Labour
Building Floor Space
Maintenance 20,000 8,000 8,000 4,000
expenses
Rent and Floor Space
1,20,000 48,000 48,000 24,000
Rates
Salary of Equal
2,40,000 80,000 80,000 80,000
foreman
Salary of Equal
60,000 20,000 20,000 20,000
attendant

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 Total
standing 4,72,000 1,65,000 1,68,000 1,39,000
charges
Hourly rate
for standing 90.36 92.00 76.12
charges
(B) Machine
Expenses:
Depreciation Direct 20,000 7,500 7,500 5,000
Spare parts Final
13,225 4,600 5,750 2,875
estimates
Power K.W. rating 40,000 15,000 10,000 15,000
Consumable Direct
9,000 3,600 2,700 2,700
Stores
Total
Machine 82,225 30,700 25,950 25,575
expenses
Hourly Rate
for Machine 16.81 14.21 14.01
expenses
Total (A + B) 5,54,225 1,95,700 1,93,950 1,64,575
Machine
107.17 106.22 90.13
Hour rate

Working Notes:
(i) Calculation of effective working hours:
No. of holidays 52 (Sundays) + 14 (other holidays) = 66
Saturday (52 – 2) = 50
No. of days (Work full time) = 365 – 66 – 50 = 249
Hours
Full days work 249  8 = 1,992
Half days work 50  4 = 200
2,192
Hours
Effective capacity 85% of 2,192 1,863 (Rounded off)
Less: Normal loss of time (Breakdown) 2% 37 (Rounded off)
Effective running hour 1,826
(ii) Amount of spare parts is calculated as under:
P Q R
` ` `
Preliminary estimates 4,000 4,000 2,000
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 Add: Increase in price @ 15% 600 600 300
4,600 4,600 2,300
Add: Increase in consumption − 1,150 575
@ 25%
Estimated cost 4,600 5,750 2,875
(iii) Amount of Indirect Labour is calculated as under:
`
Preliminary estimates 20,000
Add: Increase in wages @ 20% 4,000
24,000

(iv) Amount of Consumables Stores is calculated as under:

`
Preliminary estimates 10,000
Less: Decrease in consumption @ 10% 1,000
9,000

(v) Interest on capital outlay is a financial matter and, therefore it has

been excluded from the cost accounts.
(b) Economic batch quantity in Batch Costing: In batch costing the most
important problem is the determination of ‘Economic Batch Quantity’.
The determination of economic batch quantity involves two types of
costs viz, (i) set up cost and (ii) carrying cost. With the increase in the
batch size, there is an increase in the carrying cost but the set up cost
per unit of product is reduced. This situation is reversed when the batch
size is reduced. Thus there is one particular batch size for which both
set up and carrying costs are minimum. This size of a batch is known as
economic or optimum batch quantity.
Economic batch quantity can be determined with the help of table, graph
or mathematical formula. The mathematical formula usually used for its
determination is as follows:
2DS
E.B.Q =
C
Where, D= Annual demand for the product
S = Setting up cost per batch
C = Carrying cost per unit of production per annum
3. (a) (a) Flexible Budget for different levels
` ` ` ` `
No. of Students 60 90 120 150 180
VARIABLE COST
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 Breakfast 3000 4500 6000 7500 9000
Lunch 6000 9000 12000 15000 18000
Tea 600 900 1200 1500 1800
Entrance fee 1200 1800 2400 3000 3600
Sub-total (A) 10800 16200 21600 27000 32400
Variable cost/unit 180 180 180 180 180
SEMI-VARIABLE
COST
Bus rent 13000 13000 19500 19500 26000
Special permit fee 1000 1000 1500 1500 2000
Allowance for
2000 2000 3000 3000 4000
teachers
Sub-total (B) 16000 16000 24000 24000 32000
FIXED COST
Block entrance fee 2500 2500 2500 2500 2500
Prize to students 500 500 500 500 500
Sub total (C) 3000 3000 3000 3000 3000
Total cost (A + B +
29,800 35,200 48,600 54,000 67,400
C)

(b) Cost per student 496.67 391.11 405.00 360.00 374.44

(c) Break-even level `

Collection per students 400
Less Variable Cost 180
Contribution 220
Since semi-fixed costs relate to a block of 50 students, the fixed and
semi-variable cost for three level will be:
Level of Student 51–100 101–150 151-200
Fixed + Semi–variable cost (`) 19,000 27,000 35,000
Contribution per unit (`) 220 220 220
Break Even level of students 86 123 159
(b) (i) Statement of cost allocation to each product from each activity
Product
A (`) B (`) C (`) Total (`)
Power 10,00,000 20,00,000 15,00,000 45,00,000
(Refer to
working note)

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 (10,000 (20,000 (15,000
kWh × kWh kWh
` 100) × ` 100) × ` 100)
Quality 31,50,000 22,50,000 27,00,000 81,00,000
Inspections (3,500 (2,500 (3,000
(Refer to inspections inspections inspections
working note) × ` 900) × ` 900) × ` 900)

Working Note:
Rate per unit of cost driver:
Power : (` 60,00,000 ÷ 60,000 kWh) = `100/kWh
Quality Inspection: (` 90,00,000 ÷ 10,000 inspections) = `900 per
inspection
(ii) Calculation of cost of unused capacity for each activity:
(`)
Power 15,00,000
(`60,00,000 – `45,00,000)
Quality Inspections 9,00,000
(`90,00,000 – `81,00,000)
Total cost of unused capacity 24,00,000
4. (a) Job Cost Sheet for the period…..
`
Direct materials 2,13,000
Direct wages:
Machine shop 63,000
Assembly shop 48,000 1,11,000
Prime Cost 3,24,000
Works overhead:
Machine shop 88,200
Assembly shop 51,800 1,40,000
Work Cost 4,64,000
Administration overhead 92,800
Cost of Production 5,56,800
Selling overhead 81,000
Distribution overhead 62,100
Total Cost 6,99,900

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 Schedule of Overhead Rate
(i) Works Overhead : Hourly rate = (Overhead amount ÷ Hours)
Machine shop = (88,200 ÷ 12,000) = ` 7.35 per hour
Assembly shop = (51,800 ÷ 10,000) = ` 5.18 per hour
(ii) Administrative Overhead as a % of works cost
92,800
= 100 = 20%
4,64,000
(iii) Selling and distribution overhead as % of works cost
81,000 + 62,100
= 100 = 30.84%
4,64,000
Labour hour rates are calculated as under:
Machine shop = ` 63,000 ÷ 12,000 hrs. = ` 5.25
Assembly shop = ` 48,000÷10,000 hrs. = ` 4.80
(b) Cost Estimate for Job
Direct Materials ` `
(i) 25 kg @ ` 17.20 per kg 430
(ii) 15 kg @ ` 21 per kg 315 745.00
Direct Labour
Machine shop (30 hrs. @ ` 5.25) 157.50
Assembly shop (42 hrs. @ ` 4.80) 201.60 359.10
Prime Cost 1104.10
Works Overhead
Machine shop (30 hours @ ` 7.35) 220.50
Assembly shop (42 hours @ ` 5.18) 217.56 438.06
Works Cost 1542.16
Administration overhead (20% of works cost) 308.43
Cost of Production 1850.59
Selling and distribution cost (30.84% of works
475.60
cost)
Total Estimated Cost 2326.19
(b) Detection of slow moving and non-moving item of stores:
The existence of slow moving and non-moving item of stores can be
detected in the following ways.
(i) By preparing and perusing periodic reports showing the status of
different items or stores.
(ii) By calculating the inventory turnover period of various items in
terms of number of days/ months of consumption.

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 (iii) By computing inventory turnover ratio periodically, relating to the
issues as a percentage of average stock held.
(iv) By implementing the use of a well designed information system.
Necessary steps to reduce stock of slow moving and non-moving
item of stores:
(i) Proper procedure and guidelines should be laid down for the
disposal of non-moving items, before they further deteriorates in
value.
(ii) Diversify production to use up such materials.
(iii) Use these materials as substitute, in place of other materials.
(c) When the Cost and Financial Accounts are integrated - there is no need
to have a separate reconciliation statement between the two sets of
accounts. Integration means that the same set of accounts fulfil the
requirement of both i.e., Cost and Financial Accounts.
5. (a) Cost sheet for the year ended 31 st March, 2023.
Units produced - 14,000 units
Units sold - 14,153 units
Particulars Amount (`)
Raw materials purchased 43,50,000
Add: Freight Inward 1,20,000
Add: Opening value of raw materials 2,28,000
Less: Closing value of raw materials (3,05,000)
43,93,000
Less: Sale of scrap of material (7,000)
Materials consumed 43,86,000
Direct Wages (12,56,000 + 1,50,000) 14,06,000
Prime Cost 57,92,000
Factory overheads (20% of Prime Cost) 11,58,400
Add: Opening value of W-I-P 1,92,500
Less: Closing value of W-I-P (1,40,700)
Factory Cost 70,02,200
Add: Administrative overheads 1,73,000
Cost of Production 71,75,200
Add: Value of opening finished stock 6,08,500
Less: Value of closing finished stock
[` 500(71,75,200/14,350) × 767] (3,83,500)
(1,320 + 14,350 – 14,903 = 767 units)
Cost of Goods Sold 74,00,200
Distribution expenses (`16 × 14,903 units) 2,38,448
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 Cost of Sales 76,38,648
Profit (Balancing figure) 9,90,189
Sales (` 579 × 14,903 units) 86,28,837
(b) Workings:
Total occupancy = Occupancy in normal season + Occupancy in off-
season
= (20 rooms × 80% × 8 months × 30 days) + (20 rooms × 50% × 4 months
× 30 days)
= 3,840 + 1,200 = 5,040 room-days
Total Cost = Variable cost + Fixed cost
= (` 500 × 5,040 room-days) + ` 53,25,000
= ` 25,20,000 + ` 53,25,000
= 78,45,000
(a) Calculation of tariff rate per room
Tariff per room per day = (Total cost + 25% Margin on total cost) ÷
Total occupancy
= (` 78,45,000 + 19,61,250) ÷ 5,040 = ` 1,945.68
(b) Calculation of break-even occupancy
Contribution per day = Tariff – Variable cost
= ` 1,945.68 – 500 = ` 1445.68
Break-even occupancy = ` 53,25,000 ÷ 1445.68
= 3683
Occupancy in normal season = Break-even occupancy – Occupancy
in off-season
= 3683 – (20 rooms × 50% × 4 months × 30 days)
= 3683 – 1200 = 2483 room-days
In Percentage = 2483 ÷ 4800 = 51.73%
6. (a) When the cost and financial accounts are kept separately, It is imperative
that these should be reconciled, otherwise the cost accounts would not
be reliable. The reconciliation of two set of accounts can be made, if both
the sets contain sufficient detail as would enable the causes of
differences to be located. It is therefore, important that in the financial
accounts, the expenses should be analysed in the same way as in cost
accounts. It is important to know the causes which generally give rise to
differences in the costs & financial accounts. These are:
(i) Items included in financial accounts but not in cost accounts
➢ Income-tax
➢ Transfer to reserve

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 ➢ Dividends paid
➢ Goodwill / preliminary expenses written off
➢ Pure financial items
➢ Interest, dividends
➢ Losses on sale of investments
➢ Expenses of Co’s share transfer office
➢ Damages & penalties
(ii) Items included in cost accounts but not in financial accounts
➢ Opportunity cost of capital
➢ Notional rent
(iii) Under / Over absorption of expenses in cost accounts
(iv) Different bases of inventory valuation
Motivation for reconciliation is:
➢ To ensure reliability of cost data
➢ To ensure ascertainment of correct product cost
➢ To ensure correct decision making by the management based on
Cost & Financial data
➢ To report fruitful financial / cost data.
(b) The essential features, which a good Cost Accounting System should
possess, are as follows:
(a) Informative and Simple: Cost Accounting System should be tailor-
made, practical, simple and capable of meeting the requirements
of a business concern. The system of costing should not sacrifice
the utility by introducing meticulous and unnecessary details.
(b) Accuracy: The data to be used by the Cost Accounting System
should be accurate; otherwise it may distort the output of the
system and a wrong decision may be taken.
(c) Support from Management and subordinates: Necessary
cooperation and participation of executives from various
departments of the concern is essential for developing a good
system of Cost Accounting.
(d) Cost-Benefit: The Cost of installing and operating the system
should justify the results.
(e) Procedure: A carefully phased programme should be prepared by
using network analysis for the introduction of the system.
(f) Trust: Management should have faith in the Costing System and
should also provide a helping hand for its development and
success.

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(c) The following steps are useful for minimizing labour turnover:
(a) Exit interview: An interview to be arranged with each outgoing
employee to ascertain the reasons of his leaving the organization.
(b) Job analysis and evaluation: to ascertain the requirement of each
job.
(c) Organization should make use of a scientific system of recruitment,
placement and promotion for employees.
(d) Organization should create healthy atmosphere, providing
education, medical and housing facilities for workers.
(e) Committee for settling workers grievances.
OR
(c) CVP Analysis:-Assumptions
(i) Changes in the levels of revenues and costs arise only because of
changes in the number of products (or service) units produced and
sold.
(ii) Total cost can be separated into two components: Fixed and
variable
(iii) Graphically, the behaviour of total revenues and total cost are linear
in relation to output level within a relevant range.
(iv) Selling price, variable cost per unit and total fixed costs are known
and constant.
(v) All revenues and costs can be added, sub traded and compared
without taking into account the time value of money.

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