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1. In the event of conflict between the International Accounting Standards and the local
standards, which
among the following will prevail?
(a) The rule of the Company Law will prevail
(b) The rule of the Securities Exchange Board of India prevails (c)
The rule of the International Accounting Standards prevails (d)
The rule of local standards, laws and regulations shall prevail (e)
The rule of the Central Government will prevail.
2. Under which of the following conditions is a balance sheet said to be window dressed?
(a) When income is accounted for on accrual basis
(b) When prepaid expenses are considered and accounted for in the preparation of final
accounts
(c) When an adequate provision for expenses and potential losses is not made
(d) When a provision for the probable loss is made in advance of its occurrence
(e) When the assets and liabilities in the Balance Sheet are reflected at Historical cost.
3. The transactions pertaining to purchase of fixed assets and investments on credit, are
recorded in
(a) Simple cash book

(b) Double cash book

(c) Purchase book

(d) Journal proper

(e) Bills payable book.

4. An asset, the value of which depends on the earning capacity of the business concern is
(a) Investments

(b) Debtors

(c) Fixed asset

(d) Goodwill

(e) Cash at Bank.

5. Rights shares are the shares
(a) Issued by a newly formed company
(b) Legally issued to the public at large
(c) Offered to the existing equity shareholders
(d) That have a right of redemption
(e) That have a right to cumulative dividends.

6. The maximum amount beyond which a company is not allowed to raise funds by issue of
shares is
(a) Issued capital

(b) Reserve capital

(c) Authorized capital

(d) Subscribed capital

(e) Paid-up capital.

7. Which of the following methods of valuation of goodwill uses the present value factor?
(a) Capitalization of average profits methods
(b) Capitalization of super profits method
(c) Annuity method of super profits
(d) Number of years purchase of average profits method
(e) Super profits method.
8. The process of converting cost of intangible assets to expense is called
(a) Depreciation

(b) Amortization

(c) Depletion

(d) Deterioration

(e) None of the above.

9. Which of the following methods is/are followed for amortization of intangible assets?
(a) Straight-line method

(b) Written down method

(c) Sum of the years digits method

(d) Annuity method

(e) Both (a) and (b) above.

10. When depreciation appears in the Trial balance, in which of the following statements will it
be shown?
(a) Trading Account

(b) Profit and loss account

(c) Profit and loss appropriation account

(d) Balance Sheet

(e) Notes to accounts.

11.The method of inventory valuation which enables the firm to even out the erratic movements
in the purchase prices to the best extent possible, is
(a) Last in first out method

(b) First-in-first out method

(c) High-in-low out method

(d) Simple average method

(e) Weighted Average Method.

12. Certain fundamental accounting assumptions underlie the preparation and presentation of
financial statements and hence are not specifically stated because their acceptance and use are
assumed. Which among the following is not a fundamental accounting assumption?
(a) Going concern concept

(b) Consistency

(c) Accrual

(d) Conservatism

(e) Both (a) and (b) above.

13.The discount allowed on re-issue of forfeited shares is debited to
(a) General reserve account

(b) Capital reserve account

(c) Revaluation reserve account

(d) Capital redemption reserve account

(e) Forfeited shares account.

14. Which of the following cannot be utilized for the redemption of Preference Shares of a
company?
(a) Proceeds of fresh issue of shares
(b) Securities premium on fresh issue of shares
(c) General reserve
(d) Profit and loss account
(e) Dividend equalization reserve.
15. Which of the following data is essential for calculation of value of an equity share under the
intrinsic
value method?
(a) Normal rate of return

(b) Expected rate of return

(c) Market value per share

(d) Dividend per share

(e) Net equity.

16.The cum-interest/cum-dividend quotation implies
(a) The purchaser pays a higher price than the normal price
(b) The right of receiving accrued interest/dividend is retained by the seller
(c) The seller charges a higher price
(d) The right of receiving accrued interest/dividend is passed on to the purchaser
(e) (a), (c) and (d) above.

17.The cumulative preference shareholders enjoy preferential treatment over equity

shareholders with regard to
(a) Priority in payment of dividend

(b) Return of capital

(c) Voting rights

(d) Cumulation of dividends

(e) (a), (b) and (d) above.

18.The accounting based on Real capital maintenance concept (which considers the general
price rise) is called the
(a) Current purchasing power Accounting

(b) Current Cost Accounting

(c) Cost accounting

(d) Financial Accounting

(e) Managerial Accounting.

19. Share allotment denotes a stage subsequent to
(a) Share Application

(b) Share forfeiture

(c) Share redemption

(d) Share First call

(e) Share second call.

20. The accounting entry involved, for issue of shares to promoters for the services rendered by
them is
(a) Debit goodwill account and credit share capital account
(b) Debit cash account and credit share capital account
(c) Debit promoters account and credit share capital account
(d) Debit share capital account and credit cash account
(e) Debit goodwill account and credit calls in arrear account.
21. Premium on redemption of debentures account is
(a) A real account
(b) A nominal account
(c) A personal account
(d) An asset
(e) A capital reserve.

22. Which of the following statements is true?

(a) Going concern concept assumes that business will be carried on for a definite period
(b) Time period concept facilitates the comparison of the results of one accounting period of a
business with that in the past
(c) The capital losses need not be deducted to ascertain net income
(d) Provision for bad and doubtful debts is created in recognition of conservatism concept
(e) Materiality concept states that all business transactions are to be recorded how so ever
insignificant they may be.
23. Which of the following accounts appear(s) in the Balance Sheet of a business?
I. Stock at the end of the financial year.
II. Stock at the beginning of the financial year.
III. Drawings.
IV. Prepaid Rent.
V. Interest received but not yet earned.
(a) Only (I) above
(b) Only (III) above
(c) Both (I) and (III) above
(d) (I), (III), (IV) and (V) above
(e) All (I), (II), (III), (IV) and (V) above.
24. Underwriting commission will not be paid on the amount of shares taken by
(a) Promoters

(b) Directors

(c)Employees

(d) Directors friends

(e) All of the above.

25. The portion of the acquisition cost of the asset yet to be allocated is known as
(a) Written down value

(b) Accumulated value

(c) Realisable value

(d) Salvage value

(e) Residual value.

26. Which of the following items is/are covered under Accounting Standard-2 with regard to
accounting for inventory?
I. Financial instruments held as stock-in-trade.
II. Work in progress arising under construction contracts.
III. Work in progress of service providers.
IV. Work in progress of a manufacturing industry.
(a) Only (I) above

(b) Only (IV) above

(c) Both (I) and (II) above

(d) Both (III) and (IV) above

(e) (II), (III) and (IV) above.

27.Which of the following statements is false?
(a) Bonus issue can be made out of share premium account
(b) Bonus issue shall not be made within 12 months of any public issue
(c) Bonus issue shall not be made in lieu of dividend
(d) Reserves created out of revaluation of fixed assets can be used for bonus issue
(e) Bonus shares should not be issued unless partly paid shares are made fully paid.
28. The money received on reissue of forfeited shares is inadvertently credited to Capital
Suspense account. The adjustment entry involved in reversing the capital suspense account is
(a) Debit to Capital Suspense account

(b) Credit to Share Capital account

(c) Debit to Share forfeiture account

(d) Both (a) and (b) above

(e) (a), (b) and (c) above.

29. Which of the following assets is/are to be valued at the lower of cost and net realizable
value?
(a) Goodwill

(b) Inventories

(c) Investments

(d) Sundry debtors

(e) Fixed Assets.

30. Which of the following statements is true?
(a) Bank charges increase debit balance shown as per bank column of the cash book
(b) Bank charges increase debit balance as per bank pass book
(c) A cash sale of a non-trading asset is recorded in the journal proper
(d) Cash discount allowed by the business will appear on the debit side of the debtors account
(e) Bank reconciliation statement is prepared by a bank.

31. The balances of which of the following accounts do not disappear, once they are
debited/credited to Trading Account.
(a) Sales

(b) Purchases

(c) Inward returns

(d) Closing stock

(e) Outward returns.

32. On issue of shares, the application money should not be less than
(a) 2.5% of the nominal value of shares
(b) 2.5% of the issue price of shares
(c) 5.0% of the nominal value of shares
(d) 5.0% of the issue price of shares
(e) 10.0% of the nominal value of shares.
33. Which of the following methods is not a practical way of realizing revenue?
(a) Delivery method
(b) Percentage-of-completion method
(c) Production method
(d) Installment method
(e) Moving average method.
34. According to the SEBI guidelines, before the redemption of debentures having a maturity of
more than
18 months, the debenture redemption reserve created, should be at least equivalent to
(a) 10% of the debenture issue (b) 25% of the debenture issue
(c) 30% of the debenture issue (d) 50% of the debenture issue
(e) 75% of the debenture issue.
35. The periodical total of a purchase returns book is recorded to the
(a) Debit side of the purchases account
(b) Debit side of the purchases returns account
(c) Credit side of the purchases account
(d) Credit side of the purchases returns account
(e) Credit side of creditors account.

36. In Retail Inventory Method, if the markup selling price is decreased but not below the
original selling price, it is known as
(a) Markup cancellation

(b) Markdown

(c) Markdown cancellation

(d) Net markup

(e) Net markdown.

37. According to which of the following accounting concepts, are the shareholders treated as
creditors for the amount they pay on shares?
(a) Cost concept

(b) Duality concept

(c) Going concern concept

(d) Money measurement concept

(e) Business entity concept.

38. The profit or loss on own debentures is to be accounted for at the time of
(a) Purchase of own debentures (b)
Subsequent interest payment (c)
Cancellation of own debentures (d)
Original issue of debentures
(e) Liquidation of the company.
39.The statement which helps an accountant to assess the arithmetical accuracy of the
accounting process is the
(a) Balance sheet
(b) Profit and loss account
(c) Cash book
(d) Trial balance
(e) Bank reconciliation statement.
40.Which of the following is a liability of a firm?
(a) Debit balance of discount column of cash book
(b) Credit balance of bank pass book
(c) Debit balance of bank column of cash book
(d) Debit balance of cash column of cash book
(e) Credit balance of bank column of cash book.

41. Following information pertains to Nilgiri Limited for the year 2005-06: Opening balance of
provision for bad and doubtful debts account Rs. 18,000 Bad debts during the year Rs. 15,000
Closing balance of sundry debtors Rs.3,30,000 If the company has the practice of maintaining
provision at the rate of 5% on sundry debtors, the amount to be debited to profit and loss
account for the period ended March 31, 2006, was
(a) Rs.6,500

(b) Rs.13,500

(c) Rs.10,720

(d) Rs.20,800

(e) Rs.10,680.
42. Nalli Ltd. proposed to issue 10,000 equity shares of Rs.100 each at a premium of 150%. The
minimum amount of application money to be collected per share is
(a) Rs.5.00

(b) Rs.7.50

(c) Rs.15.00

(d) Rs.10.00

(e) Rs.12.50.
43. While preparing the final accounts of the company, the accountant of Nisha Limited located
the following errors:
The Returns Inward book was undercast by Rs.1,377.
A purchase of Rs.1,252 was posted to the debit of the suppliers account as Rs.125.
Wages of Rs.500 paid for installation of a new machine was debited to wages account.
Sales returns of Rs.877 were taken into stock but no entry in respect of the transaction was
passed in the books. The difference in Trial Balance of the company on account of the above
errors is
(a) Rs.Nil

(b) Rs.877

(c) Rs.1,377

(d) Rs.255

(e) Rs.4,131.
44. Consider the following data pertaining to Nupur Limited for the period 2005-2006:
Particulars Rs. Opening inventory 15,00,000 Purchases during the year 55,00,000 Sales during
the year 54,00,000 A physical inventory taken on March 31, 2006 showed an ending inventory of
Rs.25,75,000. Companys gross profit on sales was constant at 25% through out the year. The
management of the company suspects pilferage of inventory. The estimated cost of missing
inventory on the last day of the financial year was

(a) Rs.2,00,000

(b) Rs.3,75,000

(c) Rs.1,75,000

(d) Rs.2,75,000

(e) Rs.3,25,000.
45. On April 01, 2005 the balance of 12% Debentures of Rs.100 each of Neeti Ltd. was
Rs.5,00,000. The company reserves the right to redeem the debentures in any year by purchase
in the open market. Interest on debentures is payable on September 30, and March 31, every
year. On July 01, 2005, the company purchased 2,000 of its own 12% debentures as investment
at Rs.99 cum-interest. The company cancelled its own 2,000 debentures on March 31, 2006.
The amount of profit/loss on cancellation of own debentures on March 31, 2006 was
(a) Rs.6,000 (profit)

(b) Rs.4,000 (loss)

(c) Rs.4,000 (profit)

(d) Rs.3,000 (loss)

(e) Rs.8,000 (profit).

46. Nikhilesh Limited has an account with Century Bank Ltd. Its balance as shown in the Cash
book on December 31, 2005 stood at Rs.2,15,270 (Credit). The above balances were not agreeing
with the balance shown by the bank statement. On scrutiny, the following discrepancies were
noticed: Outstation cheques for Rs.78,000 deposited in the bank on December 22, 2005 were
not collected by the bank as on December 31, 2005.
ii. Bank charges amounting to Rs.1,500, and Bank interest amounting to Rs.5,500 were not
recorded in the cash book.
iii. Cheques amounting to Rs.15,000 issued were not presented for payment as on December 31,
2005. iv. A deposit of Rs.22,500 in Career Bank was wrongly entered in Century Bank column in
the cash book. The bank balance as per pass book as on December 31, 2005 was
(a) Rs.2,62,770 (debit)
(b) Rs.3,07,770 (credit)
(c) Rs.2,78,770 (debit)
(d) Rs.3,07,770 (debit)
(e) Rs.2,62,770 (credit).
47. On April 01, 2005, Narendra Limited showed a balance of Rs.15,600 to the credit of Provision
for bad and doubtful debts. On March 31, 2006 the Sundry Debtors showed a balance of
Rs.2,50,400. Out of the total debtors, the status of the following debtors is as follows:
Mita Rs.8,000 - identified as bad debt and is to be written off Gita Rs.7,500 - expected to realize
only 80% Sita Rs.8,000 - expected to realize only 60% Rita Rs.7,500 - filed insolvency petition

and the recovery chances are remote. All other debts as on the date of finalisation of accounts
are estimated to be good. The company maintains a suitable provision for doubtful debts. The
amount debited to the profit and loss account in respect of provision for bad and doubtful debts
for the year ended March 31, 2006 was
(a) Rs.14,300
(b) Rs.8,700
(c) Rs.4,600
(d) Rs.6,400
(e) Rs.4,900.
48. The following is the balance sheet of Nagendra Ltd. as on March 31, 2006: Liabilities Rs.
Assets Rs. Equity shares of Rs.10 each fully paid up 10,00,000 Sundry assets 19,50,000
12% Redeemable preference shares of Rs.100 each fully paid up 10,00,000 Investments
4,50,000 General Reserve 4,00,000 Cash at bank 4,00,000 Profit & Loss account 2,50,000
Share premium 25,000 Sundry creditors 1,25,000 28,00,000 28,00,000 The Board of Directors of
the company decided to redeem the preference shares at a premium of 10%. In order to
facilitate the redemption, the Board has taken the following decisions:
To sell the investments for Rs.4,20,000.
To issue sufficient equity shares at a premium of Rs.2 per share to raise the balance need of
funds.
To maintain minimum bank balance of Rs.50,000.
The Board of Directors initiated the above course of action during the month of April, 2006 and
redeemed all the preference shares.
The amount to be transferred to Capital Redemption Reserve is
(a) Rs.70,000
(b) Rs.5,25,000
(c) Rs.1,25,000
(d) Rs.8,00,000
(e) Rs.7,25,000.
49. Consider the following information pertaining to Niharika Ltd. for the year 2005-2006:
Particulars 1st April 2005 31st March 2006 Inventory Rs. 52,200 Rs. 65,800
Sundry debtors Rs.1,12,000 Rs. 60,000 Sundry creditors Rs. 50,000 Rs. 48,000
Total credit sales made during the year was Rs.9,75,000. The amount of discount allowed to the
sundry debtors during the period was Rs.8,400. The cost of goods sold of the company was 80%

of the sales. Cash collected from the sundry debtors during the year was
(a) Rs.10,18,600
(b) Rs.10,87,000
(c) Rs.10,27,000
(d) Rs.9,75,000
(e) Rs.9,23,000.
50. Neeta Ltd. purchased furniture for Rs.6,00,000 two years ago. The current book value of the
furniture is Rs.3,84,000. If the company charges depreciation on furniture under written down
value method, the rate of depreciation charged was
(a) 35%

(b) 30%

(c) 25%

(d) 20%

(e) 15%.
51. Nitish Ltd. invited applications for 1,00,000 equity shares of Rs.10 each at a premium of Rs.2
per share. The entire issue was underwritten by three underwriters in the following
percentages: Ram 30% Sham 40% Graham 30% The details of marked and unmarked
applications received are: Marked applications of Ram 20,000 shares
Sham 32,000 shares
Graham 28,000 shares
Unmarked applications 16,000 shares
The final liability of Sham in terms of number of shares is
(a) Nil

(b) 9,600

(c) 3,200

(d) 16,000

(e) 8,000.
52. Consider the following data pertaining to Nikki Ltd. for the month of December 2005:
Particulars As on December 01, 2005 (Rs.) As on December 31, 2005 (Rs.) Stock 5,80,000
1,60,000 Sundry creditors 1,50,000 60,000. The company makes all purchases on credit. During
the month of December 2005, the company paid a sum of Rs.4,50,000 to the suppliers. The goods
are sold at 25% above the cost. The sales for the month of December 2005 were
(a) Rs.7,80,000

(b) Rs.9,75,000

(c) Rs.4,90,000

(d) Rs.3,60,000

(e) Rs.3,30,000.

53. Niladri Ltd. purchased a machinery on April 01, 2003 for Rs.2,40,000. It was estimated that
the machinery will have a useful life of 5 years after which it will have no salvage value. If the
company follows sum-of-the-years-digits method of depreciation, the amount of depreciation
charged during the year 2005-2006 was
(a) Rs.32,000

(b) Rs.48,000

(c) Rs.30,000

(d) Rs.16,000

(e) Rs.64,000.
54. Narahari Ltd. issued 3,000 10% Preference shares of Rs.100 each at par, which are
redeemable at a premium of 10%. For the purpose of redemption, the company issued 2,000
Equity Shares of Rs.100 each at a premium of 20% per share. At the time of redemption of
Preference Shares, the amount to be transferred by the company to the Capital Redemption
Reserve Account is
(a) Rs.50,000

(b) Rs.40,000

(c) Rs.2,00,000

(d) Rs.1,00,000

(e) Rs.70,000.
55. The value of equity share of Naresh Ltd. as per yield method is Rs.254.50 and as per fair
value method is Rs.315.50. The value of the equity share according to intrinsic value method is
(a) Rs.285.00

(b) Rs.265.00

(c) Rs.315.50

(d) Rs.225.50

(e) Rs.376.50.
56. Naveen, a sole proprietor, maintains a three columnar cash book to record his business
transactions. Consider the following data pertaining to his business for the month of December,
2005: Particulars Rs. Opening cash on hand 25,000 Balance at bank 3,50,000 Cheque received
from a customer (after allowing a discount of Rs.2,500) 50,000 Paid the supplier by cheque
(discount allowed by the supplier: Rs.10,000) 1,00,000 Salaries paid to staff in cash 20,000
Received a cheque from Daulat Ram, a customer (who owed Rs.16,500 and was allowed a
discount of 10%) 14,850 Paid M/s. Bharani and Co. in full settlement of their dues of Rs.28,500
26,250 Received from Rama & Bros. (as against Rs.38,900) in full and final settlement 36,200
The total amount of discount recorded on the debit side of the three columnar cash book for the
month of December 2005 was
(a) Rs.5,200

(b) Rs.4,150

(c) Rs.6,850

(d) Rs.12,250

(e) Rs.13,900.
57. On December 31, 2005, Nirlap Ltd. buys 1,000 of its own 12% Debentures of the par value of
Rs.100 each at Rs.97 ex-interest from the open market. The company pays debenture interest
half-yearly on September 30 and March 31. The amount paid by the company in respect of the
above purchase was
(a) Rs.93,000

(b) Rs.97,000

(c) Rs.1,00,000

(d) Rs.1,01,000

(e) Rs.1,04,000.
58. The following balances are extracted from the books of accounts of Nayar Ltd. as on March
31, 2006: Particulars Rs. Particulars Rs. Share capital account 26,88,000 Manufacturing wages
8,19,400 Preliminary expenses 2,11,000 Sales 71,08,000 Sundry creditors 11,00,600 Returns
inward 55,600 15% Term- Loan 4,00,000 Salaries 27,98,400 Closing inventory as on
March 31, 2006 20,52,000 Returns outward 20,600 Cash at bank 4,40,000 Discount allowed
82,000 Sundry debtors 14,30,000 Office administrative expenses 2,17,400
Bills Payable 15,55,000 Prepaid insurance 12,000 Provision for doubtful debts 20,000 Insurance
8,000 Fittings and Fixtures 7,55,400 Bad debts 72,400 Discount received 92,000 Commission
received 1,12,800 Opening inventory as on April 01, 2005 10,93,600 Outstanding salaries
30,000 Purchases 30,79,800
The total of Trial Balance of the company as on March 31, 2006 was
(a) Rs.1,10,33,000

(b) Rs.1,31,27,000

(c) Rs.1,30,97,000

(d) Rs.1,31,23,000

(e) Rs.1,10,75,000.
59. Mr. Narain Singh is the proprietor of M/s. Narain Enterprises. The capital contributed by him
amounted to Rs.1,90,000. On April 01, 2005, he withdrew Rs.30,000. The interest on capital and
interest on drawings is 12% per annum and 10% per annum respectively. At the time of
finalization of accounts of M/s. Narain Enterprises for the year 2005-2006, the journal entry to
record interest on drawings is Rs. Rs.
(a) Bank account Dr. 3,000 To interest on drawings account 3,000
(b) Interest on drawings account Dr. 3,600 To Capital account 3,600
(c) Interest on drawings account Dr. 2,000 To Bank account 2,000
(d) Interest on capital account Dr. 2,400 To Interest on drawings account 2,400
(e) Capital account Dr. 3,000 To Interest on drawings account 3,000.

60. The following information is extracted from the books of Nasser Limited:
i. The paid-up share capital of the company consists of 1,000, 15% preference shares of Rs.100
each and 20,000 equity shares of Rs.10 each.
ii. The average annual profits of the company after providing for depreciation and taxation
amounted to Rs.95,000. It is considered necessary to transfer Rs.15,000 to general reserve
before declaring any dividend.
iii. The normal return expected by investors on equity shares in similar business is 10%.
The value of an equity share of Nasser Ltd. is
(a) Rs.32.50

(b) Rs.37.50

(c) Rs.10.00

(d) Rs.25.00

(e) Rs.27.50.
61. Nirmal Ltd. started its operations on April 15, 2005. Consider the following data pertaining
to the company for the year 2005-2006: Particulars Rs. Sales (85% collected during the year
2005-2006) 16,00,000 Bad debts written off 4,000 Issue of shares for cash 10,00,000
Purchase of fixed assets for cash 8,00,000 Depreciation 80,000 Amount received by way of
short-term loan 2,00,000 Short-term loan repaid 50,000 Payment towards manufacturing and
administrative expenses 7,00,000 Amount paid to purchase raw materials 3,00,000
Amount deposited in bank 4,00,000
The balance of cash as on March 31, 2006 was
(a) Rs.3,60,000

(b) Rs.4,55,000

(c) Rs.2,50,000

(d) Rs.5,50,000

(e) Rs.3,10,000.
62. In the books of Nalini Ltd., the balance in the furniture and fixtures account as on March 31,
2005 was Rs.7,50,000. The following additional information is given:
i. Sales of the company during the year 2005-2006 include Rs.25,500 in respect of sale of an old
furniture on March 31, 2006. The book value of the furniture on April 01, 2005 was Rs.38,000
ii. Depreciation @ 5% is to be provided on furniture & fixtures.
The amount at which the furniture and fixtures is shown in the balance sheet of Nalini Ltd. as on
March 31, 2006 was
(a) Rs.6,15,000

(b) Rs.6,76,400

(c) Rs.6,44,500

(d) Rs.6,87,000

(e) Rs.6,74,500.

63. Nakshtra Ltd. issued 10,000 equity shares of Rs.10 each at a premium of 20%. The share
amount was payable as: On application Rs.2 On allotment (including premium) Rs.5
On first call Rs.3 On second and final call Rs.2 Applications were received for 15,000 shares and
the shares were allotted to applicants on pro-rata. Naveen, who was allotted 500 shares, failed to
pay the first call. On his subsequent failure to pay the second and final call, all his shares were
forfeited. Out of the forfeited shares, 400 shares were re-issued @ Rs.8 per share. The amount
transferred to capital reserve is
(a) Rs.200

(b) Rs.1,000

(c) Rs.800

(d) Rs.1,300

(e) Rs.1,200.
64. Consider the following particulars pertaining to the sole proprietor business of Mr. Naveen:
Particulars As on April 01, 2005 Rs. As on March 31, 2006 Rs. Capital 10,50,000 ?
Loan from bank 5,25,000 3,75,000 Sundry creditors 75,000 1,05,000 Fixed assets 8,25,000
7,65,000 Inventory 4,50,000 5,25,000 Sundry debtors 2,10,000 2,70,000
Cash and bank 1,65,000 2,55,000 The profit for the year 2005-2006 was
(a) Rs.13,35,000

(b) Rs.1,50,000

(c) Rs.2,85,000

(d) Rs.1,95,000

(e) Rs.1,75,000.
65. The balance in machinery account of Leo Ltd. as on April 01, 2005 was Rs.85,000. The
following transactions took place during the year 2005-2006: Date Particulars Amount (Rs.)
01-07-2005 Machinery purchased 90,000
01-10-2005 Machinery sold (book value as on April
01, 2005 is Rs.40,000) 50,000
01-01-2006 New machinery purchased 80,000
If the company charges depreciation at the rate of 10%, the balance in machinery account as on
March 31, 2006 was
(a) Rs.1,84,500

(b) Rs.1,93,500

(c) Rs.2,05,000

(d) Rs.1,99,000

(e) Rs.2,01,750.

66. The total of debit side of trial balance of a company is Rs.4,75,000 and that of the credit side
is Rs.5,03,000. Subsequently the following mistakes are discovered: Particulars
Correct Amount (Rs.) Amount which appears in trial balance (Rs.) Opening stock 30,600 40,600
Advertisement expenses 20,000 20,000 (credit side) Interest from investments 36,000 30,000
Sundry creditors 76,000 80,000 The total of the corrected trial balance is
(a) Rs.4,74,900
(c) Rs.4,85,000

(b) Rs.4,59,900
`

(d) Rs.4,84,900

(e) Rs.4,50,000.
67. M/s.Neta Enterprises introduced the imprest system of petty cash book, the amount of
imprest being Rs.2,500. The petty cash transactions during the month of June 2005 are as under:
Particulars Amount (Rs.) Stamps 265 Conveyance 270 Repairs 516 Stationery 450
Other office expenses 120 The amount of cash received on July 01, 2005 to make up the imprest
balance was
(a) Rs.2,500

(b) Rs.879

(c) Rs.855

(d) Rs.1,621

(e) Rs.1,000.
68. The inventory of Nikhil Ltd. as on March 31, 2005 is overvalued by Rs.24,000. The net profit
for the year 2005-2006 was
(a) Overstated by Rs.24,000
(b) Understated by Rs.24,000
(c) Overstated by Rs.48,000
(d) Understated by Rs.48,000
(e) Not affected.
69. Consider the following data pertaining to Naidu Ltd. for the month of June 2005:
Purchases Issues Balance Date Quantity (Kg.)
Rate

(Rs.)

Quantity

(Kg.)

Quantity

(Kg.)

Rate

(Rs.)

01-06-2005 1,000 22.80

02-06-2005 800 24
10-06-2005 1,200 25
25-06-2005 2,000
If the company uses weighted average method for inventory valuation, the value of inventory as

on June 30, 2005 was

(a) Rs.12,000
(b) Rs.23,333
(c) Rs.24,000
(d) Rs.25,000
(e) Rs.22,800.
70. Consider the following data pertaining to Naidu Ltd. for the month of June 2005:
Purchases Issues Balance Date Quantity
(Kg.)

Rate

(Rs.)

Quantity

(Kg.)

Quantity

(Kg.)

Rate

(Rs.)

01-06-2005 1,000 22.80

02-06-2005 800 24
10-06-2005 1,200 25
25-06-2005 2,000
If the company uses FIFO Method for inventory valuation, the value of inventory as on June 30,
2005 was
(a) Rs.12,500
(b) Rs.25,000
(c) Rs.24,000
(d) Rs.22,800
(e) Rs.20,000.
71. Consider the following data pertaining to Naidu Ltd. for the month of June 2005:
Purchases Issues Balance Date Quantity
(Kg.)

Rate

(Rs.)

01-06-2005 1,000 22.80

Quantity

(Kg.)

Quantity

(Kg.)

Rate

(Rs.)

02-06-2005 800 24

10-06-2005 1,200 25
25-06-2005 2,000
If the company uses LIFO for inventory valuation, the value of inventory as on June 30, 2005 was
(a) Rs.12,500
(b) Rs.25,000
(c) Rs.24,000
(d) Rs.22,800
(e) Rs.20,000

72. Nandita Ltd. issued 1,000, 10% debentures at the rate of Rs.100 each during the year 200203. Interest on debentures is payable half yearly on September 30 and March 31 every year. The
company has power to purchase its own 10% debentures in the open market for cancellation.
The following purchases were made during the year 2005-2006: On July 01, 2005 400 of its
own 10% debentures at the rate of Rs.96 ex-interest. On December 01, 2005 300 of its own
10% debentures at the rate of Rs.102 cum- interest. The total amount debited to own
debentures investment account was
(a) Rs.70,000

(b) Rs.68,500

(c) Rs.69,000

(d) Rs.70,600

(e) Rs.71,600.
73. In the year 2005- 2006, Nikhilesh Ltd. purchased a new machine and made the following
payments in relation to it: Rs.

Rs.

Cost as per suppliers list 5,20,000

Less: Agreed discount 30,000 4,90,000
Delivery charges 10,000
Erection charges 20,000
Annual maintenance charges 30,000
Additional components to increase capacity of the machine 40,000
Annual insurance premium 5,000
The cost of the machine is
(a) Rs.5,40,000

(b) Rs.5,45,000

(c) Rs.4,70,000

(d) Rs.5,60,000

(e) Rs.5,70,000.
74. As per the Profit and loss account of Naga Ltd. for the year ended March 31, 2006 the amount
of salary expenditure was Rs.4,15,000. If the balance of outstanding salaries as on April 01, 2005
and March 31, 2006 was Rs.64,000 and Rs.74,000 respectively, the cash paid on account of
salaries during the year 2005-06 was
(a) Rs.4,05,000
(b) Rs.4,03,000
(c) Rs.4,67,000
(d) Rs.4,27,000
(e) Rs.4,79,000.

75. The total purchases of Nagar Ltd. is Rs.50,000. If the gross profit of the company is 20% on
sales and the closing stock is more than the opening stock by Rs.10,000, the cost of goods sold
will be
(a) Rs.75,000
(b) Rs.62,500
(c) Rs.40,000
(d) Rs.37,500
(e) Rs.30,000.
76. Which of the following transactions would cause a change in owners equity?
(a) Repayment of a bank loan
(b) Amount received from a debtor
(c) Amount paid to a creditor
(d) Purchase of a second-hand machine
(e) Sale of land on credit for a price above cost.
77. If the yield rate of return of Nirupama Ltd. is 14%, normal rate of return is 8% and nominal
value of its equity share is Rs.10, then the value of an equity share of Nirupama Ltd. is
(a) Rs.17.50
(b) Rs.13.33
(c) Rs.10.00
(d) Rs.7.50
(e) Rs.5.71.

Suggested Answers
1. Answer : (d)
Reason : If there is a conflict between the International Accounting Standards and the local
standards or the local laws and regulations, the local standards, laws and regulations will
prevail.
2. Answer : (c)
Reason : Options (a), (b), (d) and (e) are a part of the accounting principles and concepts which
need to be adhered to in the preparation of Financial statements. Hence the adherence to these
concepts does not result in window dressing the financial statements. However, provision for
expenses and potential losses is to be made as per accounting concept of conservatism. Not
providing such provision leads to window dressing since the profits get inflated.
3. Answer : (d)
Reason : Journal proper is used to record all transactions which cannot be included in the Cash
book or any other subsidiary books. Eg. Purchase or sale of fixed assets and investments on
credit, adjusting entries and rectification entries.
4. Answer : (d)
Reason : The value of investments, debtors, Fixed assets and cash at bank are not dependent on
the earning capacity of the firm. Goodwill an intangible asset, depends on the earning capacity of
the firm. The higher the profits or earnings expected the higher the value of goodwill.
5. Answer : (c)
Reason : Rights shares are the shares that are offered to the existing equity shareholders (c).
These are not issued by a newly formed company (a) They are not the shares issued to the public
at large. They are issued only to the existing shareholders. (b). It does not indicate the right of
redemption of shares issue
(d). These are not the shares with cumulative dividend right.
6. Answer : (c)
Reason : The maximum amount beyond which a company is not allowed to raise funds by issue
of shares is called nominal capital or authorized capital. The issued capital is that part of the

nominal capital issued to the public and subscribed capital is that part of the issued capital
which is subscribed by the public. Paid up capital is the amount which is paid-up by the
shareholders. Reserve capital is that capital which will be called-up only in case of liquidation.
7. Answer : (c)
Reason : Annuity Method of super profits of valuation of goodwill uses the present value factor
since there is heavy loss of interest. Capitalisation of average profits method (a) is not the correct
answer since there is not such method through which goodwill can be assigned a value.
Capitalisation of super profits method (b) tries to find out the amount of capital needed for
earning the super profit and it does not consider the present value factor and hence is not the
correct answer. No. of years purchase of average profits method (d) is also known as simple
profit method where in the goodwill is calculated with the help of the average annual profit
expected to accrue in future based on past profits and the number of years of purchase as agreed
by the parties and is not the correct answer. Number of years of purchase of super profits method
(e) where in super profits are computed taking into account the average profits and the normal
rate of return in the similar type of industry based on the capital employed in the business the
difference between the average profit and the normal return is the super profit an
is multiplied with the number of years purchase as agreed by the parties. And it is not the
correct answer. Thus, alternative (c) is the correct answer.
8. Answer : (b)
Reason : Amortization is the method of converting cost of intangible assets to expense.
Intangible assets like patents, trademarks, franchises are amortized over a period of time.
The other alternatives (a) Depreciation is the process of allocating to expense the cost of fixed
assets over its useful life in a rational and systematic manner.
(c) Depletion is the process of allocating the cost of natural resources like coal petroleum etc. to
expense in a rational and systematic manner.
(d) Deterioration is the physical process of wearing out.
Thus, the alternatives (a), (c), (d) and (e) are not relevant to intangible assets.
9. Answer : (a)
Reason : Amortization of intangible assets signifies, the systematic writing down of the value of
the intangible assets over its life. The method adopted is straight line method. The other
alternatives written down value method, sum of the years digits method and Annuity method

are used for depreciating the value of tangible fixed assets.

10. Answer : (b)
Reason : When depreciation appears in the Trial balance, it is taken in the Profit and loss account
only. If depreciation does not appear in the Trial balance but appears as an adjustment it
appears in the Profit and loss account and is also reduced from Fixed assets to give double effect
to the transaction.
11. Answer : (e)
Reason : The advocates of this method feel that the smoothing of purchase costs achieved by
the weighted average method enable them to even out the erratic movements in the purchase
prices to the best possible extent.
12. Answer : (d)
Reason : AS -1 discusses this issue where it lists out going concern concept, consistency concept,
and accrual concept as fundamental accounting assumptions. Conservatism is a concept under
GAAP but its use cannot be assumed.
13. Answer : (e)
Reason : Discount allowed on re-issue of forfeited shares is debited to forfeited shares account. It
cannot be debited to general reserve account, capital reserve account, revaluation reserve
account and capital redemption reserve account.
14. Answer : (b)
Reason : Securities Premium on fresh issue of shares (b) cannot be utilized for the redemption of
Preference Shares of a company. As per the Companies Act, the redemption may be done from the
proceeds of fresh issue of shares or undistributed profits which would otherwise be
available for dividend. Thus, proceeds of fresh issue of shares (a), General reserve (c), Profit and
loss account credit balance and Dividend equalization reserve are not the correct answers since
they can be utilized for redemption of preference shares.

15. Answer : (e)

Reason : Under intrinsic value method the value per share is arrived by valuing the assets of a
company and deducting there from all the liabilities and claims of preference shareholders and

dividing the net assets by the number of shares. The value of net assets is nothing but the net
equity.
16. Answer : (e)
Reason : The cum-interest/cum-dividend quoting price of securities implies that interest
accrued or dividend accrued is added to the value of the securities. Thus, it is more than the exinterest price. The purchaser pays a higher price than the normal price, the seller charges a
higher price and the right of receiving dividend/interest is passed on to the buyer. Thus,
alternatives (a), (c) and (d) are correct. The alternative (b) the right to receive the
interest/dividend is retained by the seller is false.
17. Answer : (e)
Reason : Cumulative Preference shareholders enjoy preferential treatment with regard to
priority in payment of dividend, (a) repayment of capital (b) and also in case of insufficient
profits their dividends (undeclared) are cumulated (d) unlike equity shareholders. Equity
shareholders enjoy voting rights (c) but not the preference shareholders. Thus, the alternatives
(a), (b), and (d) are true in case of cumulative preference shareholders.
18. Answer : (a) Reason : The accounting based on Real capital maintenance concept (which
considers the general price rise) is called the Current Purchasing Power Accounting.
19. Answer : (a)
Reason : Only when the share applications are received and the allotment is finalized is the share
allotment money called for from the shareholders to whom share allotment is made.
20. Answer : (a)
Reason : The accounting entry involved for issue of shares to promoters for the services
rendered by them is debit goodwill account and credit share capital account (a). Since in
recognition of the vale of services rendered by the promoters certain number of shares are
allotted to them for which no consideration is coming forth and is debited to goodwill and
credited to share capital account. Since no cash is coming forth and no obligation form the
promoters to pay in future the entries in alternatives (b) and (c) are incorrect. It is issue of
shares in lieu of the services rendered and hence share capital account is not debited and no
payment of cash is involved and cash account cannot be credited and alternative (d) is
incorrect. Since no payment from the directors is expected the question of calls in arrears does

not arise and the alternative (e) is incorrect.

21. Answer : (c)
Reason : Premium on redemption of debentures account represents the additional amount
payable to debenture holders at the time of redemption of debentures and is a personal account.
22. Answer : (d)
Reason : According to the conservatism concept, anticipate no profit and provide for all possible
losses. Thus, in recognition of conservatism concept, provision for bad and doubtful debts is
created in anticipation of actual bad debts. The statements in other alternatives are incorrect
because Going concern concept assumes that business will be carried on for a indefinite period
and not for definite period (a). The capital losses are to be deducted to ascertain net income (c).
Materiality concept states that insignificant events need not be recorded and the statement in
alternative (e) is incorrect. Thus, the correct answer is (d).
23. Answer : (d)
Reason : Stock at the end of the financial year is the closing stock, drawings are the amounts
withdrawn by the owner of the business for personal use; and prepaid rent is the amount of rent
which is paid in advance of the current financial year and interest received but not yet earned is
the amount of interest received which does not pertain to the current year are the items that
appear in the balance sheet of a business. Stock at the beginning of the financial year is the
opening stock that appears in Trading Account of a business and not in the balance sheet.
Thus,(d), the combination of all the accounts in alternatives (I), (III), (IV) and (V) is the correct
answer.
24. Answer : (e)
Reason : According to Section.76 of the Companies Act, a company is authorized to pay
underwriting commission only if the shares or debentures are offered to the general public. No
underwriting commission can be paid, if the issue is privately placed. The shares taken by
Promoters, Directors, employees and directors friends cannot be considered as shares offered
to the general public. As such no underwriting commission is payable on these shares.
25. Answer : (a)
Reason : The portion of the acquisition cost of the asset yet to be allocated is known as written
down value (a) Accumulated value (b) is the value of a thing accumulated over a period of time
and not the correct answer. Realizable value (c) is the value which can be realized in the event of

sale and is not correct answer. Salvage value (d) is the value of an asset that remains as scrap
value after its usage over a period of time and is not the correct answer. Residual value (e) is the
value remaining residue and is not the correct answer. Alternative (a) is the correct answer.
26. Answer : (b)
Reason : The Accounting Standard-2 deals with regard to accounting for inventory. According to
the statement, Work in progress of a manufacturing industry is covered. Thus, the alternative (b)
is the correct answer. The items of inventory stated in other alternatives are not covered under
AS-2 Financial instruments held as stock-in-trade: Work in progress arising under construction
contracts and Work in progress of service providers. Hence, alternatives (a) reflecting statement
(I); (c) combination of statements (I) and (II); alternative (d) combination of statements (III) and
(IV) and alternative (e) combination Of statements II, III and IV are incorrect.
27. Answer : (d)
Reason : Reserves created out of revaluation of fixed assets should not be capitalized and hence
should not be used for bonus issue. Bonus issue can be made out of share premium account.
Bonus issue shall not be made within 12 months of any public issue and it shall not be made in
lieu of dividend. Bonus shares should not be issued unless partly paid shares are made fully paid.
28. Answer : (e)
Reason : The adjustment entry involved in reversing Capital Suspense account which is created,
while placing the amounts received on reissue of forfeited shares at a discount is (a) Debit to
Capital Suspense account (b) Credit to Share Capital account (c)Debit to Share forfeiture account
and thus, the combination of alternatives (a), (b) and (c) the alternative (e) is the correct answer.
29. Answer : (b)
Reason : Inventories (b) are to be valued at the lower of cost and net realizable value. All the
other assets stated in other alternatives are valued as per the cost concept. Goodwill (a) is a fixed
intangible asset and is shown at the cost of its acquisition. Investments (c) are valued at cost or
market value which is ever less. Sundry debtors (d) are shown at deducting any amount of bad
debts and the provision created for bad and doubtful debts. Fixed Assets are valued at Cost only.
Thus, the correct answer is (b).
30. Answer : (b)
Reason : Bank charges increase debit balance as per bank pass book (b) is the correct answer.

The debit balance as per bank pass book indicates the overdraft balance and the bank charges
being the expenditure increase the debit balance. The alternative (a) is incorrect because, the
Bank charges decrease the debit balance shown as per bank column of the cash book and do not
increase the debit balance as debit balance as per cash book signifies the favourable balance. A
cash sale of a nontrading asset is recorded in the journal proper is incorrect (c) because all in
transactions involving cash receipts and payments are recorded in the cash book Cash discount
allowed by the business will appear on the debit side of the debtors account (d) is incorrect
because, the cash discount allowed is a reduction in the balance of a debtors account which
appears on the credit side. Bank reconciliation statement is prepared by a bank (e) is incorrect
because bank reconciliation statement is prepared by the business and not by the bank. Thus,
(b) is the correct answer.
31. Answer : (d)
Reason : The closing stock(d) is the value of goods which remain unsold at the end of the period
whose balance appears once in trading account and once in balance sheet of the business. All
other accounts sales (a), purchases (b), inward returns (c) and outward returns (e) are closed
once they are absorbed by the trading account. Thus, (d) is the correct answer.
32. Answer : (c)
Reason : According to the provisions of the Companies Act, the application money should not be
less than 5% of nominal value of the shares. The other options given in a, b, d and e are not
correct.
33. Answer : (e)
Reason : The following methods are the practical ways of realizing revenue applying the
conservatism concept and realization concept and the (a)Delivery method in case of sale of
goods, (b)Percentage-ofcompletion method in case of rendering of services,(c) Production
method in case of agriculture produce and (d) Installment method in case of sale of goods on
installments. Thus, these are the various ways of recognizing revenue and the methods adopted
to recognize revenue. Moving average method (e) is the method of valuing inventory and it is not
the method adopted to recognize revenue. Thus, (e) is the correct answer.
34. Answer : (d)
Reason : According to SEBI guidelines, a debenture issue having a maturity of more than 18
months necessitates the creation of a special reserve known as debenture redemption reserve.

Such debenture redemption reserve should be equivalent to at least 50% of the amount of
debenture issue prior to the commencement of the redemption. Thus, (d) is the correct answer.
35. Answer : (d)
Reason : Purchases account is a debit balance and purchase returns is a credit balance and the
total of purchase returns will be recorded to the credit side of the purchase returns account.
36. Answer : (a)
Reason : In retail inventory method, if the markup selling price is decreased but not below the
original selling price, it is known as markup cancellation.
37. Answer : (e)
Reason : Shareholders are treated as creditors for the amount they have paid on shares
subscribed by them according to the business entity concept. According to cost concept, all
transactions are recorded at cost. The duality concept emphasizes that assets = owners equity +
outside liability. A business entity is assumed to carry on its operations forever under going
concern concept. According to money measurement concept, only those transactions that can be
expressed in monetary terms are recorded.
38. Answer : (c)
Reason : The profit or loss on own debentures is to be calculated at the time of cancellation of
own debentures and not at the time of purchase or next interest payment or original issue of
debentures or liquidation of the company.
39. Answer : (d)
Reason : The trial balance is prepared to assess the arithmetical accuracy. Hence the answer is
(d). The profit and loss account is prepared to know the profit or loss of the concern. The balance
sheet is prepared to know the financial position as on a particular date. The cashbook indicates
the cash receipts and payments. The bank reconciliation statement is prepared to reconcile the
bank balance as per cash book and pass book.
40. Answer : (e)
Reason : Credit balance of bank column of cash book represents bank overdraft and is a liability.
Hence the answer is (e). Credit balance of bank pass book, Debit balance of bank column of cash
book and Debit balance of cash column of cash book represents favorable balance. The debit

balance of discount column of cash book represents an expense.

41. Answer : (b)
Reason : Nilgiri Limited Bad debts Rs.15,000 Add: Closing provision (5% on Rs.3,30,000)
Rs.16,500 Rs.31,500 Less: Opening provision Rs.18,000
Amount to be debited to profit & loss account Rs.13,500
42. Answer : (a)
Reason : The application money should not be less than 5% of the nominal value of the shares.
Hence, the minimum amount of application money is Rs.5 per share. The percentage of share
premium has no relevance as regard the minimum amount of application money to be collected.
There are no restrictions on the percentage of premium that a company can issue its shares.
Thus, the alternative (a) is the correct answer
43. Answer : (a)
Reason : Rs.Nil The difference in one transaction got compensated by another transaction. The
error of principle does not result in any difference and also the error of omission does not affect
the agreement of trial balance. The undercasting of returns inward book is rectified by debiting
returns inward account with Rs.1,377 and the wrong debit to the suppliers account is to be
rectified by crediting the account with Rs.1,252+Rs.125=Rs.1,377. Thus, the wrong casting in
one transaction is compensated by wrong posting of wrong amount to the wrong side. It has no
effect on the agreement of trial balance. Payment of wages to the debit of wrong account is an
error of principle and it does not affect the trial balance. The complete omission of sales returns
will not affect the trial balance totals. Thus, the difference in trial balance is Rs.nil despite the
errors.

44. Answer : (b)

Reason : Cost of goods sold during the year 2005-2006 = Rs.54,00,000 0.75 = Rs.40,50,000
Closing inventory = Opening inventory + Purchases during the year 2005-06 Cost of goods sold
= Rs.15,00,000 + Rs.55,00,000 Rs.40,50,000
= Rs.29,50,000
Actual physical inventory as on March 31, 2006 = Rs.29,50,000
Therefore, missing inventory = Rs.29,50,000 Rs.25,75,000 = Rs.3,75,000

45. Answer : (e)

Reason : Neeti Ltd.
The amount of profit transferred on cancellation of debentures is Rs.8,000.
Journal Entries
Date Particulars
Dr.
(Rs.)
Cr.
(Rs.)
July 01, 2005 Own Debenture A/c. Dr. 1,92,000
Interest on Debenture A/c. Dr. 6,000
To Bank A/c. 1,98,000
(Being the purchase of 2000 own debentures at the rate of Rs.99 cum interest. Interest for 3
months from April 1,2005 to June 30, 2005 is Rs.6,000) March 31, 2006 12% Debentures A/c.
Dr. 2,00,000
To Own debenture A/c. 1,92,000
To Capital reserve A/c. 8,000
(Being the profit on redemption of debentures transferred to capital reserve A/c.)
46. Answer : (d)
Reason : Bank Reconciliation statement as on December 31,2005 Particulars Rs. Rs.
Credit (Overdraft) balance as per cash book 2,15,270 Add:
i. Outstation cheque deposited, not yet collected by the bank as on December 31, 2005.
78,000
ii. Bank charges 1,500
iii. Bank interest (obviously on OD) not recorded in the cash book 5,500
iv. A deposit in Career Bank wrongly entered in Century in the cash book
22,500 1,07,500
3,22,770
Less:
v. Cheque amounting , not presented for payment as on December 31,
2005
15,000
Overdraft balance as per bank pass book (DEBIT BAL ) 3,07,770

47. Answer : (c)

Reason : The amount debited to profit and loss account in respect of provision for doubtful debts
is Rs.4,600
Dr. Provision for bad and doubtful debts Cr.
Particulars Rs. Particulars Rs.
To Bad debts (Mita) 8,000 By balance b/f 15,600
To Provision c/f 12,200 By Profit and loss account 4,600
20,200 20,200
Computation of suitable provision for the year ending March 31,2006
Particulars Rs.
Gita Rs. 7,500 Expected to realize only 80% hence doubt full part 1,500
Rita Rs.8,000 Expected to realize only 60%. 3,200
Sita Rs.7,500 Filed Insolvency petition and the recovery chances are remote 7,500
48. Answer : (e)
Reason : Nagendra Ltd.
Workings:
Note 1 Bank Account
Rs. Rs.
To Balance 4,00,000
To Investments Account 4,20,000
By Preference share holders
(Rs.10,00,000 Rs.1.10)
11,00,000
To Equity shares By Balance account. 50,000
27,500 shares Rs.10 Rs.2,75,000
Premium of Rs.2 per share Rs. 55,000 3,30,000
9,30,000 11,50,000
Amount transferred to capital redemption reserve account. Face value of preference shares
Rs.10,00,000
Less: Face value of shares 27,500 10 (funds available by way of fresh equity issue)
Rs.2,75,000
Rs7,25,000
Where redemption of preference shares in effected without corresponding issue of shares if
implies it is mode out of distributce profits, the gap created to the extent is transferred the cap.

Red res.
49. Answer : (a)
Reason :
Particulars Rs.
Opening balance of sundry debtors 1,12,000
Add: Credit sales 9,75,000
10,87,000
Less: Closing balance of Sundry debtors 60,000
10,27,000
Less: Discount allowed 8,400
Cash collected from sundry debtors 10,18,600
50. Answer : (d)
Reason : Rate of depreciation = 1
n
S
C
=1
2
3, 84, 000
6, 00, 000
= 1 0.80 = 20%.
51. Answer : (a)
Reason : (No. of shares)
Particulars Ram Sham Graham Total
Liability 30,000 40,000 30,000 1,00,000
Less: Unmarked applications in the ratio of 3:4:3 4,800 6,400 4,800 16,000
25,200 33,600 25,200 85,200
Less: Marked (Stamped) applications 20,000 32,000 28,000 80,000
5,200 1,600 (2,800) 4,000
Less Credit of surplus of Gram to Ram and Sham in the ratio of 3: 4
1,200
1,600
2,800

Final liability of each underwriter 4,000 Nil Nil 10,000

52. Answer : (b)
Reason : Books of Nikki Ltd
Stock Account
Dr. Cr.
Date Particulars Rs. Date Particulars Rs.
Dec.01, 05 To Opening balance 5,80,000 Dec.31, 05 By Cost of goods
sold (bal. Fig)
7,80,000
To Purchases 3,60,000 By Closing
balance
1,60,000
9,40,000 9,40,000
Sundry creditors Account
Dr. Cr.
Date Particulars Rs. Date Particulars Rs.
Dec.31, 05 To Cash paid 4,50,000 Dec.01, 05 By Opening balance 1,50,000
To Closing balance 60,000 By Purchases
(balancing figure)
3,60,000
5,10,000 5,10,000
Sales = Rs.7,80,000 + 25% (Rs.7,80,000) = Rs.9,75,000.
53. Answer : (b)
Reason : Depreciation under sum-of-the-years digits method for the year 2005-06, being the
third = 3 x 2, 40, 000
1 + 2 + 3 + 4 + 5 = Rs.48,000
54. Answer : (d)
Reason :
Particulars (Rs.)
Face value of shares to be redeemed (3,000 Rs.100) 3,00,000
Less: Proceeds from fresh issue (2,000 Rs.100) 2,00,000
Balance to be utilized from profit & loss a/c. Hence, amount to be
transferred to capital redemption reserve 1,00,000

The premium received on fresh issue of shares should not be used for redemption of preference
shares.
However, the same can be used for the premium payable on redemption of preference shares.
55. Answer : (e)
Reason : Value as per fair value method is
(value as per intrinsic value method + value as per yield method)/2
Value as per intrinsic value method is (2 Rs.315.50) Rs.254.50 = Rs.376.50
56. Answer : (c)
Reason : Discount recorded on debit side of cash book represents the discount allowed to the
customers.
Rs.
= Cheque received and allowed discount 2,500
+ Discount allowed to Rama & Bros
(Rs.38,900 Rs.36,200) 2,700
+ Cheque received from Daulat Ram
discount allowed 10% of 16,500 1,650
Rs.6,850.
57. Answer : (c)
Reason : Ex Interest
The nominal value of debentures Rs.1,00,000 of each Rs.100 at the rate of Rs.97 ex interest will
be of value Rs.97,000 and the amount of interest at the rate of 12% from 1.10.2005 to
31.12.2005 for 3
months will be Rs.3,000 and the total price paid is Rs.1,00,000.
58. Answer : (b)
Reason : Trial Balance of Nayar Ltd. as on March 31, 2006
Particulars
Amount
Debit
Particulars
Amount
Credit
Preliminary expenses

2,11,000
Share capital account
26,88,000
Closing stock 20,52,000 Sundry creditors 11,00,600
Cash at bank 4,40,000 15% Loan 4,00,000
Sundry debtors 14,30,000 Provision for doubtful debts 20,000
Bad debts 72,400 Sales 71,08,000
Fittings and Fixtures 7,55,400 Commission received 1,12,800
Insurance premium 8,000 Outstanding salaries 30,000
Opening inventory as on
April 1, 2005 10,93,600
Returns outward
20,600
Purchases 30,79,800 Discount received 92,000
Manufacturing wages 8,19,400 Bills payable 15,55,000
Returns inward 55,600
Salaries 27,98,400
Office Administrative
expenses 2,17,400
Prepaid Insurance 12,000
Discount allowed 82000
TOTAL 131,27,000 TOTAL 131,27,000
59. Answer : (e)
Reason : The interest on drawings is an income to the business. Hence the interest on drawings
account is to be credited. As charging the interest on drawings will reduce the capital, capital
account is to be debited.
The entry to record interest on drawings is
Capital account Dr. Rs.3,000
To Interest on drawings account Rs.3,000
60. Answer : (a)
Reason : Average annual profit Rs.95,000
Less: Preference dividend :
15% on Rs.100 x 1000 Rs.15,000

Rs.80,000
Less: Transfer to general reserve Rs.15,000
Profit for equity shareholders Rs.65,000
Equity share capital = 20,000 Rs.10 = Rs.2,00,000
Return on equity =
Pr ofit for equity shareholders
Outs tan ding balance of equity share capital =
100
.2,00,000
.65,000
x
Rs
Rs
= 32.50%
Normal rate of return = 10%
Value of equity share = Rs.10 10%
32.50%
= Rs.32.50
61. Answer : (e)
Reason :
Particulars Rs.
Cash Sales (16,00,000 85%) 13,60,000
Issue of shares 10,00,000
Amount received by way of short-term loan 2,00,000
25,60,000
Less: Purchase of fixed assets 8,00,000
Short tem loan repaid 50,000
Payment towards expenses 7,00,000
Amount paid to purchase raw materials 3,00,000
Amount deposited in bank 4,00,000
Cash balance as on March 31, 2006 3,10,000

62. Answer : (b)

Reason :
Dr. Furniture and fixtures account Cr.
Particulars Rs. Particulars Rs.
To Opening balance 7,50,000 By Bank (sale) 25,500
By profit and loss account 10,600
By depreciation
(Rs.7,50,000 x 5%)
37,500
By closing balance 6,76,400
7,50,000 7,50,000
Particulars Rs.
Written down value of machinery sold as on April 01, 2005 38,000
Less: Depreciation (Rs.38,000 x 5%) 1,900
Value of machine on March 31, 2006 36,100
Less: Sale consideration 25,500
Loss on sale of machine 10,600
63. Answer : (e)
Reason : Amount transferred to capital reserve is Rs.1,200
Working Note:
Particulars Rs.
Amount received on 400 shares on forfeiture (400 x Rs.5) 2,000
Less: Amount of discount allowed on 400 shares which were reissued (400 x Re. 2.) 800
Amount to be transferred to Capital Reserve 1,200
64. Answer : (c)
Reason : According to the basic accounting equation, assets = liabilities + owners equity.
Hence owners equity = assets liabilities.
Capital = Rs.7,65,000 + Rs.5,25,000 + Rs.2,70,000 + Rs.2,55,000 (Rs.3,75,000 + Rs.1,05,000)
= Rs.18,15,000 Rs.4,80,000 = Rs.13,35,000
Profit for the year 2005-2006 = Capital as on March 31, 2006 Capital as on April 01, 2005
= Rs.13,35,000 Rs.10,50,000 = Rs.2,85,000.

65. Answer : (e)

Reason : Dr. Machinery account Cr.
Date Particulars Rs. Particulars Rs.
1-4-05 To opening balance 85,000 1-10-05 By bank (sale) 50,000
1-7-05 To bank 90,000 31-3-06 By depreciation 15,250
1-10-05 To profit and loss a/c
(profit on sale of machine)
12,000
31-3-06 By closing balance 2,01,750
1-1-06 To bank 80,000
2,67,000 2,67,000
Depreciation calculation:
Particulars Rs.
On machinery purchased on 1-7-05 (Rs.90,000 x 10% x 9/12) 6,750
On machinery sold (40,000 x 10% x 6/12) 2,000
On machinery purchased on 1-1-06 (Rs.80,000 x 10% x 3/12 ) 2,000
On balance machinery (85,000 40,000) x 10% 4,500
15,250
66. Answer : (c)
Reason :
Particulars Rs.
Total of debit side of trial balance 4,75,000
Add: Advertisement expenses 20,000
Less: Opening stock (excess taken) 10,000
Total of trial balance (Debit side) 4,85,000
Particulars Rs.
Total of credit side of trial balance 5,03,000
Add: Interest on investments (less taken) 6,000
Less: Sundry creditors (excess taken) 4,000
Less: Advertisement expenses (wrongly taken) 20,000
Total of trial balance (credit side) 4,85,000
67. Answer : (d)
Reason :

Particulars
Amount
(Rs.)
Amount
(Rs.)
Petty cash 2,500
Less: Stamps 265
Conveyance 270
Repairs 516
Stationery 450
Other office expenses 120 1621
879
Amount reimbursed 1621
2500
68. Answer : (b)
Reason : The stock as on March 31, 2005 is overvalued. Hence the opening stock for the year
2005-2006 is overvalued. Hence the profit for the year 2005-2006 is understated by Rs.24,000
69. Answer : (c)
Reason :
Purchases Issues Balance
Date Quantity
(Kg)
Rate per
kg. (Rs.)
Amount
(Rs.)
Quantity
(Kg)
Rate per
kg. (Rs.)
Amount
(Rs.)
Quantity

(Kg)
Rate per
kg. (Rs.)
Amount
(Rs.)
1-6-05 1,000 22.80 22,800
2-6-05 800 24 19,200 1,800 23.33 42,000
10-6-05 1,200 25 30,000 3,000 24.00 72,000
25-06-05 2,000 24 48,000 1,000 24.00 24,000
70. Answer : (b)
Reason : When FIFO method of inventory valuation is used, the closing inventory on June 30,
2005 comprises of latest purchased units. Since the latest purchases were purchased @ Rs.25,
the value of closing inventory is Rs.25,000.
71. Answer : (d)
Reason : When the LIFO method of inventory valuation is used, the latest stock of inventory is
issued first and hence the closing inventory comprises of units which were purchased first or
otherwise, those which existed on the opening day. In the above case since 1000 units existed on
the opening day, the closing stock of 1000 units are opening stock units @ 22.80, hence the
closing stock is Rs.22,800.
72. Answer : (b)
Reason :
01.07.2005
400 Rs.96 ex. interest Rs.38,400
01.12.2005
300 Rs.102 cum. Interest = Rs.30,600 Rs.500
(Interest for 2 months 30,000
2 10
12 100

= Rs.500)
Rs.30,100
Rs.68,500

Amount debited to own debenture investment account is Rs.68,500.

73. Answer : (d)
Reason : Costs that improve the revenue earning capability of an asset should be capatilised as
part of the cost of the asset (for example, Rs.40,000 paid for additional component for increasing
the earning capacity). However, costs that maintain the revenue earning capability (such as the
maintenance charges and the replacement parts) should be treated as revenue expenses and they
are to be charged to the Profit and Loss Account. The correct figure for depreciation calculation is
therefore, as under: Particulars Rs. Rs.
Cost less discount 4,90,000
Delivery charges 10,000
Erection charges 20,000
Additional component to increase the capacity 40,000 5,60,000
74. Answer : (a)
Reason : Salary as per income statement
Rs.4,15,000
Add: Outstanding salary as on April 01, 2005 Rs.64,000
Rs.4,79,000
Less: Outstanding salary as on March 31, 2006 Rs.74,000
Cash paid for salary during the year Rs.4,05,000
75. Answer : (c)
Reason : Cost of goods sold = Purchases + Opening stock Closing stock = Purchases (Closing
stock Opening stock)
= Rs.50,000 (Rs.10,000)* = Rs.40,000
Since, the closing stock has been increased by Rs.10,000
76. Answer : (e)
Reason : Repayment of a bank loan and amount paid to creditor reduces the liabilities and assets
by the same amount. Amount received from debtors and purchase of second hand machine
changes only the composition of the assets and does not affect the ttal assets figure. Hence, (a),
(b), (c) and (d) will not change owners equity. But, sale of land has been made at a price above
cost. It means that there is a profit on sale of land. That profit is owned by the owners of the
company. Therefore, profit or loss on sale of asset will change the owners equity. Hence, (e) is

correct.
77. Answer : (a)
Reason : Value of equity share =
Nomin al value of shares
Normal ratesof return Yield rate of return.
=
Rs.10
8% 14% = Rs.17.50

1. Which of the following will not form a part of Miscellaneous Expenditure of the Balance Sheet of a
company?
(a) Preliminary expenses

(b) Underwriting expenses

(c) Loss on sale of fixed assets

(d) Discount on issue of shares

(e) Interest paid out of capital during construction.

2. Which of the following is/are subjective method(s) of sales forecasting?
(a) Jury of executive opinion

(b) Sales force estimate

(c) Regression Method

(d) Time Series Projection Method

(e) Both (a) and (b) above.

3. In accordance with AS -14, purchase consideration is the aggregate of shares and other securities
issued and the payment made in the form of cash or other assets by the transferee company to the
of the transferor company.
(a) Equity holder

(b) Preference holders

(c) Debenture holders

(d) Shareholders

(e) All (a), (b), (c) and (d) above.

4. In the Consolidated Balance Sheet of a Holding Company, the value of minority interest consists of
the proportionate share of minority shareholders in the
I. Nominal value of share capital of subsidiary company.
II. Reserves of the holding company.
III. Reserves and profits of the subsidiary company at the time of acquisition by the holding company.
IV. Income of the holding company after its acquisition.
V. Income of the subsidiary company after its acquisition by the holding company.
(a) Only (I) above

(b) Both (I) and (II) above

(c) Both (I) and (IV) above

(d) (I), (III) and (IV) above

(e) (I), (III) and (V) above.

5. Which of the following ratios measures the liquidity of a company?
(a) Debt-equity ratio
(c) Net profit margin
(e) Return on equity.

(b) Interest coverage ratio

(d) Acid-test ratio

6. Under the Net Assets Method of calculating purchase consideration, assets and liabilities of the
transferor company are taken over by the transferee company at
(a) Book value

(b) Fair value

(c) Market value

(d) Replacement value

(e) Agreed value.

7. Which of the following is not shown by a funds flow statement on cash basis?
(a) The sources of cash

(b) The uses of cash

(c) Decrease in cash

(d) The net change in working capital

(e) Increase in cash.

8. Which of the following is false with regard to Economic Value Added (EVA)?
(a) The computation of EVA involves a complex procedure
(b) EVA can be improved by downsizing profitable operations
(c) EVA is a residual income measure that subtracts the cost of capital from the operating profit
generated by a

business

(d) EVA can be used for making day-to-day decisions as well as for strategic planning
(e) EVA is one variation of residual income with adjustments in the method of calculation.
9. Which of the following points can be considered as the starting point of financial forecasting?
(a) Forecasting material requirements
(b) Forecasting man power requirements
(c) Forecasting financial requirements
(d) Forecasting sales volume
(e) Forecasting assets requirements.
10. Dividend paid by a subsidiary company out of pre-acquisition profits is
(a) Adjusted against investment in subsidiary account at the time of consolidation of accounts
(b) Adjusted against general reserve at the time of consolidation of accounts
(c) Credited to profit and loss account as revenue receipts at the time of consolidation of accounts
(d) Ignored for consolidation purposes
(e) The claim of the shareholders of the holding company.

11. When the identity of the specific statutory reserve created under the Purchase Method of
accounting for amalgamation is no longer required to be maintained, the following entry is to be
made
(a) Statutory Reserves A/c Dr. To Amalgamation A/c
(b) Statutory Reserves A/c Dr. To Amalgamation Adjustment A/c
(c) Amalgamation Adjustment Dr. To Statutory Reserves A/c
(d) Share Capital A/c Dr. To Statutory Reserves A/c
(e) Statutory Reserves A/c Dr. To Profit and Loss A/c
12. Which of the following should be deducted from the share capital to find out paid-up capital?
(a) Calls-in-advance

(b) Calls-in-arrears

(c) Share forfeiture

(d) Discount on issue of shares

(e) Share premium.

13. A funds flow statement is also known as
(a) Balance sheet

(b) Profit and loss statement

(c) Income statement

(d) Proforma statement

(e) Statement for the changes in financial position.

14. Which of the following is not shown under the head Share Capital in the Balance Sheet of a
company?
(a) Preference share capital

(b) Equity share capital

(c) Calls-in arrear

(d) Share forfeiture

(e) Preference dividend.

15. Which of the following ratios indicates the ability of a firm to service the financial charges?
(a) Dividend pay-out ratio

(b) Fixed charges coverage ratio

(c) Net profit margin ratio

(d) Inventory turnover ratio

(e) Acid test ratio.

16. As per schedule VI of the Companies Act, 1956, which of the following is not shown in the Balance
Sheet of a company under the head Fixed Assets ?
(a) Lease hold property

(b) Development of property

(c) Railway sidings

(d) Designs

(e) Unadjusted development expenditure.

17. According to schedule VI of the Companies Act, 1956, which of the following assets is/are shown
under the head investments in the balance sheet of a company?
I. Investments in the capital of partnership firms.
II. Investment in trust securities.
III. Investment in shares.
IV. Investment in debentures.
(a) Only (I) above

(b) Only (II) above

(c) Both (III) and (IV) above

(d) (II), (III) and (IV) above

(e) All (I), (II), (III) and (IV) above.

18. In addition to the Managing Director or Manager of the company, who among the following is/are
responsible for keeping proper books of accounts of a company?
I. Every legal advisor of the company.
II. Every banker of the company.
III. Every officer and other employee and agent in default.
IV. Every auditor of the company.
V. Every member of the company.
(a) Only (III) above

(b) Both (I) and (IV) above

(c) Both (III) and (IV) above

(d) Both (IV) and (V) above

(e) All (I), (II), (III), (IV) and (V) above.

19. In which of the following situations, price earnings ratio is applied?
(a) To determine the financial risk of a business entity
(b) To determine the expected market value of the shares of a company
(c) To assess the earning potential of a company in the near future
(d) To examine the operational efficiency of a company
(e) To check how efficiently the assets are utilized by a firm.
20. Dividends are usually paid as a percentage of
(a) Authorized share capital

(b) Net profit

(c) Paid-up capital

(d) Called-up capital

(e) Called-up share capital plus calls-in-advance less un-paid calls.

21. As per schedule VI of the Companies Act, 1956, under which of the following heads is Premium
on issue of debentures shown in the balance sheet of a company?
(a) Miscellaneous expenditure

(b) Debentures

(c) Reserves and surplus

(d) Current liabilities and provisions

(e) Current assets.

22. While preparing proforma financial statement by using budgeted expense method
(a) The method of extrapolation is applied to assess the total expenses of the company in proportion
to increase in sales
(b) The items related to various expenses are projected on the basis of the anticipated changes
(c) The future cost-sales ratio is assumed to be prevailed as per historical relationship
(d) A regression equation may be framed to project the costs during the future years
(e) All the expenses are increased by a fixed percentage.
23. Declared dividend should be classified in the balance sheet as a
(a) Provision

(b) Current liability

(c) Reserve

(d) Current asset

(e) Miscellaneous expenditure.

24. According to which of the following accounting concepts consolidated financial statements are
prepared when a parent-subsidiary relationship exists?
(a) Going concern

(b) Business entity

(c) Materiality

(d) Cost

(e) Periodicity.
25. The profit and loss appropriation section of the profit and loss account shows the appropriation
of profit and is popularly known as
(a) Below the line

(b) Above the line

(c) Profit and loss adjustment account

(d) Specific reserve

(e) General reserve.

26. According to the Companies Act, 1956, the companies have to compulsorily maintain their books
of account only on
(a) Accrual basis

(b) Cash basis

(c) Accrual basis or cash basis whichever is followed consistently

(d) Hybrid basis (e) Tax basis.

27. No disclosure is required in consolidated financial statements in respect of

(a) Remittances-in-transit

(b) Capital reserve

(c) Intra-group transactions

(d) Goodwill

(e) Minority interest.

28. Which of the following is/are true regarding the effect on return on equity, other things
remaining constant?
(a) Greater the amount of sales, lower the return on equity
(b) Lower the equity multiplier, lower the return on equity
(c) Higher the assets turnover, lower the return on equity
(d) Lower the debt-assets ratio, higher the return on equity
(e) Higher the return on assets, lower the return on equity.
29. Which of the following increases the external funds required?
(a) An increase in the spontaneous liabilities to sales ratio
(b) A decrease in the retention ratio
(c) An increase in the assets turnover ratio
(d) A decrease in the short-term bank borrowings
(e) Both (b) and (d) above.
30. In which of the following circumstances, subscribed capital is equal to issued capital?
(a) When the board of directors have called up the total amount payable by the shareholders
(b) When the maximum share capital which the company is authorized to issue is offered to public
(c) When there are no calls-in-arears
(d) When all the shares offered to the public are taken up by the public
(e) Subscribed capital and issued capital are one and the same.
31. Which of the following results in an increase in working capital of a company?
(a) An increase in outstanding rent

(b) An increase in investments

(c) A decrease in depreciation

(d) A decrease in the amount of provision for tax

(e) An increase in gross fixed assets.

32. Which of the following statements is/are true regarding inventory turnover ratio?
I. If the inventory turnover ratio has decreased from past, it means that either inventory is
decreasing or cost of goods sold is increasing.
II. If a firm has an inventory turnover that is slower than for its industry, then the inventory stocks
may be low.
III. Low inventory turnover has impact on the liquidity of the business.
(a) Only (I) above

(b) Only (II) above

(c) Only (III) above

(d) Both (I) and (III) above

(e) All (I), (II) and (III) above.

33. Which of the following cannot be inferred from a funds flow analysis?
(a) Liquidity

(b) Acquisition of non current assets

(c) External funds utilized

(d) Pattern of financing

(e) None of the above.

34. If the proposed dividend appears in the balance sheet of subsidiary company, while preparing the
Consolidated Balance Sheet, the share of minority shareholders should be
(a) Shown under proposed dividend in the Consolidated Balance Sheet
(b) Credited to Investment account
(c) Credited to Consolidated Profit and Loss account
(d) Added to minority interest in Consolidated Balance Sheet
(e) Credited to Goodwill account.
35. Which of the following equations is equal to Net Value Added?
(a) Gross Value Added + Depreciation

(b) Gross Value Added + Interest

(c) Gross Value Added Depreciation

(d) Gross Value Added Inventory

(e) Gross Value Added Net Inventory.

36. The item Interest Accrued on Investments appears in the balance sheet of a company under the
category of
(a) Loans and advances

(b) Current assets

(c) Investments

(d) Current liabilities

(e) Reserves and surplus.

37. As per Accounting Standard 18, if two or more companies are subsidiaries of the same holding
company, each subsidiary is known as

of the other subsidiary.

(a) Fellow subsidiary

(b) Co-subsidiary

(c) Subsidiary

(d) Associate

(e) Sub-subsidiary.
38. Which of the following denotes the dividend declared by the directors between two annual
general meetings?
(a) Proposed dividend

(b) Final dividend

(c) Interim dividend

(d) Declared dividend

(e) Unpaid dividend.

39. Which of the following ratios indicates the capital structure?
(a) Debt-assets ratio

(b) Inventory turnover ratio

(c) Total asset turnover ratio

(d) Return on equity

(e) Return on assets.

40. Economic value addition can be computed as
(a) Gross profit Cost of capital
(b) Gross profit Average cost of capital
(c) Net operating profit before tax Cost of capital
(d) Net operating profit after tax Weighted average cost of capital
(e) Net operating profit before tax Depreciation.
41. Ananya Ltd. takes over the business of Arya Ltd. at the following values:
Particulars Amount (Rs.)
Fixed Assets 6,00,000
Current Assets 2,50,000
Debentures 1,50,000
Current Liabilities 1,00,000
The amount of purchase consideration in the above takeover (using Net Asset method) is
(a) Rs.8,50,000

(b) Rs.3,50,000

(c) Rs.7,00,000

(d) Rs.6,00,000

(e) Rs.7,50,000.

42. Ashiki Ltd. is taken over by Asha Ltd.. Each share of Ashiki Ltd. has a market value of Rs.20 while
the market value of Asha Ltd. is Rs.40. The following is the balance sheet of Ashiki Ltd.
Liabilities Rs. Assets Rs. Share Capital @Rs.10 10,00,000 Fixed Assets 15,00,000
Debentures 5,00,000 Current Assets 10,00,000
General Reserve 5,00,000
Creditors 5,00,000
25,00,000 25,00,000
If the purchase consideration is satisfied in the form of shares to be issued by Asha Ltd., at a par
value of Rs.10 each, the number of shares issued as purchase consideration is
(a) 1,00,000 shares

(b) 50,000 shares

(c) 10,00,000 shares

(d) 1,50,000 shares

(e) 2,00,000 shares.

43. The total debt-equity ratio of Appu Ltd. is 4:3. Its total asset is Rs.7000 lakh and its short-term
debt is Rs.500 lakh. If total debt consists of long-term debt as well as short-term debt, the amount of
long-term debt is
(a) Rs.500 lakh

(b) Rs.3,500 lakh

(c) Rs.1,000 lakh

(d) Rs.1,500 lakh

(e) Rs.1,600 lakh.

44. Arathi Ltd. acquires Bharati Ltd. for a consideration of Rs.40,00,000 to be satisfied in the form of
fully paid equity shares of Rs.10 each. The balance sheet of the two companies is as follows:
Liabilities Arathi Ltd. Bharati Ltd. Assets Arathi Ltd. Bharati Ltd.
Equity share capital @ Rs.10 each 40,00,000 25,00,000 Fixed assets 76,00,000 48,00,000
General reserves 15,00,000 3,00,000 Current assets 20,00,000 10,00,000
Development rebate reserve 3,00,000 1,00,000
Export profit Reserve 6,00,000 4,00,000, Profit & loss A/C 12,00,000 9,00,000
Sundry liabilities 20,00,000 16,00,000
96,00,000 58,00,000 96,00,000 58,00,000
The amount of Goodwill/Capital Reserve resulting from the amalgamation accounted for under
pooling of interest method is
(a) Rs.4,00,000 (Goodwill)

(b) Rs.4,00,000 (Capital Reserve)

(c) Rs.6,00,000(Goodwill)

(d) Rs.6,00,000 (Capital Reserve)

(e) Rs.Nil.

45. Arathi Ltd. acquires Bharati Ltd. for a consideration of Rs.40,00,000 to be satisfied in the form of
fully paid equity shares of Rs.10 each. The Balance Sheet of the two companies is as follows:
Liabilities Arathi Ltd. Bharati Ltd. Assets Arathi Ltd. Bharati Equity share capital 40,00,000 25,00,000
Fixed assets 76,00,000 48,00,000 General reserves 15,00,000 3,00,000 Current assets 20,00,000
10,00,000 General reserves 15,00,000 3,00,000 Current assets 20,00,000 10,00,000
Development rebate reserve 3,00,000 1,00,000
Export profit Reserve 6,00,000 4,00,000
Profit & loss A/C 12,00,000 9,00,000
Sundry liabilities 20,00,000 16,00,000
96,00,000 58,00,000 96,00,000 58,00,000
The amount of Goodwill/Capital Reserve resulting from the amalgamation accounted for under
Purchase method is
(a) Rs.4,00,000 (Goodwill)

(b) Rs.4,00,000 (Capital Reserve)

(c) Rs.2,00,000(Goodwill)

(d) Rs.2,00,000 (Capital Reserve)

(e) Rs.Nil.
46. The following information is related to Arnika Industries Ltd. Current liabilities and provisions
Rs.150 lakh Net sales Rs.700 lakh Inventory turnover ratio 7 Current ratio 1.50
Receivables/Quick Assets Ratio 0.8
What is the amount of cash and bank balance? (Assume 360 days in a year)
(a) Rs.18 lakh

(b) Rs.10 lakh

(c) Rs.12 lakh

(d) Rs.15 lakh

(e) Rs.25 lakh.

47. H. Ltd. acquired 80% shares of S. Ltd. on April 01, 2004. The Balance Sheets of H. Ltd. and
S. Ltd. as on March 31, 2005 were as follows: Balance sheets of H. Ltd. and S. Ltd. as onMarch 31,
2005 Liabilities H. Ltd.
(Rs.)

S. Ltd.

(Rs.)

Assets H. Ltd.

(Rs.)

S. Ltd.

(Rs.)

Share capital (Rs.10 each) 4,50,000 1,50,000 Land & building 2,10,000 1,20,000
General reserve 1,95,000 75,000 Plant & machinery 1,95,000 65,000
Profit & loss a/c 95,000 65,000 Furniture &fixtures 95,000 45,000
Sundry creditors 50,000 30,000 Investments 1,60,000 10,000
Bills payable 30,000 25,000 Stock 45,000 25,000
Sundry debtors 60,000 50,000
Bills receivable 35,000 20,000

Cash & bank 20,000 10,000

8,20,000 3,45,000 8,20,000 3,45,000
Other information:
i. As on the date of acquisition, the following balances were revealed in the books of S. Ltd.:
General reserve Rs.50,000
Profit & loss account Rs.30,000 (cr.)
ii. H. Ltd. received a dividend of Rs.12,000 from S. Ltd. from pre-acquisition profits and credited the
amount to investment account.
iii. Total bills payable of S Ltd. consisted of bills drawn by H. Ltd. and the same were discounted with
the bank by H. Ltd.
The total of Consolidated Balance Sheet of H. Ltd. and S. Ltd. as on March 31, 2005 was
(a) Rs.10,00,000

(b) Rs.11,00,000

(c) Rs.11,65,000

(d) Rs.20,00,000

(e) Rs.10,05,000.
48. Arundhati Ltd. sells its goods on credit only. The average collection period of the company is 30
days. Its balance sheet shows debtors balances of Rs.50 lakh as on 01.04.2005 and of Rs.70 lakh as on
31.03.2006. What was its annual sales turnover for the year 2005-06? (Assume 360 days in a year.)
(a) Rs.250 lakh

(b) Rs.300 lakh

(c) Rs.720 lakh

(d) Rs.450 lakh

(e) Rs.750 lakh.

49. Following is the balance sheets of H.Ltd. and its subsidiary S.Ltd. as on December 31, 2005.
Liabilities
H. Ltd.

(Rs.)

S. Ltd.

(Rs.) Assets H. Ltd. (Rs.)

S. Ltd.

Share capital (Rs.10 each) 2,00,000 1,00,000 Land & building 2,00,000 1,00,000
General reserve 1,00,000 50,000 Plant & machinery 1,00,000 50,000
Profit & loss a/c as on December 2004 50,000 40,000
Profit & Loss A/c 1,00,000 60,000 Investments 1,00,000 12% Debentures 2,00,000 1,00,000 Stock 1,50,000 1,50,000
Sundry creditors 1,00,000 50,000 Sundry debtors 1,00,000 50,000
Bills receivable 75,000 25,000
Cash & bank 25,000 25,000
7,50,000 4,00,000 7,50,000 4,00,000
H.Ltd. acquired shares in S.Ltd. on July 01, 2005.

(Rs.)

S.Ltd. had a balance of Rs.40,000 in General Reserve on January 01, 2005. Goods costing Rs.20,000 of
S.Ltd. were destroyed in March 2005 and was charged to Profit and loss account for the year.
The share of H.Ltd. in the capital profits of S.Ltd. was
(a) Rs.21,000

(b) Rs.84,000

(c) Rs.1,00,000

(d) Rs.76,000

(e) Rs.23,000.
50. Amoorv Industries Ltd. has made the following projections: Expected increase in spontaneous
Liabilities Rs.600 lakh Expected increase in assets Rs.1200 lakh Expected net profit by the end of the
year Rs.600 lakh Expected pay-out ratio 40 percent The amount of external funds required by the
firm is
(a) Rs.200 lakh

(b) Rs.400 lakh

(c) Rs.500 lakh

(d) Rs.240 lakh

(e) Data insufficient.

51. On December 01, 2005 H Ltd. acquired 70% shares in S Ltd.. The balance of profit and loss
account of S Ltd. On April 01, 2005 and March 31, 2006 was Rs.1,80,000 and Rs.2,95,000,
respectively. The profit is earned evenly throughout the year. The share of capital profit of HLtd. in
the Consolidated Balance Sheet as onMarch 31, 2006 is
(a) Rs.2,06,500

(b) Rs.88,500

(c) Rs.1,79,667

(d) Rs.1,26,000

(e) Rs.1,08,000.
52. On October 01, 2004, H.Ltd. acquired 70% shares in S.Ltd. at a cost of Rs.37,50,000. On October
01, 2004 the profit and loss account and Capital reserve of S.Ltd. showed credit balances of
Rs.5,00,000 and Rs.9,00,000 respectively. Following is the Balance Sheet of S.Ltd. as on March 31,
2005: Liabilities Rs. Assets Rs. Share capital 40,00,000 Land and building 31,50,000
(4,00,000 shares Rs.10 each) Machinery 14,70,000 Capital reserve 12,00,000 Furniture and fittings
10,80,000 Profit and loss account 8,00,000 Sundry debtors 3,90,000
Short term loan 4,00,000 Closing inventory 2,40,000
Sundry creditors 60,000 Cash on hand 70,000
Cash at bank 60,000

64,60,000 64,60,000

On October 15, 2004 S.Ltd. declared a dividend of 10% out of its previous years profits. Amount of
goodwill/Capital Reserve that is to be shown in the Consolidated Balance Sheet as on March 31, 2005
was

(a) Rs.2,50,000 (Goodwill)

(b) Rs.2,50,000 (Capital Reserve)

(c) Rs.30,000 (Goodwill)

(d) Rs.30,000 (Capital Reserve)

(e) Rs.3,10,000 (Capital Reserve).

53. The data on the current assets and current liabilities of Arpita Ltd. for the financial year 2005-06
are given below (in terms of Rs. lakh):
Debtors Cash balance Inventory Current liabilities
Beginning 100 70 30 60
Ending 120 60 45 55
The change in net working capital of the company is
(a) Rs.15 lakh

(b) Rs.20 lakh

(c) Rs.25 lakh

(d) Rs.30 lakh

(e) Rs.50 laksh.

54. M/s.Hold Ltd. acquired 85% shares of M/s. Sold Ltd. on December 12, 2004. M/s.Hold Ltd. makes
a profit of 15% on its sales. During the year 2005-06, it supplied goods worth Rs.60,000 to M/s.Sold
Ltd., out of which, 50% are still in stock of M/s Sold Ltd. as on March 31, 2006. The company adheres
to AS-21, for reporting purposes. The unrealized profit on stock to be adjusted while preparing
Consolidated Balance Sheet is
(a) Rs.3,060

(b) Rs.3,825

(c) Rs.2,550

(d) Rs.4,500

(e) Rs.3,600.
55. The following figures are collected from the annual report of Akhaya Ltd.:
Return on investment = 12 percent
Number of outstanding equity shares = 1,00,000
Net worth = Rs.25 lakh
Total debt = Rs.40 lakh
Average cost of debt = 9 percent
Applicable tax rate = 40 percent
The earning per share for Akhaya Ltd. is
(a) Rs.2.00

(b) Rs.2.26

(c) Rs.2.52

(d) Rs.2.73

(e) Rs.2.99.

56. M/s.Hell Ltd. acquired 90 % shares of M/s. Sell Ltd. on October 1, 2005. At the time of acquisition,
the plant and machinery of M/s.Sell Ltd. was revalued by M/s.Hell Ltd. at 20% above its book value
of Rs.6,00,000. At the time of Consolidation of Balance Sheet on March 31, 2006, the share of M/s.Hell
Ltd. in the profit is
(a) Rs.1,08,000 (Capital profit)

(b) Rs.1.08,000 (Revenue profit)

(c) Rs.1,40,000 (Capital profit)

(d) Rs.1,20,000 (Revenue profit)

(e) Rs.1,20,000 (Capital profit).

57. On July 01, 2005, M/s.Hat Ltd. acquired 8,000 equity shares of M/s. Sat Ltd. for a consideration of
Rs.8,00,000.
The share capital of M/s. Sat Ltd. consists of 10,000 equity shares of Rs.100 each.
The balances of General reserve and Profit and loss account ofM/s.Sat Ltd. are as under:
As on July 01, 2005 (Rs.) As on March 31, 2006 (Rs.)
General reserve 1,70,000 2,00,000
Profit and loss account 1,50,000 1,75,000
The amount of minority interest shown in Consolidated Balance Sheet as onMarch 31, 2006 is
(a) Rs.3,30,000

(b) Rs.2,75,000

(d) Rs.2,50,000

(e) Rs.2,69,000.

(c) Rs.3,07,500

58. Consider the following data pertaining to Abbas Ltd.

Authorized share capital Rs. 20,00,000
Issued, called-up and paid -up capital Rs. 12,00,000
Calls in advance Rs. 80,000
Securities Premium Rs. 1,20,000
Profit for the current year Rs. 2,55,600
The directors of the company proposed a dividend of 12%. The amount debited to Profit and Loss
Appropriation
account on account of proposed dividend is
(a) Rs.30,672
(b) Rs.2,40,000
(c) Rs.1,53,600

(d) Rs.1,44,000

(e) Rs.1,58,400.

59. The Managing Director of Alluri Ltd. is entitled to a commission of 5% on net profits before
charging such commission. The net profit of the company for the year ended March 31, 2006 was
reported to be Rs.25,50,000.
Subsequently, it was noticed that the following transactions were omitted:

Particulars Rs.
Payment of directors remuneration 50,000
Sale of a plant (cost price Rs.1,00,000; written down value Rs.80,000) 1,10,000
Payment of bonus to production executive 50,000
Payment of income tax and super tax 5,000
Issue of 20,000 equityshares ofRs.10 each at a premiumofRs.2 2,40,000
The commission payable by the company to the managing director for the year 2005-2006 is
(a) Rs.1,23,500
(b) Rs.1,26,000
(c) Rs.1,28,500
(d) Rs.1,17,620

(e) Rs.1,60,000.

60. Hot Ltd. holds 80% shares of Sot Ltd. As on March 31, 2006, the bills payable of Sot Ltd. consists
of Rs.20,000 out of which bills worth Rs.6,000 were drawn by Hot Ltd. and the same were discounted
with the bank. If the Balance Sheet of Hot Ltd. does not have any bills payable, the amount of bills
payable to be shown in the Consolidated Balance Sheet as on March 31, 2006 is
(a) Rs.10,000

(b) Rs.6,000

(c) Rs.14,000

(d) Rs.20,000

(e) Rs.Nil.

61. The directors of M/s.Agra Ltd. proposed a dividend of 14%. The minimum amount of current
profits to be transferred by the company to reserves is
(a) 2.5%

(b) 10%

(c) 7.5%

(d) 5%

(e) 20%.

62. Consider the following data pertaining to a company:

Average capital employed Rs.25,00,000
Closing capital employed Rs.30,00,000
The amount of capital employed at the beginning of the year is
(a) Rs.27,50,000

(b) Rs.25,00,000

(d) Rs.20,00,000

(e) Rs.5,00,000.

(c) Rs.22,50,000

63. Consider the following data pertaining to M/s April Ltd.:

Particulars Rs. Nominal equity share capital 50,000
Issued and called-up equity share capital 48,000
Paid-up equity share capital 48,000
Calls in advance 1,000
10% Preference share capital (fully paid-up) 50,000
If the company declares a dividend of 10%, the total dividend payable is
(a) Rs.10,100

(b) Rs.10,000

(c) Rs.9,900

(d) Rs.9,800

(e) Rs.4,800.

64. For a company, the net profit margin is 12 percent, debt-equity ratio is 2.00 and the total asset
turnover is 1.67. What is the return on equity for that company?
(a) 3.34 percent

(b) 20 percent

(d) 30 percent

(e) 60 percent.

(c) 24 percent

65. For Akash Ltd., the current ratio is 2.75 while the acid test ratio is 2.00. What is the percentage of
inventories with respect to the current liabilities?
(a) 20.00 percent
(b) 27.50 percent
(d) 55.00 percent

(c) 40.00 percent

(e) 75.00 percent.

66. Aryan Ltd. purchased furniture for Rs.60,000 two years ago. The current book value of the
furniture is Rs.43,350. If the company charges depreciation on furniture under written down value
method, the rate of depreciation charged was
(a) 35%

(b) 30%

(c) 25%

(d) 20%

(e) 15%.

67. The sales turnover of a company is Rs.120 lakh while the amount of credit sales is 80 percent of
total sales. If the amount of receivables increases from Rs.8.50 lakh to Rs.11.50 lakh during the year,
what is its average collection period from its debtors?
(a) 22.5 days

(b) 27.5 days

(d) 37.5 days

(e) 42.5 days.

(c) 32.5 days

68. Consider the following data pertaining to Ananth Ltd. as on March 31, 2006:
Particulars Rs. Credit sales 1,40,000
Credit purchases 20,000
Cash sales 20,000
Cash purchases 70,000
Wages paid 5,000
Salaries paid 2,000
Returns inward 3,000
Returns outward 2,000
Carriage inward 1,000
Carriage outward 1,000
Printing and stationery 600
Gas, water and fuel 2,000
Raw materials destroyed by fire 2,000

Additional Information:
Particulars As on April 01, 2005 As on March 31, 2006
Rs. Rs.
Inventory 27,000 40,000
Outstanding wages 500 700
Outstanding salaries 400 300
Gross profit of Ananth Ltd. for the year ended March 31, 2006 is
(a) Rs.73,800
(b) Rs.75,800
(c) Rs.74,800
(d) Rs.76,200

(e) Rs.75,200.

69. The following information is related to Allepy Ltd.:

Gross profit Rs.45 lakh
Gross profit margin 20 percent
Total assets turnover ratio 3
Total debt to equity ratio 1.50
Current assets Rs.35 lakh
Current ratio 2.50
What is outstanding amount of term loan in its balance sheet? (Assume term loan is the only interest
bearing borrowings made by the company)
(a) Rs.22 lakh

(b) Rs.25 lakh

(d) Rs.31 lakh

(e) Rs.34 lakh.

(c) Rs.28 lakh

70. Apurva Ltd. has the practice of creating provision for doubtful debts @ 5% on debtors. The
balance of provision for doubtful debts on April 01, 2005 and March 31, 2006 is Rs.30,000 and
Rs.40,000, respectively. If the amount collected from debtors is Rs.56,00,000, credit sales during the
year 2005-2006 are
(a) Rs.58,00,000

(b) Rs.56,10,000

(d) Rs.55,90,000

(e) Rs.56,00,000.

(c) Rs.54,00,000

71. Which of the following conditions have to be met to receive calls-in-advance?

(a) It should be authorized by a special resolution of the company
(b) It should be authorized by an ordinary resolution of the company
(c) It should be sanctioned by the Central Government
(d) It should be approved by the Company Law Board
(e) It should be authorized by the articles.

72. The time interval between the dates of balance sheets of holding company and subsidiary
company for the purpose of consolidation of accounts
(a) Can be more than 1 year
(b) Can be more than 9 months but less than 1 year
(c) Can be more than 6 months but less than 9 months
(d) Cannot be more than 6 months
(e) Cannot be more than 2 months.
73. Under which of the following heads is a claim against a company not acknowledged as debt
shown?
(a) Notes to balance

(b) Current liability

(c) Current asset

(d) Secured loan

(e) Unsecured loan.

Suggested Answers
1. Answer : (c)
Reason: The loss on sale of fixed assets (c) is debited to profit and loss account and is not carried
over under Miscellaneous expenditure in the balance sheet of a company and alternative (c) is the
correct answer. the following will form part of Miscellaneous Expenditure of the Balance Sheet of a
company till they are adjusted/written off completely Preliminary expenses (a), Underwriting
expenses (b), Discount on issue of shares (d) and Interest paid out of capital.(e) are not the correct
answers.
2. Answer : (e)
Reason: In Jury of Executive opinion method, the personal judgements of many senior executives from
different fields are taken into account while in sales force estimates method, the personal judgment of
the sales personnel operating at the ground level are considered. But mathematical tools and
techniques are applied in the methods mentioned in the options (c) and (d). Hence, the option
(e) is answer.
3. Answer : (d)
Reason: Para 3(g) of AS-14 clearly states that purchase consideration is the aggregate of shares and
other securities issued and the payment made in the form of cash or other assets by the transferee
company to the shareholders of the transferor company.
4. Answer : (e)
Reason: In the Consolidated Balance Sheet of a Holding Company, the value of minority interest
consists of the proportionate share of minority shareholders in the (I) Nominal value of share capital
of subsidiary company (III) Reserves and profits of the subsidiary company at the time of acquisition
by the holding company and (V). Income of the subsidiary company after the acquisition by the
holding company Hence, the alternative (e) the combination of the these statements is the correct
answer. (II) Reserves of the holding company and (IV) Income of the holding company after its
acquisition are entirely the share of the share holders of the holding company and do not belong to
the minority share holders of the subsidiary company and the alternatives (b), (c) and (d) with these
statements are incorrect. The alternative (a) is incorrect because it does not represent the entire
share of the minority share holders. Thus, alternative (e) is the correct answer.

5. Answer : (d)
Reason: The liquidity of a company is measured by the acid-test ratio as it is a liquidity ratio. The
other ratios, as mentioned in the other options, do not convey anything in relation to the liquidity of
a company.
6. Answer : (e)
Reason: Under the Net Assets method of calculating purchase consideration, assets and liabilities of
the transferor company are taken over by the transferee company at agreed values. In the absence of
agreed values, book values of the assets and liabilities is considered.
7. Answer : (d)
Reason: A funds flow statement on cash basis does not show the net change in working capital.
8. Answer : (b)
Reason: EVA can be improved by downsizing non-profitable operations, units or by selling off substandard assets. Hence (b) is false. The computation of EVA involves a complex procedure. Stern and
Stewart suggested 175 different assumptions and adjsutments on the basic measure. EVA is a
residual income measure that subtracts the cost of capital from the operating profit generated by a
business. In other words, EVA measures whether the operating profit is enough compated to the total
cost of capital. EVA is simply after-tax operating profit minus the total annual cost of capital. EVA is
one variation if residual income with adjustments in the method of calculation. Unlike the traditional
measure of accounting profit where only part of the cost of capital (cost of debt) is deducted, EVA
requires deduction of full cost of capital (Cost of debt as well as cost of equity).
EVA can be used for making day-to-day decisions as well as for strategic planning. For this
purpose, EVA points have to be identified. An EVA point is one which has revenue, expenditure
and capitl issue attached to it. EVA destroyers for each EVA point are identified and steps are taken
to improve them.EVA analysis is made for each and every EVA point for decision-making. Thus
(a), (c), (d) and (e) are true.
9. Answer : (d)
Reason: Forecasting sales volume is the first step in the exercise of financial forecasting. Based on the
amount of sales target to be achieved by the company, forecasting for the other requirements are
made.

10. Answer : (a)

Reason: Dividends paid by a subsidiary company out of pre-acquisition profits are adjusted against
Investment A/c for the purpose of arriving at cost of control at the time of consolidation of accounts
(a) since they form part of capital profits they are adjusted against the cost of control and alternative
(a) is the correct answer. Since, they are capital profits, they cannot be adjusted against general
reserve at the time of consolidation (b) is the incorrect answer. They are not revenue receipts to be
transferred to Profit and Loss account at the time of consolidation of accounts and alternative (c) is
the incorrect answer. Since they are part of capital profits, they cannot be ignore for consolidation
purposes. And alternative (d) is incorrect. The dividends declared out of post-acquisition profits are
the claims of the shareholders of the holding company. and do not form part of cost of control. The
alternative (e) is not the correct answer. Thus, alternative (a) is the correct answer.
11. Answer : (b)
Reason: When Statutory Reserves are incorporated in the financial statements of the transferee
company by
way of the following entry.
Amalgamation Adjustment A/c Dr.
To Statutory Reserves A/c
This ENTRY is reversed when the statutory reserve is no longer required. Hence the journal entry is
Statutory Reserves A/c Dr.
To Amalgamation Adjustment A/c
12. Answer : (b)
Reason: Called up capital is the amount on the shares which is actually demanded by the company to
be paid. However, there may be some shareholders who may make default in the payment. The
money due from them is called calls-in-arrears. This amount should be deducted from the called up
capital to arrive at the paid-up capital. Thus, (b) is the correct answer.
13. Answer : (e)
Reason: A funds flow statement is known through different terms one of them is mentioned in the
given option (e). A balance sheet states the financial position of a company as on a particular date
while profit and loss statement or income statement shows the financial performance of a company
during a year or a particular time period. Proforma statements are prepared to project the financial
position (proforma balance sheet) of a company and the financial performance (proforma income

statement) of a company in future.

14. Answer : (e)
Reason: Preference share capital, equity share capital, calls-in arrear and share forfeiture should be
shown under the head Share capital in the balance sheet. However the preference dividend will be
shown under provisions if it is proposed and under current liabilities if declared. The unclaimed
dividend also will be shown under the head current liabilities, Thus the answer is (e).
15. Answer : (b)
Reason: Dividend pay out ratio indicates the amount of dividend paid out of net profit earned by the
company. Net profit margin represents the amount of profit as a percentage of total sales. Inventory
turnover ratio implies how efficiently the inventories are used by a company while acid test ratio
shows the liquidity status for a company. But fixed chares coverage ratio represents the ability of a
firm to meet its financial obligations to make service the debts as well as to pay the lease rentals.
16. Answer : (e)
Reason: As per schedule VI of the Companies Act, 1956, Unadjusted development expenditure (e) is
shown under Miscellaneous expenditure and is the correct answer. It is not shown under the head
fixed assets. The other assets stated in alternatives Lease hold property (a), Development of property
(b), Railway sidings (c) and Designs (d) are the fixed assets and not the correct answers. Thus,
alternative (e) is the correct answer.
17. Answer : (e)
Reason: According to the Schedule VI of the Companies Act, 1956, the following assets is/are shown
under the head investments in the balance sheet of a company
I Investments in the capital of partnership firms
II Investment in Trust securities
III Investment in shares
IV Investment in debentures.
18. Answer : (a)
Reason: (III) Every officer and other employee and agent in default is/are held responsible for
keeping proper books of accounts of a company in addition to the Managing Director or Manager of
the company Thus, alternative (a) is the correct answer. The other persons mentioned in other
statements and alternatives (b), (c), (d) and (e) are incorrect because they are not the persons held

liable for proper keeping books of accounts

I Every legal advisor of the company
II Every banker of the company
IV Every auditor of the company
V Every member of the company. Thus, the correct answer is (a).
19. Answer : (b)
Reason: The financial risk of a firm may be estimated by using the leverage and coverage ratios while
the earning potential of a company may be evaluated through the profitability ratios. The operational
and the level of efficiency in utilizing the assets may measured by using the turnover ratios. But
price-earnings ratio is used to determine the expected market price per share of the company. One
may project the EPS of a company for the next few years and thereafter by assuming the continuity
of the same P/E multiple, the future market price per share may be calculated.
20. Answer : (c)
Reason: Dividends are usually paid as a percentage of called-up capital less calls-in-arrear (c).It is not
paid on authorized capital (a) unless it is fully called-up and paid-up. Net profit (b) is the basis for
declaring dividends but the computation is as a percentage of paid-up capital. And is not the correct
answer. No dividend is payable on calls-in-advance hence the alternative (d) which states paid-up
share capital plus calls-in-advance is incorrect. The alternative (e) is also incorrect because, it also
includes calls-in-advance. Thus, alternative (c) is the correct answer.
21. Answer : (c)
Reason: As per the Schedule VI of the Companies Act, 1956, Premium on issue of debentures is
shown under head Reserves and Surplus in the balance sheet of a company. It is unlike share
premium which is to be utilized as per section 79 of the Companies Act. The premium on issue of
debentures is treated as profit and placed under Reserves and Surplus in the balance sheet of a
company. Thus, (c) is the correct answer.
22. Answer : (b)
Reason: The trend analysis, through the method of extrapolation and regression analysis are used for
the projection of sales volume of the company. The future relationship between various costs to sales
is assumed to follow historical relationship in case of percent of sales method. But in budgeted
expense method, the estimation of the various items is considered on the basis of the expected
changes to be happened in the market for the preparation of the proforma income statement. Hence,

the option (b) is the answer.

23. Answer : (b)
Reason: The proposed dividend is classified as a provision and shown on the liability side of the
balance sheet. The dividend finally decided by the shareholders in the annual general meeting as
payable is termed as Declared Dividend. Any dividend declared must be paid with thirty days from
the date of declaration. Hence, a declared dividend must be classified as a current liability in the
balance sheet of the company. Thus the answer is (b).
24. Answer : (b)
Reason: Consolidated financial statements should reflect the economic activities of a business
enterprise measured without regard to the boundaries of the legal entity. A parent and subsidiary
are legally separate but are treated as a single business enterprise in consolidated statements, in
recognition of Business entity concept (b). The other concepts do not explain about consolidation of
financial statements. The Going concern concept (a) assumes that the business entity will continue to
operate in the absence of evidence to the contrary. Materiality (c) requires reporting the information
that has a value significant enough to affect decisions of those using the financial statements. Cost
concept
(d) explains how the assets are to be recorded in the books of accounts. According to this, fixed assets
are to be recorded at cost less accumulated depreciation. Periodicity (e) explains that the financial
accounting process is meant to provide the information about the economic activities of the business
enterprise at regular intervals. It does not speak about consolidation of financial
statements.
25. Answer : (a)
Reason: In case of a company, it is not necessary to split the profit and loss account into three
sections i.e. Trading Account, Profit and Loss Account and Profit and Loss Appropriation Account.
Only Profit and Loss Account may be prepared covering items appearing in Trading Account and
Profit and Loss Appropriation Account. The Profit and Loss Appropriation section of the profit and
Loss account shows the appropriation of profit and is popularly known as below the line (a) is the
correct answer. There is no term above the line (b) in accounting in this context. Profit and loss
adjustment account (c) is the final account depicting rectification of errors that are found after
preparation of final accounts. Specific reserve (d) is appropriation of profit for specific purpose
either for acquisition of an asset or amortization of expenditure or redemption of a liability and has
no relevance. General reserve (e) is the reserve created out of net profits, which is not the correct

26. Answer : (a)

Reason: According to the Companies Act, 1956, the companies have to compulsorily maintain their
books of account only on accrual basis. Cash basis should not be followed.
27. Answer : (c)
Reason: No disclosure is required in consolidated financial statements in respect of Intra-group
transactions. The other items, Remittances-in-transit, capital reserve/Goodwill and minority interest
are disclosed in consolidated financial statements.
28. Answer : (b)
Reason: Du Pont equation for return on equity is:
Return on Equity (ROE)
Net profit Sales Average assets
Sales Average assets Average equity

The third component of the equation is called equity multiplier.

Thus, higher the assets turnover ratio, higher the equity multiplier, higher the debt-assets ratio,
higher the return on assets, higher will be the return on equity. Hence, (c), (d) and (e) are not correct
and (b) is correct. Return on equity does not depend on sales. Hence, (a) is also not true.
29. Answer : (b)
Reason: A decrease in the retention ratio implies an increase in the dividend payment and less
amount of funds available for investment and hence increases the external funds required. Hence, (b)
is true. An increase in the spontaneous liabilities to sales ratio, an increase in assets turnover ratio
(i.e. a decrease in total assets to sales ratio) decreases the external funds required. Hence, (a) and (c)
are incorrect. Short-term bank borrowings are one of the sources of the external funds and does not
indicate the amount of funds required.
30. Answer : (d)
Reason: The nominal value of shares taken up by the public is subscribed capital. The issued capital
is the nominal value of shares offered to the public. Hence subscribed capital is equal to issued
capital when all the shares offered to the public are taken up by the public. When the board of
directors have called up the total amount payable by the shareholders, the called-up capital will be
equal to the subscribed capital. When the maximum share capital which the company is authorized
to issue is offered to public, the authorized capital will be equal to the issued capital.When all the

shareholders have duly paid the total amount payable by them, the called-up capital will be equal to
the paid-up capital. Subscribed capital and issued capital are not one and the same. Thus the answer
is (d).
31. Answer : (d)
Reason : An increase in current assets or a decrease in current liabilities will increase the working
capital. Hence, a decrease in the amount of provision for tax i.e. a current liability results in an
increase in working capital. Option (a) results in an increase in current liability and hence results in
decrease in working capital. Other alternatives indicates changes in non-current assets and hence are
not correct.
32. Answer : (c)
Reason : Inventory turnover ratio=Cost of goods sold/Average inventory
If the inventory turnover ratio has decreased from past, it means that either inventory is growing or
cost of goods sold sales are dropping. So statement (I) is incorrect.
If a firm has an inventory turnover that is slower than for its industry, then there may be obsolete
goods on hand, or inventory stocks may be high. So statement (II) is incorrect.
Low inventory turnover has impact on the liquidity of the business because most of the current
assets are tied up in inventory. So statement (III) is correct.
Hence option (c) is the answer.
33. Answer : (e)
Reason : Using a funds flow statement we can know about all the given factors. i.e. liquidity,
acquisition of non current assets, about utilization of external funds and pattern of financing. Hence
(e) is the answer.
34. Answer : (a)
Reason : If the proposed dividend appears in the balance sheet of subsidiary company, while
preparing the Consolidated Balance Sheet, the amount belonging to minority shareholders should be
shown under proposed dividend in the Consolidated Balance Sheet. Hence the answer is (a).
35. Answer : (c)
Reason : Net value-added is derived by deducting depreciation from the gross value added. Gross
value added is arrived at by deducting cost of all materials and services and other extraordinary
expenses from sales revenue and any other income. Therefore, Net value added = Gross value added

Depreciation.
36. Answer : (b)
Reason : The item interest accrued on investments appears in the Balance Sheet of a company under
the category of current assets.
37. Answer : (a)
Reason : As per accounting standard 18, if two or more companies are subsidiaries of the same
holding company, each subsidiary is known as Fellow subsidiary.
38. Answer : (c)
Reason : Though dividends can be declared only by a resolution of the shareholders, if the articles
permit, the directors can declare an interim dividend (c) between two annual general meetings. The
dividend recommended by the directors is termed as proposed dividend (a) till such time it is
approved by the shareholders in the AGM. The dividend finally decided by the shareholders in the
AGM as payable is termed as Declared dividend (d). The unclaimed portion of it is un-paid/ unclaimed dividend (e). Final dividend (b) gives rise to an enforceable obligation.
39. Answer : (a)
Reason : Debt asset ratio indicates the capital structure of a company. Inventory turnover ratio and
total asset turnover ratio are the turnover ratios that indicate how efficiently the assets are utilized
by a company. While return on equity and return on assets are the profitability ratios of a business
entity.
40. Answer : (d)
Reason : Economic value addition=Net operating profit after tax Weighted average cost of capital.
41. Answer : (d)
Reason : Net asset method refers to vendor companys assets less liabilities taken over by the
purchasing company. In the above, purchase consideration is equal to
Particulars Amount (Rs.)
Fixed Assets 6,00,000
Current Assets 2,50,000
8,50,000
Less Debentures 1,50,000

Current Liabilities 1,00,000

Purchase consideration 6,00,000
42. Answer : (b)
Reason : Each share of Asha Ltd. has a market value of Rs.40 while the market value of Ashiki Ltd. has
Rs.20. Hence purchase consideration payable is 1,00,000 x Rs.20 = Rs.20,00,000. This purchase
consideration is to be satisfied with the issue of shares of Asha Ltd. with a market value of Rs.40.
Hence, the number of shares of Asha Ltd. is 50,000.
43. Answer : (b)
Reason : Here, the total debt-equity ratio is = 4:3 and the amount of total assets is Rs.7000 lakh.
So, the total amount of debt is =
4
Rs.7000 lakh
7

= Rs.4000 lakh.
But the amount of short term debt is Rs.500 lakh.
Hence, the amount of long term debt = 4000 500 = Rs.3500 lakh.
44. Answer : (e)
Reason : In the case of amalgamation accounted for under Pooling of interest method, no goodwill or
capital reserve results. The excess of assets over liabilities is adjusted in the General Reserve not
giving rise to goodwill or capital reserve.
45. Answer : (d)
Reason : When the amalgamation is accounted for under the purchase method, the journal entry is
Fixed Assets Dr. 48,00,000
Current Assets Dr. 10,00,000
To Sundry Liabilities 16,00,000
To Purchase Consideration 40,00,000
To Capital Reserve 2,00,000

46. Answer : (e)

Reason : Inventory = =
Sales
Inventory Turnover ratio = Rs.100 lakh
Current assets = Current liabilities current ratio = Rs.150 1.5 = Rs.225 lakh.
Quick assets = Current assets Inventories = Rs.225 lakh Rs.100 lakh = Rs.125 lakh
Receivables = Rs.125 lakh 0.80 = Rs. 100 lakh
So, the amount of cash and bank balance will be = Rs.225lakh Rs.100 lakh Rs.100 lakh
= Rs.25 lakh.
47. Answer : (e)
Reason : Consolidated balance sheet of H Ltd and S Ltd as on March 31, 2005
Liabilities Rs. Assets Rs.
Share capital (Rs.10 each) 4,50,000 Land & building Rs.
General reserve 1,95,000 H Ltd. 2,10,000
Capital reserve 12,000 S Ltd. 1,20,000 3,30,000
Profit & loss account Rs. Plant & machinery
H Ltd. 95,000 H Ltd. 1,95,000
Shares in S Ltd.
(Revenue profit)
60,000 1,55,000
S Ltd.
65,000 2,60,000
Sundry creditors: Furniture & fixtures
H Ltd. 50,000 H Ltd. 95,000
S Ltd. 30,000 S Ltd. 45,000 1,40,000
80,000 80,000 Investments 10,000
Stock H Ltd.
45,000
Bills payable: S Ltd. 25,000 70,000
H Ltd. 30,000 Sundry debtors
S Ltd. 25,000 55,000 H Ltd. 60,000
Minority interest 58,000 S Ltd. 50,000
1,10,000
Bills receivable

H Ltd. 35,000
S Ltd. 20,000 55,000
Cash & bank
H Ltd. 20,000
S Ltd. 10,000 30,000
10,05,000 10,05,000
48. Answer : (c)
Reason : Average collection period =
Average accounts receivable
Averagedailysales
Let the annual sales of the company is = S and so the amount of average daily sales =
S
360
So, the average daily sales =
Average accounts receivable
Average collection period
The average amount of account receivables for the company is : {50+70}/ 2 = Rs.60 lakh. Hence,
S Rs. = 60
360 30
Or, S = Rs.720 lakh.
49. Answer : (b)
Reason : Reason: Analysis of Capital Profits of S.Ltd.
General Reserve as on January 01, 2005 40,000
Profit and Loss Account balance as on Jan 01, 2005 40,000
Profit for the year before transfer to G.Reserve and
Writing off loss of stock
(60,000 + 10,000 +20,000 = 90,000)
Current profit for Jan 1 to July 1) 45,000
1,25,000
Less loss of stock in March 2005 20,000
1,05,000
Less share of minority interest (20% ) 21,000
Share of Holding Company ( 80% ) 84,000

50. Answer : (d)

Reason : The amount of external funds required by a company is given by : Expected increase in
assets Expected increase in spontaneous liabilities Expected retained earnings.
Here, the expected retained earnings of the company is Rs.600 lakh 60 percent = Rs.360 lakh.
Hence, the required figure is Rs.1200 lakh Rs.600 lakh Rs.360 lakh = Rs.240lakh.
51. Answer : (c)
Reason : Profit for the year 2004-2005 = Rs.2,95,000 Rs.1,80,000 = Rs.1,15,000
Profit for 8 months (from April 01, 2005 to December 01, 2005)=
x,,
8
1 15 000
12 = Rs.76,667
Share of capital profit of H Ltd. = (1,80,000 + 76,667) x 70% = Rs.1,79,667.
52. Answer : (d)
Reason :
Capital Profits
(Rs.)
Pre-acquisition reserve 9,00,000
Pre-acquisition profits 5,00,000
14,00,000
Less: Dividend (40,00,000 x 10%) 4,00,000
10,00,000
Particulars (Rs.) (Rs.)
Cost of investments 37,50,000
Face value of investments (40,00,000 x 70%) 28,00,000
Capital profits Rs.(10,00,000 x 70%) 7,00,000
Dividend out of pre-acquisition profits Rs.4,00,000 x 70%) 2,80,000 37,80,000
Capital Reserve 30,000
53. Answer : (d)
Reason : Change is net working capital can be calculated as : (120 + 60 + 45 55) (100 + 70 +30
60) = 170 140 = Rs.30 lakh.

54. Answer : (d)

Reason : Unrealised profit on stock to be adjusted while preparing Consolidated Balance Sheet = Rs.
60,00015%50% = Rs.4,500. Since the company adheres to AS-21 for reporting purposes, intra
group transactions are to be eliminated in full. Hence the unrealised profit to the extent of Rs.4,500
is to be eliminated or adjusted.
55. Answer : (c)
Reason : Total assets of the company = Rs.25 lakh + Rs.40 lakh = Rs.65 lakh and so the amount of
EBIT registered by the company = Rs.65 lakh 12 percent = Rs.7.80 lakh.
Now, interest paid by the company against the debt capital = Rs.40 lakh 9 percent = Rs.3.60 lakh.
Hence, the earnings before taxes is = Rs.7.80 lakh Rs.3.60 lakh = Rs.4.20 lakh and the net profit
for the company = Rs.4.20 lakh 0.60 = Rs.2.52 lakh.
Therefore, the earnings per share will be = Rs.2.52.
56. Answer : (a)
Reason : Book value of the machinery = Rs.6,00,000
Value of machinery on revaluation = 20% above book value
Profit on revaluation = 20% of Rs.6,00,000
= Rs.1,20,000
Share of H. Ltd. = 90%of Rs.1,20,000
= Rs.1,08,000 (Capital profit)
If the value of assets of the subsidiary company are revalued at the time of acquisition of shares,
profit or loss on such revaluation is treated as capital profit or capital loss and is divided among
minority shareholders and holding company according to their share.
There is no revenue profit in the instant problem.
57. Answer : (b)
Reason :
Particulars Rs.
Nominal value of 2,000 shares @ Rs.100 per share 2,00,000
Share of capital Profit (1,70,000 + 1,50,000) 20% 64,000
Share of Revenue Profit
[(2,00,000-1,70,000)+(1,75,000 1,50,000)] 20% 11,000
Minority interest 2,75,000

58. Answer : (d)

Reason : No dividends are paid on call in advance nor on calls in arrear Dividend = 12% on Rs.
12,00,000 =
Rs.1,44,000.
59. Answer : (a)
Reason :
Particulars Rs. Rs.
Net Profit as calculated 25,50,000
Add: Revenue Profit on sale of plant 20,000
25,70,000
Less: Directors remuneration 50,000
Bonus paid to production executive 50,000 1,00,000
Net Profit 24,70,000
Where the amount for which the fixed asset is sold exceed the written-down value, credit shall be
given for so much of the excess as is not higher than the difference between the original cost of the
fixed asset and its written down value. Hence only Rs.20,000 (Rs.1,00,000 Rs.8,00,000) should be
added The directors remuneration and the bonus paid to any member of companys staff should be
deducted whereas Income tax and super tax should not be deducted.
Credit should not be given to profits by way of premium on shares
Managing Directors Commission = 24,70,000 5% = Rs.1,23,500.
60. Answer : (d)
Reason : As the bills drawn by Hot Ltd. were already discounted with the bank, the same are no more
intercompany debts. Hence the bills payable should be shown at Rs.20,000.
61. Answer : (d)
Reason : Where the dividend proposed exceeds 12.5% but does not exceed 15%, the amount to be
transferred to the reserves shall not be less than 5% of the current profits
62. Answer : (d)
Reason : Average capital employed = (Opening capital employed + Closing capital employed) 2
2 Rs.25,00,000 = Opening capital employed + Rs.30,00,000
Opening capital employed = Rs.50,00,000 Rs.30,00,000
= Rs.20,00,000.

63. Answer : (d)

Reason : Dividend is paid on paid-up capital
Equity share capital + Preference share capital
= Rs.48,000 + Rs.50,000 = Rs.98,000 = 10% of Rs.98,000 = Rs.9,800.
64. Answer : (e)
Reason : The Return on Equity (ROE) for a company may be stated as:
ROE = Net profit Net profit Sales TotalAssets
Networth sales Totalassets Networth
=
= Net profit margin total assets turn over ratio
Debt
Equity

1
= 12 1.67 3 = 60 percent.
65. Answer : (e)
Reason : For any company, current ratio is the ratio between the current assets and current liabilities
while the acid test ratio is the ratio between the current assets less inventories and current liabilities.
So, if the current ratio is 2.75 and the acid test ratio is 2.00, then it can be said that the inventories
constitute for 75 percent of the current liabilities.
66. Answer : (e)
Reason : Rate of depreciation = 1
n
S
C
= 1
2
43,350
60,000
= 1 0.85 = 15%.

67. Answer : (d)

Reason : Sales turnover = Rs.120 lakh and so credit sales = Rs.120 0.8
= Rs.96 lakh
So, the average daily credit sales =
= Rs. . 96
0 267
360 lakhs.
And the average account receivables = (8.50 +11.50) / 2 = Rs.10 lakh
So, the required average collection period is =
Average accounts receivable
Average daily credit sales
=
10
37.5 days
0.267
=
.
68. Answer : (b)
Reason : Ananth Ltd.
Dr. Trading Account for the period ending March 31, 2006 Cr.
Particulars Rs. Rs. Particulars Rs. Rs.
To Opening stock 27,000 By Sales:
To Opening stock 27,000 By Sales:
To Purchases Cash 20,000
Cash 70,000 Credit 1,40,000
Credit 20,000 1,60,000
90,000 () Returns inward 3,000 1,57,000 (
) Goods lost 2,000 By Closing stock 40,000 (
) Returns outward () 2,000 86,000
To Wages 5,000
(+) Outstanding as
on March 31, 2006 700
5,700
() Outstanding as

on April 01, 2005 500 5,200

To Carriage inward 1,000
To Gas, water, fuel 2,000
To Gross Profit 75,800
1,97,000 1,97,000
69. Answer : (d)
Reason : Gross profit = Rs.45 lakhs and gross profit margin = 0.2
So, the sales turnover =
45
0.2 = Rs.225 lakhs
Total assets =
Sales
Total assets turnover ratio
=
225
3 = Rs.75 lakhs.
But, total assets = Total liabilities = Total Debt + Total equity
and the total debt equity ratio = 1.50
So, total debt = 75
3
2 + 3 = Rs.45 lakhs.
and total equity = 75
2
2 + 3 = Rs.30 lakhs
Now, the amount of current liabilities
=
Current Assets
Current Ratio =
35
2.5 = Rs.14 lakhs
So, the amount of term loan in its balance sheet = 45 14 = Rs.31 lakhs.
70. Answer : (a)
Reason : Dr. Sundry Debtors Account Cr.
Date Particulars Rs. Date Particulars Rs.

April 01,
2005
To Opening balance
(30,000/5%)
6,00,000
2005-2006 By Cash
56,00,000
2005-2006 To credit sales
(Balance figure)
58,00,000
March 31,
2006
By Closing
balance
8,00,000
64,00,000 64,00,000
71. Answer : (e)
Reason : A company can accept advance money before calls from the shareholders, if this clause is
authorized by the articles of association. So, this is true. The other conditions, relating to the
question, stated in a, b, c and d are not correct.
72. Answer : (d)
Reason : According to the sub-section 2(c) of Section 212 of the Companies Act, the time interval
between the dates of balance sheets of the holding company and subsidiary company should not be
more than 6 months and hence the other points, stated in a, b, c and e are not correct.
73. Answer : (a)
Reason : If the claim against a company is not fixed-up as debt, that information should be disclosed
in the financial statement. This type of claim cannot be treated either as current asset or current
liability or secured loan or unsecured loan in the balance sheet, because it is of the nature of a
contingent liability.

1. Which of the following money market instruments has a maturity period varying from 2 to 15 days?
(a) Call money
(b) Commercial Paper
(c) Notice money
(d) Treasury Bill
(e) Certificate of Deposit.
2. Which of the following will decrease with an increase in the interest rate?
(a) Future Value Interest Factor
(b) Future Value Interest Factor For Annuity
(c) Capital Recovery Factor
(d) Present Value Interest Factor for a perpetual annuity
(e) Inverse of Present Value Interest Factor For Annuity.
3. Which of the following is true?
(a) A change in YTM affects bonds with a lower YTM more than it does bonds with a higher YTM (b)
Given the maturity, for equal sized increases or decreases in the YTM, price movements are not
symmetrical
(c) When the required rate of return is greater than the coupon rate, the value of the bond is more than
its par value
(d) Bonds price is directly proportional to its YTM
(e) When the required rate of return is more than the coupon rate, the premium on the bond declines as
maturity approaches.
4. Which of the following statements is/are true?
I. Beta of a security increases with an increase in the variance of market returns.
II. Beta of a security increases with a decrease in standard deviation of the securitys return.
III. Beta of a security increases with an increase in the value of the correlation coefficient between the
securitys return and market return.
(a) Only (I) above
(b) Only (II) above
(c) Only (III) above
(d) Both (I) and (II) above
(e) Both (I) and (III) above.
5. Which of the following is not true about Commercial Papers (CPs)?
(a) CPs are negotiable by endorsement and delivery
(b) The minimum maturity period of CPs is 15 days
(c) CPs are unsecured in nature
(d) CPs cannot be issued at a discount to face value
(e) Prior approval of RBI is not needed for CP issues.
6. Which of the following assumptions associated with Capital Asset Pricing Model (CAPM) is/are not
true?
I. The greater the perceived risk of a portfolio, the higher is the return expected by a risk-averse
investor.
II. All individuals agree on the nature of return and risk associated with each investment.
III. The choice of buying assets is affected by taxes.
(a) Only (I) above
(b) Only (II) above
(c) Only (III) above
(d) Both (I) and (II) above
(e) Both (II) and (III) above.

7. Which of the following is an example of a diversifiable risk?

(a) Ability of a company to obtain adequate supply of raw materials
(b) Changes in the tax structure
(c) Reduction in the purchasing power of money
(d) Recession in the economy
(e) Introduction of a restrictive credit policy by RBI.
8. Who among the following categories of people try to obtain risk free profits by simultaneously buying and
selling similar instruments in different markets?
(a) Arbitrageurs
(b) Speculators
(c) Factors
(d) Brokers
(e) Authorized Dealers.
9. The sinking fund factor is the inverse of
(a) Capital Recovery Factor
(c) Future Value Interest Factor for Annuity
(e) Present Value Interest Factor.

(b) Future Value Interest Factor

(d) Present Value Interest Factor for Annuity

10. Consider the following data

Annual credit purchase = Rs.72,72,000
Opening balance of accounts payable = Rs.17,66,400
Closing balance of accounts payable = Rs.29,20,000
The average payment period assuming 360 days in a year is
(a) 36 days
(b) 66 days
(c) 96 days
(d) 116 days
(e) 136 days.
11. Under which of the following factoring arrangements does the factor not make any prepayment to the
client?
(a) Recourse factoring
(b) Invoice discounting
(c) Maturity factoring
(d) Non-recourse factoring
(e) Both (c) and (d) above.
12. Which of the following statements is/are true?
I. Collection float indicates the amount of cheques issued by a company, awaiting payment by the
bank.
II. If the collection float is more than the payment float, the company is said to have positive net float.
III. When the bank balance as per the books of the company is less than that in the banks books, the
company can play the float.
(a) Only (II) above
(b) Only (III) above
(c) Both (II) and (III) above
(d) Both (I) and (III) above
(e) All (I), (II) and (III) above.
13. Which of the following statements is/are true as per the Net Operating Income Approach?
I. Overall capitalization rate remains constant for all degrees of leverage.
II. Cost of equity remains constant for all degrees of leverage.
III. Cost of equity is a constant linear function of the debt-equity ratio.
IV. Cost of debt remains constant for all degrees of leverage.
(a) Only (III) above
(b) Only (IV) above
(c) Both (I) and (II) above
(d) Both (II) and (IV) above
(e) (I), (III) and (IV) above.
14. Which of the following is not the source of long-term finance?
(a) Secured Premium Notes
(b) Fully Convertible Debentures
(c) Cumulative Preference Shares
(d) Commercial Paper

(e) Lease Arrangement.

15. Which of the following will increase the duration of the operating cycle?
(a) Increase in the raw material storage period
(b) Decrease in the average collection period
(c) Increase in the average payment period
(d) Decrease in the conversion period
(e) Both (a) and (c) above.
16. Which of the following appraisal criteria is useful for evaluating mutually exclusive projects providing
similar service but having differing patterns of cost and unequal life spans?
(a) Net Present Value (b) Internal Rate of Return
(c) Accounting Rate of Return (d) Benefit Cost Ratio
(e) Annual Capital Charge.
17. Which of the following approaches to compute the cost of equity capital assumes that actual returns will
be in line with the expected returns?
(a) Realized Yield Approach
(b) Bond Yield Plus Risk Premium Approach
(c) Earnings-Price Ratio Approach
(d) Dividend Capitalization Approach
(e) Capital Asset Pricing Model.
18. Which of the following is/are not true?
I. If credit standards are made more stringent, sales are likely to decrease and less amount of money
will be locked up in receivables.
II. If credit period is lengthened, sales are likely to increase but bad debt losses are likely to decrease.
III. If cash discount is increased, discount paid is likely to increase and amount of receivable is likely to
reduce.
(a) Only (II) above
(b) Only (III) above
(c) Both (I) and (II) above
(d) Both (II) and (III) above
(e) Both (I) and (III) above.
19. Which of the following is not an assumption made under the Modigliani and Miller approach for
explaining the irrelevance of dividends policy for a firm?
(a) Existence of perfect capital markets
(b) Non-existence of differential tax rates for the dividend income and capital gains
(c) Non-influence of single investor on the share value
(d) Absence of transaction costs
(e) Higher growth rate of dividends compared to cost of equity capital.
20. Which of the following is spontaneous source of financing current assets?
(a) Note lending
(b) Trade credit
(c) Cash credit
(d) Letter of credit
(e) Overdraft.
21. Consider the following projects.
I. Project B which has a Net Benefit Cost Ratio less than one but more than zero.
II. Project C whose present value of inflows is less than the present value of outflows.
III. Project D which has a cost of capital less than the internal rate of return.
IV. Project E which has the highest annual capital charge compared to all other projects.
Which of the projects mentioned above could be accepted?
(a) Only (I) above
(b) Both (I) and (III) above
(c) Both (III) and (IV) above
(d) (II), (III) and (IV) above
(e) (I), (III), and (IV) above.

22. Which of the following statements is true about the terms of trade credit 4/10, net 30?
(a) A 10% cash discount is offered for payment before 30 days
(b) A 4% cash discount can be taken for payment before the 10th of the following month after
invoicing
(c) A 10% cash discount can be taken if paid by the fourth day after invoicing
(d) No cash discount is offered from the eleventh day onwards after the date of purchase
(e) 4% cash discount is awarded for payment on the 30th day after purchase.
23. Which of the following statements is true in case of a direct quote?
(a) Exchange margin is to be added to the bid rate and ask rate
(b) Exchange margin is to be added to the bid rate and deducted from the ask rate
(c) Exchange margin is to be deducted from the bid rate and the ask rate
(d) Exchange margin is to be deducted from the bid rate and added to the ask rate
(e) Exchange margin is to be added to the bid rate only.
24. Which of the following is not an appropriate hedging strategy for a likely devaluation of a currency?
(a) Reduce the level of cash
(b) Reduce the local borrowing
(c) Delay accounts payable
(d) Sell the weak currency forward
(e) Tighten credit terms.
25. The following are the exchange rates quoted in NewYork:
CHF / $ 1.3591 / 93
$ / CAD 0.6570 / 72
The synthetic quotes of Swiss Franc per Canadian dollar are
(a) CHF / CAD 0.8929 / 33
(b) CHF / CAD 0.8930 / 32
(c) CHF / CAD 2.0683 / 86
(d) CHF / CAD 2.0680 / 89
(e) CHF / CAD 0.4833 / 36.
26. Bank of the Middle East, Dubai is maintaining an account with SBI Mumbai. SBI Mumbai calls this
account as
(a) Nostro account
(b) Vostro account
(c) Loro account
(d) Mirror account
(e) Shadow account.
27. Suppose that a speculator anticipates depreciation of US $ against Euro 3-months from now from the
current 3 months forward rate. To make profit, the speculator should
(a) Sell US $ spot and buy Euro 3-month forward
(b) Buy US $ spot and sell Euro 3-month forward
(c) Sell US $ 3-month forward
(d) Buy Euro 3-month forward
(e) Sell Euro 3-month forward.
28. The value of a forward contract at its initiation is
(a) Zero
(b) Forward price
(c) Bid - ask spread
(d) Spot price minus forward price
(e) Present value of forward price at risk less interest rate less spot price.
29. In a swap transaction where two fixed-floating currency swaps are combined to form a fixed to fixed
currency swap is known as
(a) Roller-coaster swap
(b) Amortized swap
(c) Amortizing swap
(d) Circus swap
(e) Forward swap.
30. Which of the following equation is true?
(a) Short underlying asset + long call = long put
(b) Short underlying asset + long put = long call

(c) Long underlying asset + short call = long put

(d) Short underlying asset + long put = short call
(e) Long underlying asset + long call = short put.

Suggested Answers
1. Answer : (c)
Reason : The money that is lent for more than one day but less than 15 days is referred to as Notice
money.
2. Answer : (d)
Reason : Present value factor for a perpetual annuity = 1
i . Hence it decreases with an increase in the
interest rate.
3. Answer : (b)
Reason : Given the maturity, the change in the bond price will be greater with a decrease in the bonds
YTM than the change in the bond price with an equal increase in the bonds YTM. In other
words, for equal sized increases and decreases in the YTM, price movements are not
symmetrical.
4. Answer : (c)
Reason : of the security = s m
2
m
Cov (r , r )

where rs is return on security and rm is market return.

Also = sm s m
2
m

where sm is the correlation coefficient of market return and stock return.

Hence, increase in the value of correlation coefficient between security and market returns, will
and increase the value of . Hence statement III is correct and option (c) is the answer.
Statement I is false as decreases with increase in variance of market returns. Statement II is
false as decrease in standard deviation of the securitys return will decrease the value of .
5. Answer : (d)
Reason : Commercial papers are short-term promissory notes issued at a discount to face value by wellknown
companies that are financially strong and carry a high-credit rating. Hence statement (d)
is not correct.
6. Answer : (c)
Reason : One of the assumptions associated with the Capital Asset Pricing Model is that taxes do not
affect the choice of buying assets. Hence statement III is incorrect and option (c) is the answer.
7. Answer : (a)
Reason : Diversifiable risks are those risks that are specific to a company or industry and hence can be
eliminated by diversification. When a company is not able to obtain adequate supply of raw
materials, it becomes a source of diversifiable risk. Hence option (a) is the correct choice.

Changes in tax structure, recession in the economy, the credit policy introduced by RBI and
reduction in the purchasing power of the economy are examples of non-diversifiable risks.
These risks are related to the general economy and cannot be eliminated by the process of
diversification.
8. Answer : (a)
Reason : Arbitrageurs are participants who work towards obtaining risk free profits by simultaneously
buying and selling similar instruments in different markets. Hence, (a) is the correct choice.
9. Answer : (c)
Reason : Sinking Fund Factor = i
(1 + i)n 1
=1
FVIFA
. Hence option (c) is correct.
10. Answer : (d)
Reason : Average A/c payable
8
= = Rs.23,43,200
Annual credit purchases = Rs.72,72,000
Therefore, Daily credit purchases = = Rs.20,200
Therefore the Average payment period =
=
11. Answer : (c)
Reason : Under the maturity factoring arrangement, the factor does not make any pre-payment. The
factor pays the client either on a guaranteed payment date or on the date of collection from the
customer. Hence option (c) is correct.
12. Answer : (b)
Reason : When the payment float is greater than the collection float, it implies that the balance in the
books of the company is less than that in the banks books because of certain cheques issued by
the company that are still not paid by the bank. In such a case, the firm can play the float.
Hence, statement III is true. Collection float can be defined as the amount of cheques
deposited by a company in the bank awaiting clearance. Payment float indicates the amount of
cheques issued by a company, awaiting payment by the bank.
13. Answer : (e)
Reason : According to net operating income approach, the overall capitalization rate and cost of debt
remain constant for all degrees of leverage. As long as kd remains constant, the cost of equity is
a constant linear function of the debt-equity ratio. Hence, statements I, III and IV are correct.
So (e) is the correct answer.
14. Answer : (d)
Reason : Commercial paper is a short-term, unsecured promissory note issued by companies having a
high credit rating. Hence option (d) is the answer.
15. Answer : (a)
Reason : The operating cycle= Raw material storage period + Conversion period + Finished goods
storage period + Average collection period Average payment period
Hence increase in the raw material storage period will increase the duration of the operating
cycle and decrease in average collection period, decrease in the conversion period and increase
in the average payment period will decrease the operating cycle. Hence (a) is the correct
choice.

16. Answer : (e)

Reason : Annual capital charge is an appraisal criterion that is useful in evaluating mutually exclusive
projects providing similar service but having differing patterns of cost and often unequal life
spans. The other appraisal criterions do not give consistent results in cases where differing
patterns of costs and life spans exist.
17. Answer : (a)
Reason : Realized yield approach assumes that
(i) The actual returns are in line with the expected return.
(ii) The investors will continue to have the same expectations from the security.
Hence (a) is the correct answer.
18. Answer : (a)
Reason : If credit period is lengthened, more customers are induced to take the credit and the sales tend
to increase and the there are more chances of bad debts occurring. Hence, statement II is not
true. If credit standards are made more straight, sales are likely to reduce as the customers are
expected to fulfill the rigid credit standards specified by the company. With the decrease in the
sales, the money blocked in receivables will also reduce and hence, statement I is true. If cash
discount is increased, the amounts of discount paid tend to increase even when same proportion
of customers avail the discount. As many customers tend to avail the discount and pay with in
the discount period the amount blocked in receivables will be less. Hence, statement III is true
and the answer is (a).
19. Answer : (e)
Reason : Modigliani and Miller approach makes the following assumptions:
i. Existence of a perfect market in which all investors are rational. There will be no
transaction and floatation costs.
ii. It is assumed that there are no differential tax rates for dividend income and capital gains.
iii. The company has a constant investment policy.
iv. Securities are infinitely divisible and hence no single investor is large enough to influence
the share value.
Hence, option (e) is incorrect.
20. Answer : (b)
Reason : Spontaneous sources of financing current assets refer to those liabilities which average in the
normal course of business. For example, earned expenses, provisions and trade credit are
spontaneous liabilities, Hence, (b) is the answer.
21. Answer : (b)
Reason : A project will be accepted under the following situations:
i. When the Benefit Cost Ratio of the project is greater than one and the Net Benefit Ratio
of the project is greater than zero.
ii. When the Net Present Value is greater than zero (i.e. when the present value of inflows is
greater than the present value of outflows).
iii. When the projects internal rate of return is greater than the firms cost of capital
iv. When a project has the minimum annual capital charge.
Based on the above criteria, we can conclude that only projects B and D can be selected and (b)
is the correct choice.
22. Answer : (d)
Reason : The credit term 4/10, net 30 implies that 4% discount is given if paid within or on 10th day of
invoicing and credit is given for 30 days.
23. Answer : (d)
Reason : Exchange margin is to be deducted from the bid rate and added to the ask rate, in the case of a
direct quote. In the case of a direct quote the principle is buy low - sell high. For example the

inter bank quote for US$ is 43.70/71. The exchange margin say 5 paise is to be deducted from
43.70 and added to 43.71. By this the quote now is 43.65 - 43.76. The bank buys at 43.65 from
the customer and sells at the market buying rate of 43.70. Similarly the bank sells at 43.76 to
the customer by buying at market selling rate of 43.71. Hence option (d) is correct.
24. Answer : (b)
Reason : Reducing the local borrowing is not a hedging strategy for a likely devaluation of a currency
since as the local currency devalue, borrowing will be cheaper.
25. Answer : (a)
Reason : CHF/CAD bid rate = 1.3591 0.6570 = 0.8929
CHF/CAD ask rate = 1.3593 0.6572 = 0.8933.
26. Answer : (b)
Reason : Vostro account means your account with us. SBI Mumbai calls the account maintained by
Bank of the Middle East Dubai as Vostro account.
27. Answer : (d)
Reason : Speculator is anticipating depreciation of dollar against euro, forward rate is reglecting
depreciation of euro against dollar. So in the forward market dollar is overpriced and euro
underpriced. So to make profit speculator should buy underpriced euro against overpriced
dollar in the forward market.
28. Answer : (a)
Reason : When a forward contract is initiated, by market design, its value is Zero as far all the derivative
instruments at its initiation. After initiation its value can fluctuate and be either positive or
negative. The value of forward contract when it matures is the difference between the spot price
on that date and the initial forward price.
29. Answer : (d)
Reason : In circus swap, two fixed floating currency swaps are combined to form a fixed to fixed
currency swap.
30. Answer : (a)
Reason : Protective calls and puts combines an underlying position with an option position, the resulting
position is a synthetic option as under:
Short underlying + long call = long put
Long underlying + long put = long call.
A covered write involving a position in the underlying and the option can be used to create
synthetic option as follows:
Long underlying + short call = short put
Short underlying + short put = short call.

1. A major difference between Financial Accounting and Management Accounting relates to differences
in the users. Related to Sikha Ltd., which of the following best describes a user of Management
Accounting Information?
(a) Credit Manager of a vendor for Sikha Ltd.
(b) Purchasing Manager for Sikha Ltd.
(c) Bank Manager reviewing a loan application from Sikha Ltd.
(d) Income Tax Commissioner reviewing the tax return of Sikha Ltd.
(e) Shareholders of Sikha Ltd.
2. Which of the following statements are false?
I. Management accounting statements are prepared in accordance with Generally Accepted
Accounting Principles.
II. Management accounting is mandatory for business organizations because it should be maintained
as per various legal statutes.
III. The application of Management accounting cannot be extended beyond the traditional accounting
system.
IV. Management accounting focuses more on a company as a whole and less on the parts or segments
of a company.
(a) Both (I) and (II) above
(b) Both (I) and (IV) above
(c) Both (II) and (IV) above
(d) (I), (II) and (IV) above
(e) All (I), ( II), (III) and (IV) above.
3. Which of the following statements is false?
(a) Management Accounting provides data for internal uses whereas Financial Accounting provides
data for external users
(b) Management Accounting is concerned with a strong orientation towards future while Financial
Accounting is concerned with a record of financial data of the past
(c) Management Accounting relies on the concept of responsibility whereas Financial Accounting
does not rely on the concept of responsibility
(d) Financial Accounting is mandatory for business organizations whereas Management Accounting is
not mandatory
(e) Financial Accounting statements have to be prepared in accordance with the GAAP whereas
managers set their own rules in the form and content of Management Accounting statements.
4. Research and development costs for new products are
(a) Sunk costs
(b) Conversion costs
(c) Joint costs
(d) Relevant costs
(e) Avoidable costs.
5. Which of the following statements about costs is not correct?
I. Costs are measured in terms of monetary units paid for merchandise or services.
II. Once recorded in the accounting system, costs can then be traced and allocated to one or more cost
objectives.
III. Costs are first recorded in a basic form, using accounts such as salaries, rent, or taxes.
IV. Costs are resources it is received from customers doing business in an organization.
(a) Both (II) and (III) above
(b) Only (II) above
(c) Both (III) and (IV) above
(d) Only (IV) above
(e) Both (I) and (II) above.

6. Pankaj Ltd. has furnished the following data:

Particulars Jeans Shorts Total (Rs.)
Units 10,00,000 2,00,000
Selling price per unit Rs.30 Rs.26
Direct labor hours (Rs.10 per hour) Rs.3,60,000 Rs.80,000
Direct material Rs.88,50,000 Rs.9,00,000
Machine set-ups 1,600 900
Machine utility Rs.6,00,000
Machine maintenance Rs.8,00,000
Quality control Rs.4,00,000
Material handling during set-ups Rs.18,50,000
Product engineering Rs.30.00.000
Rent of manufacturing space Rs.20,00,000
Security Rs.9,50,000
Miscellaneous production expense Rs.20,00,000
Which of the following is considered to be a product -level cost?
(a) Machine maintenance
(b) Rent of manufacturing facility
(c) Material handling
(d) Product engineering
(e) Quality control.
7. The term variable cost refers to
(a) All costs which are likely to respond to the amount of attention devoted to them by a specified
manager
(b) All costs which are associated with marketing, shipping, warehousing and billing activities
(c) All costs which do not change in total for a given period of time and relevant range but become
progressively smaller on a per unit basis as volume increases
(d) All manufacturing costs incurred to produce units of output
(e) All costs which fluctuate in total in response to small change in the rate of utilization of capacity.
8. Normal wastage is classified as
(a) Product cost
(c) Standard cost
(e) Deferred charge.

(b) Period cost

(d) Extraordinary item

9. Which of the following statements is false?

(a) Notional costs are not included while ascertaining costs
(b) Administrative expenses is mostly fixed
(c) Historical costs are useful solely for estimating costs that lie ahead
(d) Abnormal cost is controllable
(e) Direct cost is one that can be conveniently identified with and charged to a particular unit of cost.
10. Which of the following is not true?
(a) Product cost for merchandise is the cost of purchases plus transportation
(b) Cost of merchandise sold is called the cost of goods sold
(c) Retailers and wholesalers treat period costs as expenses
(d) Period costs are treated as product costs with service industry firms
(e) At the end of the year, inventory on hand is an asset.
11. Which of the following costs is based on the distinction between fixed and variable costs?
(a) Marginal cost
(b) Relevant cost
(c) Sunk cost
(d) Opportunity cost
(e) Replacement cost.

12. Cost drivers are

I. Activities that causes costs to increase as the activity increases.
II. Accounting techniques used to control costs.
III. Accounting measurements used to evaluate whether or not performance is proceeding according to
plan.
IV. Mechanical basis, such as machine hours, computer time, size of equipment etc. used to assign
costs to activities.
(a) Only (I) above
(b) Only (II) above
(c) Only (III) above
(d) Both (I) and (II) above
(e) Both (III) and (IV) above.
13. Costs are allocated to cost objects in many ways and for many reasons. Which of the following is a
purpose of cost allocation?
(a) Implementing activity-based costing
(b) Evaluating revenue center performance
(c) Budgeting cash and controlling expenditures
(d) Aiding in variable costing for internal reporting
(e) Measuring income and assets for external reporting.
14. Due to changes that are occurring in the basic operations of many firms, all of the following
represent trends of allocation of indirect cost except
(a) Treating direct labor as an indirect manufacturing cost in an automated factory
(b) Using throughput time as an application base to increase awareness of the costs associated with
lengthened throughput time
(c) Preferring plant-wide application rates that are applied to machine hours rather than incurring the
cost of detailed allocations
(d) Using several machine cost pools to measure product costs on the basis of time in a machine center
(e) Using cost drivers as application to increase the accuracy of reported product costs.
15. Pawan Ltd. had the following inventories at the beginning and end of the month of March 2006:
Particulars March 1, 2006 (Rs.) March 31, 2006 (Rs.)
Finished goods 1,25,000 1,17,000
Work-in-process 2,35,000 2,51,000
Direct materials 1,34,000 1,25,000
The following additional manufacturing data were available for the month of March 2006:
Particulars (Rs.) Direct materials purchased 1,89,000
Purchase returns and allowances 1,000
Transportation 3,000
Direct labor 3,00,000
Actual factory overhead 1,75,000
The company applies factory overhead at a rate of 60% of direct labor cost, and any over applied or
under applied factory overhead is deferred until the end of the year 2005-06.
The manufacturing cost of the company for the month of March 2006 was
(a) Rs.6,81,000
(b) Rs.6,65,000
(c) Rs.4,89,000
(d) Rs.6,80,000
(e) Rs.6,73,000.
16. Sumit Ltd. has three jobs outstanding. The company uses normal costing and the overhead rate,
which is based on machine hour amounts to Rs.85 per machine hour based on a forecast of 4,000
hours. Job 1 with a direct cost of Rs.85,500 has used 1,290 machine hours. Job 2 with a direct cost of
Rs.74,700 has used 1,760 machine hours. Job 3 with a direct cost of Rs.87,470 has used 789 hours.
Actual overhead amounted to Rs.3,50,000. Job 1 is completed and sold for Rs.2,76,500. Job 2 is

completed and not yet delivered. Job 3 is still in process. If over or under applied overhead is prorated
to cost of sales and inventory accounts based on total costs in each job, finished goods inventory will
be
(a) Debited by Rs.8,053
(b) Credited by Rs.8,053
(c) Debited by Rs.9,256
(d) Credited by Rs.9,256
(e) Debited by Rs.6,377.
17. Which of the following is not considered to be a Product-Level cost?
(a) Cost of the engineer to maintain the product's design specifications
(b) Cost of the attorney to obtain the product's patent
(c) Cost of holding inventory for the product
(d) Cost of the supervisor to assure assembly of all products on the assembly line
(e) Cost of power for manufacturing product.
18. Because of shortage of labor and materials, a department in a factory is working at 55% of its
normal capacity. In its cost records, it charges manufacturing overhead to work -in-progress as a
percentage of direct labor. For the current year, budgeted direct labor cost is Rs.2,50,000, budgeted
manufacturing fixed overhead is Rs.1,00,000 and budgeted manufacturing variable overhead is
Rs.1,25,000. A dispute has arisen as to the percentage of direct labor that should be charged to workin-progress. One officer claims that it should be 90%, another claim that it should be less than that.
The appropriate recovery rate should be
(a) 100%
(b) 90%
(c) 88%
(d) 72%
(e) 63%.
19. Apurba Ltd. has furnished the following information pertaining to its machine:
i. Total cost of machine to be depreciated Rs.3,00,000.
ii. Life of machine 10 years.
iii. Depreciation on straight line.
iv. Departmental overheads (annual).
Rent Rs.40,000; Heat and light Rs.30,000; Supervision Rs.1,50,000.
v. Department area 70,000 square meters; Machine area 2,500 square meters.
vi. Number of machines 25.
vii. Annual cost of reserve equipment for the machine Rs.2,000.
viii. Hours runs on production 2,000.
ix. Hours for setting and adjusting 150.
x. Power cost Rs.1.50 per hour of running time.
xii. Labor:
* When setting and adjusting full time attention.
* When machine is producing one worker can look after 2 machines.
xiii. Labor rate is Rs.8 per hour.
The comprehensive machine hour rate of the company is
(a) Rs.25.25
(b) Rs.25.39
(c) Rs.20.80
(d) Rs.22.00
(e) Rs.24.39.
20. The allocation of costs to a particular cost object allows a firm to analyze all of the following except
(a) Whether a particular manager earns a bonus
(b) Whether a particular department should be expanded
(c) Whether a product line should be discontinued
(d) The causes of increase in the sales of a particular product

(e) The decision with regard to a particular product that should be purchased or manufactured inhouse.
21. Vam Ltd. manufactures and sells two products M and N. The following data are estimated for the
year 2003-04. Particulars Product M Product N
Sales (Units) 80,000 1,20,000
Sales price per unit (Rs.) 20 16
Variable cost per unit (Rs.) 12 10
The annual fixed costs are estimated at Rs.8,16,000. The break-even point in sales value with the
current sales mix is
(a) Rs.24,00,000
(b) Rs.21,12,000
(c) Rs.19,20,000
(d) Rs.14,40,000
(e) Rs.9,60,000.
22. The process of charging factory overhead to work-in-process based on a predetermined
application rate multiplied by actual input is known as
(a) Direct costing
(b) Product costing
(c) Normal costing
(d) Marginal costing
(e) Actual costing.
23. In activity based costing, the overhead costs are charged to production on the basis of
(a) Blanket rate
(b) Cost driving activities
(c) Non-value added items
(d) Direct labor hours
(e) Machine hours.
24. Consider the following facts for AB Ltd. which produces product A and B:
Activity Cost driver As share Bs share Unused Rs.
Set ups No. of set ups 10 40 5 5,500
Ordering No. of orders 5 10 5 3,200
Receiving No. of receipts 22 12 6 2,400
Product dev. No. of parts 180 120 100 2,800
Gen. Mgmt. No. of labor hrs 2,900 4,100 1,000 7,200
Security Area covered 3,200 5,400 400 9,000
Materials No. of units produced 400 800 1,20,000
Labor No. of Direct labor hours 1,700 3,100 1,200 56,000
The ordering cost chargeable per unit of A, accounting for unused capacity, amounts to
(a) Rs.2.50
(b) Rs.2.00
(c) Rs.5.00
(d) Rs.5.50
(e) Rs.2.67.
25. Amway Ltd. has furnished the following data pertaining to products:
Department
Number of
employees*
Number of
hours
Square
feet
Number of
Units sold
Sales

(Rs.)
A 20 (20) 20,000 20,000 160 8,40,000
B 15 (9) 18,000 4,000 340 9,70,000
C 18 (10) 22,000 6,000 600 8,20,000
D 27 (15) 15,000 10,000 400 5,70,000
Total 80 75,000 40,000 1,500 32,00,000
* The number of full time employees is listed in the parenthesis. Full time employees work on
average 4 years with the company, part-time employees work on average 5 months with the
company.
If the salary of the President is Rs.1,60,000, which cost driver is most appropriate?
(a) Number of Employees
(b) Number of Hours
(c) Number of Departments
(d) Sales Rupees
(e) Number of part time employees.
26. The company has some costs that now have not been allocated. These include, electricity for heat,
cleaning, and telephones. Of the following allocation methods which is/are the better method(s) of
allocating these unallocated costs?
I. Establishing one cost pool and allocating the cost based upon square feet.
II. Establishing one cost pool and allocating the cost based upon number of employees.
III. Establishing two cost pools, one pool for telephones and allocate the cost based upon number of
employees, and the other pool for heat and cleaning and allocate the cost based upon square feet. IV.
Establishing two cost pools, one pool for telephones and allocate the cost based upon number of
employees, and the other pool for heat and cleaning and allocate based upon sales rupees.
(a) Only (I) above
(b) Only (II) above
(c) Only (III) above
(d) Both (II) and (IV) above
(e) Both (I) and (IV) above.
27. Mukherjee Ltd. has furnished the following information for its product:
Direct material Rs.10 per unit
Direct labor - Rs.6 per unit
Variable overhead Rs.3 per unit
Fixed overhead Rs.4 per unit
Budgeted production 12,000 units
Actual production 10,000 units
There is no overhead spending variance
Sales - 9,000 units
Sales price - Rs.28 per unit
Using Absorption costing system, what is the cost per unit based upon actual costs?
(a) Rs.27.60
(b) Rs.24.40
(c) Rs.23.80
(d) Rs.23.00
(e) Rs.25.20.
28. DKM Ltd. uses job costing system, has furnished the following cost data for Job No.386:
Particulars Rs.
Direct material 9,00,000
Direct wages 7,50,000
Profit 6,09,000
Selling & distribution overhead 5,25,000
Administrative overhead 4,20,000
Factory overhead 4,50,000
The cost of sales and works cost for job no.386 are

(a) Rs.16,50,000 and Rs.21,00,000 respectively

(b) Rs.21,00,000 and Rs.36,54,000 respectively
(c) Rs.30,45,000 and Rs.21,00,000 respectively
(d) Rs.30,45,000 and Rs.25,20,000 respectively
(e) Rs.30,35,000 and Rs.16,50,000 respectively.
29. A factory has three production departments P1, P2 and P3 and 2 service departments S1 and
S2. Budgeted overheads for the next year have been allocated or apportioned by the cost department
among the 5 departments. The secondary distribution of service department overheads is pending
and the following details are given:
Department Overheads apportioned/
Allocated (Rs.) Estimated level of activity
P1 48,000 5,000 labor hours
P2 1,12,000 12,000 machine hours
P3 52,000 6,000 labor hours
Department
Overheads apportioned /
allocated (Rs.)
Apportionment of service
department costs
S1 16,000 P1(20%),P2(40%), P3(20%) & S2(20%)
S2 24,000 P1(10%), P2(60%), P3(20%) & S1(10%)
The overhead rates of P1 and P2 departments after completing the distribution of service department
costs are
(a) Rs.10.91 and Rs.10.22 respectively
(b) Rs.10.91 and Rs.11.35 respectively
(c) Rs.11.35 and Rs.10.22 respectively
(d) Rs.10.91 and Rs.11.00 respectively
(e) Rs.11.00 and Rs.11.35 respectively.
30. Which of the following is most likely to use a process costing system?
(a) Custom cabinet-maker
(b) Ship builder
(c) Print shop
(d) Petroleum refinery
(e) Auto repairing shop.
31. Consider the following data pertaining to the production of Simanti Ltd. for the month of March
2006: Particulars Rs.
Opening stock of raw material 18,350
Closing stock of raw material 17,210
Purchase of raw material during the month 1,21,210
Total manufacturing cost of product 5,28,055
If the factory overheads are applied by the company at the rate of 72% of direct labor cost, the amount
of factory overheads applied to production is
(a) Rs.1,15,115
(b) Rs.1,69,830
(c) Rs.1,42,380
(d) Rs.1,41,525
(e) Rs.2,35,875.
32. Souvik Ltd. is a manufacturing company, where one of the production departments in its main
factory uses machine hour rate for absorption of production overheads. The company has fixed up the
predetermined rate of Rs.15 per machine hour on the basis of normal activity level. The company has
estimated the following overhead expenditure at different activity levels:

Activity level (Machine

hour) Overhead
expenditure (Rs.)
1,500 25,650
1,650 26,325
2,000 27,900
If the actual machine hours are 1,900, the under or over absorption of overhead is
(a) Rs.1,050 (under)
(b) Rs.1,050 (over)
(c) Rs.1,575 (under)
(d) Rs.1,575 (over)
(e) Rs.3,675 (under).
33. Under the proration approach to under absorbed or over absorbed overhead costs, the accounts
that would not receive any of the overhead being allocated would be
I. Direct material inventory.
II. Cost of goods sold.
III. Work-in-process inventory.
IV. Finished goods inventory.
(a) Only (I) above
(b) Both (II) and (III) above
(c) Only (III) above
(d) (II), (III) and (IV) above
(e) All (I), (II), (III) and (IV) above.
34. Jayasree Ltd. manufactures product A to the extent of 70% of total sales revenue and product B to
the extent of 30% of the total sales revenue. The variable cost of product A is 60% of its selling price
and product B is 80% of its selling price. If the total fixed cost of the company is Rs.3,06,000, the break
-even sales of the company is
(a) Rs.15,30,000
(b) Rs.12,24,000
(c) Rs.10,00,000
(d) Rs.9,00,000
(e) Rs.7,50,000.
35. Arpit Ltd. has furnished the following information pertaining to its 3 products:
Department Allocation Base
Product
A
Product
B
Product
C
Overhead
Costs
Production Machine Hours 1,200 2,200 600 Rs.7,10,000
Purchasing Purchase Order 100 300 150 Rs. 2,40,000
Inspection Labor Hours 200 200 200 Rs. 2,00,000
If the total overheads were allocated based on machine hours, how much would be allocated to
product
B?
(a) Rs.6,32,500
(b) Rs.3,14,357
(c) Rs.4,00,000
(d) Rs.6,28,714
(e) Rs.3,45,000.

36. Which of the following are the instances of recovering overheads on the basis of direct labour cost
method?
I. Where direct labour constitutes a major proportion of the total cost of production.
II. Where labour employed and types of work performed are uniform.
III. Where the ratio of skilled and unskilled labour is constant.
IV. Where machines dominate the production activities.
(a) Both (I) and (IV) above
(b) Both (II) and (IV) above
(c) Only (IV) above
(d) Both (II) and (III) above
(e) (I), (II) and (III) above.
37. Abnormal spoilage is considered as
(a) Period cost
(b) Product cost
(c) Fixed cost
(d) Opportunity cost
(e) Discretionary cost.
38. Mahavir Ltd. uses process cost system to manufacture Dust Density Sensors for the mining
industry. The following pertains to operations for the month of March 2006:
Particulars Units Opening work-in-process (March 01, 2006) 450
Introduced in production during March 2006 4,100
Closing work -in-process (March 31,2006) 500
There is no loss in the manufacturing process. The opening inventory was 80% complete for materials
and 60% complete for conversion costs. The closing inventory was 70% complete for material and
60% complete for conversion costs. The costs pertaining to the month of March 2006 are as follows:
Opening work in process:
Materials Rs. 6,850
Conversion Rs. 4,350
During the month:
Materials Rs.70,700
Conversion Rs.61,200
The total cost of closing work-in-process on March 31, 2006, using FIFO method, is
(a) Rs.10,708.62
(b) Rs.10,625.00
(c) Rs.12,573.78
(d) Rs.11,557.00
(e) Rs.12,450.00.
39. Bahadur Chemicals Ltd. runs its boiler on furnace oil obtained from Indian Oil and Bharat
Petroleum, whose depots are situated at a distance of 10 km and 8 km from the factory site of the
company. Transportation of furnace oil is made by the companys own tank lorries of 6 ton capacity
each. Onward trips are made only on full load and the lorries return empty. The filling-in time takes an
average of 50 minutes for Indian Oil and 45 minutes for Bharat Petroleum. The emptying time in the
factory is only 45 minutes for both. From the records available, it is seen that the average speed of the
companys lorries works out to 40 km per hour. The variable operating charges per km is Rs.2.20 and
fixed charges per hour of operation is Rs.13.20.
The cost per ton -km from Bharat Petroleum is
(a) Rs.1.36
(b) Rs.1.43
(c) Rs.1.51
(d) Re.1.19
(e) Rs.1.25.
40. Brand Manufacturing Ltd. makes one model of a product known as Brand M. The company has
provided the following balances as on October 01, 2005:
Finished goods 500 units
Work-in-process Rs.5,740
Raw materials Rs.9,620

The following data are available as on March 31, 2006:

Indirect labor Rs. 12,160
Freight in Rs. 5,570
Direct labor Rs. 32,640
Raw material Rs. 11,640
Factory overhead expenses Rs. 31,730
Work-in-process Rs. 7,820
Sales (15,000 units) Rs.3,60,000
Indirect material Rs. 21,390
Total manufacturing costs incurred Rs.1,94,080
There were 1,500 units of finished goods of Brand M as on March 31, 2006.
The amount of raw materials purchased during the half-year ended March 31,2006 is
(a) Rs.92,570
(b) Rs.88,610
(c) Rs.94,180
(d) Rs.92,610
(e) Rs.1,21,250.
41. Basz Plastics Ltd. has a beginning work in process inventory of 250 yards, 100% complete with
regard to material and 80% complete with regard to conversion. 9,250 yards were added during the
period. 7,200 yards were completed. Normal loss amounted to 5% of completed units. Abnormal loss
amounted to 490 yards. Ending work-in-process of the period was 80% complete with regard to
materials and 60% complete with regard to conversion costs. The cost of beginning work-in-process
was Rs.3,500, Rs.1000 of which was for conversion costs. From the total cost of Rs.1,32,280 of added
costs, Rs.37,410 was for conversion costs. The cost of completed goods, using FIFO method, is
(a) Rs.1,07,933.50
(b) Rs.1,08,158.50
(c) Rs.1,11,658.50
(d) Rs.1,11,448.50
(e) Rs.1,11,958.50.
42. HCL Chemicals produces three products, HC, HL & CL. The raw materials cost Rs.30,000 and
processing costs Rs.24,000. At this point 1,500 liter of HC is produced and can sell for Rs.20,000.
Additional processing cost of Rs.9,000 produces 4,000 liter of HL and 500 liter of CL. The HL can be sold
for Rs.60,000, and the CL can be sold for Rs.5,000 after further processing that costs Rs.1,000. Product
CL costs Rs.11 per liter prior to further pro cessing costs of Rs.1,000 or Rs.2 per liter. Then the product
can only be sold for Rs.10.00 per liter. What should HCL do with Product CL.
(a) Drop the product line because they are losing Rs.1,500
(b) Drop the product line because they don't need 3 products
(c) Continue the product but charge more than Rs.10 per liter
(d) Continue the product line because overall profitability will decrease without Product CL
(e) Continue the product line because there is no change of profitability of product CL.
43. The Cutting department is the first stage of Parker Ltd.s production cycle. Conversion costs for this
department were 80% complete as to the opening work-in-process and 50% complete as to the closing
work-in-process. The company has furnished the following information pertaining to conversion costs
in the Cutting department for the last month:
Particulars Units Conversion cost
(Rs.)
Opening work-in-process 25,000 22,000
Units started and cost incurred 1,35,000 1,43,000
Units completed and transferred to next department 1,00,000
The company uses FIFO method. The conversion cost of the work-in-process inventory in the Cutting
department for the month was

(a) Rs.33,000
(c) Rs.39,000
(e) Rs.47,500.

(b) Rs.38,100
(d) Rs.45,000

44. Hyderabad Transport Ltd. has been given a route of 20 km. long to run a bus. The cost of a bus is
Rs.5,00,000. It has been insured at 3% per annum and the annual tax will amount to Rs.10,000. Garage
rent is Rs.1,000 per month. Actual repairs will be Rs.10,000 per annum and the bus is likely to last for
5 years. The drivers salary will be Rs.1,500 per month and the conductors salary will be Rs.1,000 per
month in addition to 10% of the tickets selling as commission ( to be shared by the driver and the
conductor equally). Cost of stationery will be Rs.500 per month. The salary of Manager-cumaccountant is
Rs.3,500 per month.
Petrol and oil will be Rs.250 per 100 km. The bus will make 3 round trips carrying on average 40
passengers on each trip. The expected profit is 15% of total ticket selling. The bus will run on an
average of 25 days in a month. The bus fare to be charged to each passenger per km is
(a) Re.0.25
(b) Re.0.30
(c) Re.0.35
(d) Re.0.40
(e) Re.0.50.
45. In which of the following situations does the break-even point (in units) increase?
(a) When unit variable costs increase and sales price remains unchanged
(b) When unit variable costs decrease and sales price remains unchanged
(c) When unit variable costs remain unchanged and sales price increases
(d) When unit variable costs decrease and sales price increases
(e) When unit variable costs and unit sales price increase by the same amount in rupees.
46. Jyothi Constructions undertook a contract for construction of a large complex. The construction
work commenced on April 01, 2005 and the following data are available for the year ended March 31,
2006: Particulars Rs.
Total contract price 80,00,000
Work certified 60,60,000
Progress payment received 50,00,000
Material issued to site 30,80,000
Planning and estimating costs 4,80,000
Direct wages paid 12,30,000
Materials returned from site 42,500
Site office cost 26,400
Plant hire charges 1,82,000
Wage related costs 92,600
Head office expenses apportioned 80,500
Direct expenses incurred 85,300
Work not certified 4,25,000
Materials at site 60,000
Accrued wages 55,500
The contractors own a plant which originally cost Rs.18,00,000 and has been continuously in use in
this contract throughout the year. The salvage value of the plant after 10 years is expected to be
Rs.50,000.The company uses the straight-line method of depreciation. The total of work-in-process
and plant at site to be shown in the balance sheet as on March 31, 2006 is
(a) Rs.26,14,970
(b) Rs.27,89,970
(c) Rs.31,10,000
(d) Rs.32,85,000
(e) Rs.27,96,970.

47. Presidency Club is involved in providing staying facilities and Gym facilities to its members. It has a
capacity of 25 single rooms and 15 double rooms and the gym facility is provided for residents in the
club and also outsiders. The club has furnished the following cost structure:
Service Variable cost per day
Single Room Rs.65
Double Room Rs.45
Gym facility Rs.50
The fixed cost per day is:
For single room Rs.25
For double room Rs.35
For Gym Rs.10
The average occupancy rate in the club is 80% for 365 days of the year. The club deserves a margin of
25% on hire of room and that the rent of double room should be fixed at 150% of a single room. The
rent of a double room per day is
(a) Rs.100
(b) Rs.150
(c) Rs.145
(d) Rs.97
(e) Rs.109.
48. Simul Petroleum is a small company that acquires crude oil and manufactures three intermediate
products - A, B & C, differing only in grade. There is no opening inventory of finished goods but workinprocess existed on March 01, 2006. The production costs for March 2006 were as follows (assume
separable costs were negligible):
Particulars Rs.
Crude oil acquired and used in production 4,00,000
Direct labor and related costs 2,00,000
Factory overhead 3,00,000
The output and sales for the month of March 2006 were as follows:
Particulars A B C
Number of Barrels produced 300 240 120
Number of Barrels sold 80 150 120
Prices per Barrel sold (Rs.) 3,000 4,000 5,000
If joint costs are apportioned on the basis of relative sales value of output, the cost of closing inventory
of product B is
(a) Rs.1,75,610
(b) Rs.1,23,476
(c) Rs.2,19,512
(d) Rs.3,51,220
(e) Rs.1,31,707.
49. A, B and C are the main products and M is the by -product of a company, where A is a liquid and B is
a gas and C is a solid. If product A and product B are further processed before being in a saleable state
and product C is sold without further processing, then which of the following is the most appropriate
basis for apportionment of costs of M to joint products A, B and C?
(a) Physical units
(b) Sales value at separation point
(c) Notional sales value at separation point
(d) Standard sales value at separation point
(e) Sales value after further processing cost.
50. Beta Ltd. has concluded a contract with the Defense Department for Rs.4,95,000 with a forecasted
cost of Rs.3,75,000. It is estimated at this time that 60% of the job is completed with a cost-t o-date
amount of Rs.2,76,000 and a draw of Rs.2,76,000 as well. At this rate, the jobs final profit will amount
to
(a) Nil
(b) Rs.1,00,000
(c) Rs.1,10,000
(d) Rs.1,20,000
(e) Rs.35,000.

51. Alpha Ltd. has a beginning work in process inventory of 400 yards, 100% complete with regard to
material and 80% complete with regard to conversion. 9,000 yards were added during the period.
7,200 yards were completed. Normal loss amounted to 5% of completed units. Abnormal loss
amounted to 500 yards. Ending work-in-process of the period was 80% complete with regard to
materials and 60% complete with regard to conversion costs. The cost of beginning work -in-process
was Rs.3,500, Rs.1000 of which was for conversion costs. From the total cost of Rs.132,280 of added
costs, Rs.94,370 was for material costs. Cost of conversion in ending work-in-process, using weighted
average price method, is
(a) Rs.3,286
(b) Rs.5,356
(c) Rs.5,194
(d) Rs.3,409
(e) Rs.3,634.
52. Which of the following can be said about job-order system, process costing system and hybrid
system?
(a) The type of product manufactured by a company does not influence the type of accounting system
used
(b) The manufacturing process does not influence the type of accounting system used by a company
(c) That cost systems require the use of some form of cost averaging
(d) That managers rely upon the cost system to provide information based only upon actual costs
(e) That managers rely upon the cost system to provide information based only upon standard costs.
53. Mixing Department began 50,000 units at a cost of Rs.96,000, and transferred 45,000 units to the
Finishing Department. The Mixing Department ending inventory is 60% complete. The Finishing
Department added Rs.1,68,000 of material and transferred 40,000 units to Finished Goods. The
Finishing Department ending inventory is 60% complete. There was no beginning inventory in either
department. The material cost per equivalent unit in the Finishing Department is
(a) Rs.2.00
(b) Rs.5.73
(c) Rs.6.00
(d) Rs.6.45
(e) Rs.4.50.
54. MPQ Ltd. in the course of refining crude oil obtains 4 joint products M, N, P and Q. The total cost
till the split off point was Rs.97,600. The output and sales in the year 2005-06 were as follows:
Product Output (Gallons)
Sales (Rs.) Separate
Costs (Rs.)
M 5,00,000 1,15,000 30,000
N 10,000 10,000 6,000
P 5,000 4,000 Q 9,000 30,000 1,000
If the company decides to sell the products at the split off point at the rate of 15 paise per gallon of M,
50 paise per gallon of N, 80 paise per gallon of P and Rs.3 per gallon of Q, the net incomes of products
M and Q are
(a) Rs.9,054 and Rs.3,260 respectively
(b) Rs.9,054 and Rs.800 respectively
(c) Rs.603 and Rs.800 respectively
(d) Rs.603 and Rs.483 respectively
(e) Rs.603 and Rs.3,260 respectively.
55. BC Ltd. produces four joint products A, B, C and D, all of which emerge from the processing of one
raw material. The following are the relevant data for production for a period:
Joint Product Number of units Selling price
A 500 Rs.18.00
B 900 Rs. 8.00
C 400 Rs. 4.00
D 200 Rs.11.00

The company budgets a profit of 10% of sales value for a period. In other estimated cost are:
Carriage inwards Rs.1,000
Direct wages Rs.3,000
Manufacturing overhead Rs.2,000
Administration overhead 10% of sales value
The maximum price that may be paid for the raw material is
(a) Rs.20,000
(b) Rs.18,000
(c) Rs.10,000
(d) Rs.15,000
(e) Rs.14,000.
56. In which of the following situations, is job costing ideal?
(a) Where two or more products are produced from the same process
(b) Where the products are dissimilar and non-repetitive in nature
(c) Where the products are homogeneous
(d) Where the production is in continuous flow
(e) Where the production is carried on in batches.
57. Pre-separation costs of joint products when considered in relation to a further processing decision
may be classified as
(a) Incremental costs
(b) Avoidable costs
(c) Opportunity costs
(d) Irrelevant costs
(e) Sunk costs.
58. The capacity usage ratio and the capacity utilization ratio in respect of a machine for a particular
month is 72 % and 65 % respectively. The total available working hours in the month are 250 hours.
The idletime card reveals the following:
Waiting for material 10 hours
Waiting for tools 6 hours
Breakdown 10 hours
The actual number of hours worked is
(a) 128 hours
(b) 117 hours
(c) 110 hours
(d) 91 hours
(e) 154 hours.
59. Sachin Ltd. has furnished the following information pertaining to a new product:
i. The fixed costs will be Rs.80,000 for production of 7,500 units or less. If the production is more
than 7,500 units, the fixed costs will be Rs.1,20,000.
ii. The variable cost ratio is 60% of the sales for the first 7,500 units and it will be reduced to 50% of
sales for units in excess of 7,500 units.
iii. The sale price of the product per unit is Rs.25.
If the company manufactures more than 7,500 units, the break-even units of the new product is
(a) 12,000
(b) 11,100
(c) 12,500
(d) 9,600
(e) 8,500.
60. Sai Apna Ltd. manufactures a product, currently utilizing 80% capacity with a turnover of
Rs.8,00,000 at Rs.25 per unit. The company has furnished the following cost data:
Material cost - Rs.7.50 per unit; Labor cost - Rs.6.25 per unit; Semi-variable cost (including variable
cost of Rs.3.75 per unit) Rs.1,80,000; Fixed cost Rs.90,000 up to 80% level of output and beyond
this, an additional Rs.20,000 will be incurred. The activity level at break-even point is
(a) 60%
(b) 50%
(c) 40%
(d) 31%
(e) 25%.

61. Priyanka Chemicals Ltd. has two factories - X and Y, with similar plant and machinery fo r
manufacture of soda ash. The board of directors of the company has expressed the desire to merge
them and to run them as one integrated unit. The following data are available in respect of these two
factories: Particulars X Y
Capacity in operation 60% 100%
Turnover 120 lakh 300 lakh
Variable cost 90 lakh 220 lakh
Fixed cost 25 lakh 40 lakh
If the company runs at 80% of the integrated capacity, the profit as a percentage of turnover will be
(a) 20.00%
(b) 18.25%
(c) 12.45%
(d) 9.75%
(e) 7.80%.
62. Likhitha Ltd. manufactures a single product. The total cost per unit of the product is budgeted as
Rs.24, which includes fixed cost of Rs.8 per unit based on a volume of 40,000 units per year. During the
year 2005-06, sales volume was 38,000 units and production volume was 40,500 units. The actual
profit for the same period under absorption costing was Rs.50,000. The profit under marginal costing
method is
(a) Rs.70,000
(b) Rs.50,000
(c) Rs.40,000
(d) Rs.30,000
(e) Rs.25,000.
63. High break even point and small angle of incidence indicate
(a) The fixed costs are high and margin of safety is low
(b) Fixed costs are low and margin of safety is high
(c) Strong financial stability
(d) Profits are earned over a wide range, their extent is not high
(e) Indication of monopolistic conditions.
64. The profit and sales of a company for two consecutive years were as follows:
Period Profits (Rs.) Sales (Rs.)
Year 1 20,000 1,20,000
Year 2 25,000 1,40,000
The break-even sales of the company is
(a) Rs.60,000
(b) Rs.50,000
(c) Rs.40,000
(d) Rs.30,000
(e) Rs.20,000.
65. A factory is running at a capacity of 50% and produces 5,000 units at a cost of Rs.90 per unit as
detailed below:
Material Rs.50
Labour Rs.15
Factory overheads Rs.15 (Rs.6 fixed)
Administrative overheads Rs.10 (Rs.5 fixed)
The current selling price is Rs.100 per unit. At 60% capacity level, material cost will be increased by
2% and selling price per unit will be reduced by 2%. The profit of the factory at 60% capacity level is
(a) Rs.50,000
(b) Rs.53,000
(c) Rs.48,000
(d) Rs.55,000
(e) Rs.60,000.
66. Which of the following would cause the greatest increase in the unit contribution margin?
(a) 20% decrease in fixed costs
(b) 20% increase in fixed costs
(c) 20% decrease in variable costs
(d) 20% increase in semi-variable cost
(e) 20% increase in selling price.

67. Which of the following is true with respect to break-even analysis?

(a) As output increases, fixed costs per unit will fall
(b) As output falls total variable costs will stay the same
(c) As output increases, the selling price per unit will increase
(d) As output increases, outside the relevant range, total fixed costs will stay the same
(e) As output falls, variable cost per unit will fall.
68. Which of the following statements is/are true ?
I. Profit planning is possible with the technique of marginal costing.
II. Marginal costing helps in price fixation more in periods of depression.
III. Key factor is taken into consideration to judge the profitability of different products whenever
there is any shortage.
IV. Make or buy decisions are made by comparing variable cost with outsourced price.
(a) Only (I) above
(b) Both (II) and (III) above
(c) Only (III) above
(d) Both (I) and (IV) above
(e) All (I), (II), (III) and (IV) above.
69. Sengupta Ltd. sells a single product at a price of Rs.3 per unit. The total fixed cost and variable cost
per unit are Rs.5 crore and Re.1 respectively. Due to inflation, the variable costs are expected to
increase by 10% whereas fixed costs will increase by only 5%. If the company increases its selling
price by 4%, the break-even point in units will approximately
(a) Increase by 11%
(b) Increase by 4%
(c) Decrease by 4%
(d) Decrease by 8%
(e) Decrease by 11%.
70. Consider the following information pertaining to product M:
Cost elem ents Variable cost
(% of sales)
Fixed cost
(Rs.)
Direct materials 32.8 Direct labor 28.4 Factory overheads 12.6 1,89,900
Distribution expenses 4.1 58,400
General and administrative expenses 1.1 66,700
Budgeted sales for the next year are Rs.18,50,000. If actual sales are dropped by 10%, the profit of the
company will be
(a) Rs.50,000
(b) Rs.42,500
(c) Rs.34,650
(d) Rs.32,570
(e) Rs.38,770.
71. Which of the following assumptions is false with respect to Cost-Volume-Profit analysis?
(a) This analysis assumes that production and sales will be synchronized at all points of time
(b) This analysis assumes that prices of input factors will remain constant
(c) This analysis does not assume that efficiency and productivity remain unchanged
(d) This analysis assumes that selling prices are constant at all levels of sales
(e) This analysis assumes that efficiency of men, material and machine will remain constant.

Suggested Answers
1. Answer : (b)
Reason : The Purchasing Manager of Sikha Ltd. would be an internal user of information that is
concerned with production reports and estimates, where as the other individuals are all
external to the company and would expect Financial Accounting information prepared in
accordance with GAAP. Therefore, (b) is correct.
2. Answer : (e)
Reason : Management accounting is not mandatory. The applications of management accounting can
be extended beyond the traditional accounting system. It focuses more on the
parts/segments of a company and less on the company as a whole. It is not governed by
GAAP. It prepares reports to fulfill the needs of management. Therefore, all the options are
false and so the correct answer is (e).
3. Answer : (c)
Reason : Both Financial and Management Accounting rely heavily on the concept of responsibility.
Financial Accounting is concerned with the concept of responsibility or stewardship over
the company as a whole; while Management Accounting is concerned with stewardship
over its parts. Hence (c) is false. Management Accounting provides data for internal uses by
managers whereas Financial Accounting provides data for external users like shareholders,
creditors, etc. Since a large part of the overall responsibilities of a manager have to do with
planning, a managers information need has a strong orientation towards future. On the
other hand, Financial Accounting is concerned with a record of financial data of the past.
Financial Accounting is mandatory for business organizations. They should compulsorily
maintain financial records as per various legal statutes like Companies Act, Income Tax
Act, etc. By contrast, Management Accounting is not mandatory. Financial Accounting
statements have to be prepared in accordance with the GAAP whereas managers set their
own rules in the form and content of Management Accounting stat ements.
4. Answer : (a)
Reason : The research and development costs have already been incurred. Thus, they are costs
resulting from a past irrevocable decision. These sunk costs are irrelevant to the new
product because they are unavoidable. Therefore (a) is correct
5. Answer : (d)
Reason : Costs are resources, it is received from customers doing business in an organization. After
they are initially recorded in the accounting system, the cost allocation process studies the
costs and assigns them to different cost objectives based on cost drivers. Therefore, (d) is
not correct.
6. Answer : (d)
Reason : Product engineering is related to development of the product line. Therefore, product
engineering is considered to be as product -level cost.
7. Answer : (e)
Reason : Variable costs refer to all costs which fluctuate in total in response to small change in the
rate of utilization of capacity. Other statements given in (a), (b), (c) and (d) are not correct
in respect of meaning of variable cost. Therefore, (e) is correct.

8. Answer : (a)
Reason : Normal wastage is classified as product cost an d therefore this cost is borne by the good
units. It is not classified as period cost, standard cost, extraordinary item or deferred charge.
9. Answer : (a)
Reason : Notional costs should be included while ascertaining costs. This statement (a) is false.
Other options given (b), (c), (d) and (e) are all correct.
10. Answer : (c)
Reason : Option (c) is not true because wholesalers and manufacturers treat period costs as a
deferred revenue expenditure and they amortize this expenditure over a few years.
11. Answer : (a)
Reason : Marginal costs are based on the distinction between fixed and variable costs. Therefore
option (a) is correct.
12. Answer : (a)
Reason : It is a measure of activity such as direct labor hour, machine hours, computer time used etc.
If these activities are increased, costs will be increased. Therefore, (a) is correct.
13. Answer : (e)
Reason : The purpose of cost allocation is to measure income and assets for external reporting. The
other options given (a), (b), (c) and (d) are not the purposes of cost allocation.
Cost allocation is a process of assigning and reassigning costs to cost objects. It is used for
these costs that cannot be directly associated with a specific cost object. It is often used for
purposes of measuring income and assets for external reporting purposes. It is less
meaningful for internal purposes because responsibility accounting systems emphasize
controllability, a process often ignored in cost allocation.
14. Answer : (c)
Reason : With the recent automation of factories and the corresponding emphasis on activity-based
costing(ABC),companies are finding new ways of allocating indirect factory overhead. One
change is that plant -wide application rates are being used less often because a closer
matching of costs with cost drivers provides better information to management. ABC
results in a more accurate application of indirect costs because it provides more refined
data. Instead of a single cost goal for a process, a department, or even an entire plant, an
indirect cost pool is established for each identified activity. The related cost driver, the
factor that changes the cost of the activity, is also identified.
Option (a) is incorrect because one effect of computerization is that the amount of direct
labor relative to other costs has been decreasing. For this reason some companies have
found that it is no longer expedient to track direct costs as closely as was once done. Thus,
some companies are treating direct labor as an indirect factory overhead cost.
Option (b) is incorrect because through put time is one of the cost drivers that is beginning
to be used more often as an overhead application base. Throughput is the rate of production
over a stated time. This rate clearly drives (influences) costs.
Option (d) is incorrect because multiple cost pools are preferable. They permit a better
matching of indirect costs with cost drivers.
Option (e) is incorrect because ABC uses cost drivers (causes) as application bases to
provide more refined data.

15. Answer : (d)

Reason :
Beginning direct materials inventory 1,34,000
Add: Purchases 1,89,000
Less: Purchase returns (1,000)
Add: Transportation 3,000
Total direct materials available 3,25,000
Less: Ending direct materials inventory (1,25,000)
Direct material used 2,00,000
Direct labor 3,00,000
Total prime costs 5,00,000
Manufacturing cost = Rs.5,00,000 + 60% of Rs.3,00,000 (Direct labor)
= Rs.6,80,000
16. Answer : (c)
Reason : Actual cost Applied cost
= Rs.3,50,000 - [(1,290 + 1,760 + 789) Rs.85] = Rs.3,50,000 Rs.3,26,315
=Rs.23,685 under applied as compared to actual overhead.
Based on overhead rate of Rs.85 and given the hours consumed by each job, costs will be
(J1: Rs.1,09,650 +Rs.85,500) + (J2: Rs.1,49,600 + Rs.74,700) +
(J3: Rs.67,065 + Rs.87,470) = Rs.1,95,150 + Rs.2,24,300 + Rs.1,54,535 = Rs.5,73,985.
Amount chargeable to J2: (Rs.2,24,300 Rs. 5,73,985) Rs.23,685 = Rs.9,256 debited to
finished goods.
17. Answer : (d)
Reason: The supervisor is associated with all products and therefore, the cost would be a batch level
cost. Other options are related to the products. Therefore, (d) is correct.
18. Answer : (d)
Reason : A department is working at 55% of its normal capacity. 45% is treated as idle capacity.
Fixed cost is obviously incurred for the normal capacity work. This 45% of fixed cost
should be excluded from the calculation of overhead recovery rate. Thus the appropriate
recovery rate is to be found by dividing the 55% of fixed cost plus 100% variable
manufacturing overhead by the budgeted direct labor cost.
Appropriate recovery rate = (55% of Rs.1,00,000 + 100% of Rs.1,25,000) Rs.2,50,000 =
Rs.1,80,000 Rs.2,50,000 = 72%
19. Answer : (b)
Reason : Computation of comprehensive machine hour rate:
Expenses Workings Rs. Rs.
Standing charges:
Rent, heat and light (Rs.70,000 70,000) 2,500 2,500
Supervision Rs.1,50,000 25 6,000
Depreciation 10% of Rs.3,00,000 30,000
Reserve equipment cost Rs.2,000 25 80
Labor cost during setting and adjustment 150 hours Rs.8 1,200
Hourly standing charges Rs.39,780 2,000 39,780 19.89
Machine expenses:
Power 1.50
Labor cost Rs. 8 2 4.00
Comprehensive machine hour rate 25.39

20. Answer : (d)

Reason : Allocation of costs is a distribution of costs that cannot be directly assigned to the cost
objects that are assumed to have caused them. An allocation of costs does not enable a
company to determine why the sales of a particular product have increased. Many factors
affect consumer demand such as advertising, consumer confidence, availability of
substitutes and changes in tastes. Cost allocation is an internal matter that does not affect
demand except to the extent it results in a change in price.
21. Answer : (b)
Reason :
Particulars Product M Product N Total
Budgeted sales volume 80,000 1,20,000 2,00,000
Budgeted total contribution Rs.8 Rs.6
Budgeted total contribution Rs. 6,40,000 Rs. 7,20,000 Rs.13,60,000
Budgeted sales revenue Rs.16,00,000 Rs.19,20,000 Rs.35,20,000
Average contribution per unit = Rs.13,60,000 2,00,000 = Rs.6.80.
Break-even point =
Rs.8,16,000
Rs.6.80 = 1,20,000 units
Average selling price per unit = Rs.35,20,000 2,00,000 = Rs.17.60
Break-even point in sales value = 1,20,000 Rs.17.60 = Rs.21,12,000.
22
22. Answer : (c)
Reason : The process of charging factory overhead to work-in-process based on a predetermined
application rate multiplied by actual input is known as normal costing. Other options are
not correct.
23. Answer : (b)
Reason : In activity based costing, the overhead costs are charged to production on the basis of cost
driving activities. Other options are not correct.
24. Answer : (b)
Reason: Per set up cost = Rs.3,200 (5 + 10 + 5 ) = Rs.160;
Set up cost charged to A = Rs.160 5 = Rs.800;
Rs.800 400 = Rs.2 per unit.
25. Answer : (c)
Reason: Without any other information as to the President's work requirements, each department
needs equal effort. Therefore, (c) is correct.
26. Answer : (c)
Reason: The goal of using cost pools is to minimize the allocation effort. However, it is also
desirable to have the pools reflect the incurrence of the costs. The heat and cleaning cost
are probably more related to square feet than they are to number of employee and sales
rupees. Therefore (c) is correct.
27. Answer : (c)
Reason : Total fixed overhead = 12,000 units Rs.4 = Rs.48,000.
Fixed overhead per unit = Rs.48,000 actual overhead 10,000 units actual production
= Rs.4.80.

Total cost per unit = Material Rs.10 + Labor Rs.6 + Variable overhead Rs.3 + Fixed
overhead Rs.4.80 = Rs.23.80.
28. Answer : (c)
Reason :
Particulars Rs.
Direct material 9,00,000
Direct wages 7,50,000
Prime cost 16,50,000
Factory overhead cost (60% on direct wages) 4,50,000
Works cost 21,00,000
Administrative overhead cost (20% on works cost) 4,20,000
Cost of production 25,20,000
Selling & distribution overhead (25% on works cost) 5,25,000
Cost of sales 30,45,000
Profit (16.67% on sales or 20% on cost of sales) 6,09,000
Sales value 36,54,000
29. Answer : (b)
Reason : It is given in the question that the secondary distribution of service departments overhead
is pending. The same is thus attempted by use of simultaneous equation method.
Let , total overheads of department S1 = x; and total overheads of S2 = y;
According to problem, we get x = 16,000 + 0.1y and y = 24,000 + 0.2x;
Therefore, x = 16,000 + 0.1(24,000 + 0.2x) = 16,000 + 2,400 + 0.02x
Or, x (1 0.02) = 18,400, or, x = 18,400 0.98 = 18,775, then y = 27,755
Statement of secondary distribution:
Particulars P1 (Rs.) P2 (Rs.) P3 (Rs.) Total (Rs.)
Direct allocation 48,000 1,12,000 52,000 2,12,000
S1 (80% of 18,775) 3,755 7,510 3,755 15,020
S2 (90% of Rs.27,755) 2,776 16,653 5,551 24,980
Total 54,531 1,36,163 61,306 2,52,000
Budgeted machine hours 5,000 12,000 6,000
Overhead rate per machine hour 10.91 11.35 10.22
30. Answer : (d)
Reason : Petroleum refinery is most likely to use a process costing system because process costing
involves a series of processes by which the crude oil is refined to bring it to the saleable
condition. Others are used job costing system.
31. Answer : (b)
Reason : Raw material used = Op. stock + Purchases Cl. stock
= Rs.18,350 + Rs.1,21,210 Rs.17,210 = Rs.1,22,350
Manufacturing cost = Raw material used + Direct labor + Factory overhead
Rs.5,28,055 = Rs.1,22,350 + Direct labor + 72% of Direct labor
1.72 Direct labor = Rs.4,05,705; Direct labor= Rs.2,35,875
The amount of factory overhead = 72% of Rs.2,35,875 = Rs.1,69,830.
32. Answer : (b)
Reason : Variable overheads =
Rs.26,325 Rs.25,650
1650hrs 1500hrs

-=
Rs.675
150hrs = Rs.4.50
Fixed overhead rate = Rs.25,650 Rs.4.50 1500 hrs
= Rs.25,650 Rs.6,750 = Rs.18,900
Predetermined rate Rs. 15 Variable cost 4.50 = Rs. 10.50
Normal activity = Rs.18,900 Rs.10.50 = 1,800 hours
Over absorption = (1,800 hrs 1,900 hrs) Rs.10.50 = Rs.1,050.
33. Answer : (a)
Reason : Under the proration approach to under absorbed or over absorbed overhead costs, the
account that would not receive any of the overhead being allocated would be direct material
inventory. Direct material inventory is not an account that has overhead in the information.
It is only the storage of material not yet started into production. Other options like cost of
goods sold, work-in-process and finis hed goods absorb the under or over absorption of
overhead costs. Therefore (a) is correct.
34. Answer : (d)
Reason : Sales = variable cost + Fixed cost
Let, the total sales = S.
Where there is no profit no loss.
S = Rs.3,06,000 + 0.70 S (.6) + 0.30 S (.8)
S = Rs.3,06,000 + .42 S + .24 S or, S (1 0.42 0.24) = Rs.3,06,000
S = Rs.3,06,000 0.34 = Rs.9,00,000
35. Answer : (a)
Reason : Total overhead costs Total machine hours
= Rs.11,50,000 4,000 hours = Rs.287.50 per hour;
Overhead allocated to product B = Rs.287.50 2,200 = Rs.6,32,500.
36. Answer : (e)
Reason : Options (I), (II) and (III) are true. Option (IV) is not a circumstance where direct labour
cost is used to recover factory overhead. So, the correct answer is (e).
37. Answer : (a)
Reason : Abnormal spoilage is considered as period cost. Therefore, (a) is the answer.
38. Answer : (b)
Reason : Statement of equivalent Production Unit (FIFO)
Input Output
Completed
Material Conversion
Opening 450 Opening 450 20% 90 40% 180
Introduced 4,100 Introduced 3,600 100% 3,600 100% 3,600
Closing 500 70% 350 60% 300
4,550 4,550 4,040 4,080
Costs
during
the month Rs.70,700 Rs.61,200
Cost

per unit Rs.17.50 Rs.15.00

The total cost of closing work-in-process
Material 350 Rs.17.50 = Rs.6,125
Conversion 300 Rs.15.00 = Rs.4,500
Rs.10,625
39. Answer : (e)
Reason :
Particulars Indian Oil Bharat
Petroleum
Distance (Depots to factory full load) 10 km 8 km
Distance covered per trip 20 km 16 km
Running time @ 40 km p.h. 30 minutes 24 minutes
Filling-in time 50 minutes 45 minutes
Emptying time 45 minutes 45 minutes
Total time per trip 125 minutes 114 minutes
Details of costs:
Variable operating charges @ Rs.2.20
Indian Oil (20 km Rs.2.20)
Bharat Petr. (16 km Rs.2.20)
Rs.44.00 Rs.35.20
Fixed charges @ Rs.13.20 per hour
Indian Oil (125mint. Rs.13.20 60mint)
Bharat Petroleum
(114 mint. Rs.13.20 60 mint.)
Rs.27.50 Rs.25.08
Total cost per trip Rs.71.50 Rs.60.28
Ton-km (full load)
Indian Oil (6 ton 10 km)
Bharat Petroleum (6 ton 8 km)
60 ton-km 48 ton-km
Cost per ton-km (Total cost per trip Ton-km) Rs.1.19 Rs.1.25
40. Answer : (d)
Reason : Rs. Rs.
Total manufacturing Costs 1,94,080
Less: Overhead costs:
Indirect labor 12,160
Factory overhead 31,730
Indirect material 21,390
65,280
Freight in 5,570 70,850
1,23,230
Less: Direct labor 32,640
Material consumed 90,590
Add: Closing material 11,640
1,02,230
Less: Opening material 9,620
Material purchased 92,610

41. Answer : (d)

Reason : Material cost per equivalent unit = Rs.94,870 (6,950 + 490 + 1,160)
= Rs. 94,870 8,600 = Rs.11.03.
Conversion = Rs.37,410 (50 + 6,950 + 490 + 870) = Rs.4.47
Total cost = 6,950 (Rs.11.03 + Rs.4.47) + 50 Rs.4.47 + Rs.3,500
= Rs. 1,07,725 + Rs. 223.50 + Rs. 3,500 = Rs.1,11,448.50
42. Answer: (d)
Reason: By processing CL further at a cost of Rs.1,000 HCL earns an additional Rs.5,000 in
revenue which means a net increase in profitability of Rs.4,000 by processing CL further.
Therefore, (d) is correct.
43. Answer : (c)
Reason : Input = 25,000 units + 1,35,000 units = 1,60,000 units;
Out put = 25,000 units + 75,000 units + 60,000 units = 1,60,000 units;
Equivalent units = 20% of 25,000 units + 100% of 75,000 units + 50% of 60,000 = 5,000 +
75,000 + 30,000 = 1,10,000 units
Conversion cost per equivalent unit in this process = Rs.1,43,000 1,10,000 = Rs.1.30
Conversion cost of closing WIP = 30,000 Rs.1.30 = Rs.39,000.
44. Answer : (b)
Reason : Statement showing the fare to be charged from a passenger for one km.
Particulars Per annum
(Rs.)
Per month
(Rs.)
A. Standing charges:
Insurance charges 15,000
Taxes 10,000
Drivers salary 18,000
Conductors salary 12,000
Cost of stationery 6,000
Manager-cum-accountant salary 42,000
Garage Rent 12,000
Total 1,15,000 9,583.33
B. Maintenance charges:
Repairs (Rs.10,000 12) 833.33
C. Running charges:
Depreciation 1,00,000 8,333.33
Petrol (25 days 3 trip 2 Rs.2.50 20) 7,500.00
Commission 3,500.00
Profit 15% of tickets selling 5,250.00
Total tickets selling 35,000.00
Total effective passenger km. per month
3 2 20 25 40 = 1,20,000 )
Bus fare per passenger Rs.35,000 1,20,000 0.30
* In order to calculate the amount of commission payable to the driver and the conductor,
total tickets selling will have to be calculated.
Let, total tickets selling = x; Commission = 0.1x; profit = 0.15x;
Total cost per month without including commission = Rs.26,250
x = Rs.26,250 + 0.1x + 0.15x

x =Rs.26,250 0.75 = Rs.35,000

Commission = 10% of Rs.35,000 = Rs.3,500;
Profit = 15% of Rs.35,000 = Rs.5,250.
45. Answer : (a)
Reason : The break-even point in units is calculated by dividing the fixed costs by contribution per
unit. If selling price is constant and variable costs increase, the unit contribution margin
will decline. It results in an increase in the break-even point. Other options given in (b), (c),
(d) and (e) are not true.
46. Answer : (a)
Reason : Work-in-Process = Work certified + Work uncertified Profit in reserve Progress
payment received
= Rs.60,60,000 + Rs.4,25,000 *Rs.4,95,030 Rs.50,00,000
= Rs.9,89,970
Plant= Rs.18,00,000 Rs.1,75,000 = Rs.16,25,000
Total = Rs.9,89,970 + Rs.16,25,000 = Rs.26,14,970.
Working:
Particulars Rs. Particulars Rs.
To Material issued 30,80,000 By Work-in-Progress:
To Wages Direct 12,30,000 Work certified 60,60,000
Accrued 55,500 Work not certified 4,25,000
To Wages related cost 92,600 By Material
To Plant hire charges 1,82,000 Returned from site 42,500
To Site office cost 26,400 At site 60,000
To Planning & estimating cost 4,80,000
To Head office expenses appr. 80,500
To Direct expenses 85,300
To Depreciation 1,75,000
To Notional profit 11,00,200
65,87,500 65,87,500
To Profit & loss A/c:
2 11,00,200 50,00,000
3 60,60,000

6,05,170 By Notional Profit 11,00,200

To Reserve *4,95,030
11,00,200 11,00,200
47. Answer : (c)
Reason : Occupancy days in a year
For single room = 25 365 80% = 7300
For double room = 15 365 80% = 4380
Total room occupancy = 7300 + 1.5 (4380) = 7300 + 6570 = 13,870
Total cost:
Single room = 7300 (Rs.65 + Rs.25) = Rs. 6,57,000
Double room = 4380 (Rs.45 + Rs.35) = Rs. 3,50,400
Total cost = Rs. 10,07 400
Margin (25% hire charge) = Rs. 3,35,800
Total = Rs. 13,43,200
Rent per day of single room = Rs.13,43,200 13,870 = Rs.96.84 or Rs.97.

Rent of a double room per day = Rs.96.84 (1.5) = Rs.145.26 or Rs.145.

48. Answer : (e)
Reason : Joint cost = Rs.4,00,000 + Rs.2,00,000 + Rs.3,00,000 = Rs.9,00,000
Total sales value = 300 Rs.3,000 + 240 4,000 + 120 5,000 = Rs.9,00,000 +
Rs.9,60,000 + Rs.6,00,000 = Rs.24,60,000.
Share of joint costs of Product B = (Rs.9,00,000 Rs24,60,000) Rs.9,60,000
= Rs.3,51,219.45
The cost of closing inventory of Product B = (Rs.3,51,219.45 240) 90
= Rs.1,31,707
49. Answer : (c)
Reason : If the cost of the by-product is apportioned to joint products, it is made at notional sales
value at separation point. Other options are not appropriate for apportionment of by-product
to joint products.
50. Answer: (e)
Reason: Final profit of the job = Rs.4,95,000 - (2,76,000 0.60)
= Rs. 4,95,000 Rs. 4,60,000 = Rs.35,000.
51. Answer: (e)
Reason: Opening WIP + Added =
Completed units + Normal loss + Abnormal loss + Closing WIP
400 + 9,000 = 9,400 = 7,200 + 360 + 500 + 1,340
Cost of conversion = Rs.1,000 + Rs.37,410 = Rs.38,410
Equivalent units = 100% of 7,200 + 100% of 500 + 60% of 1,340
= 7,200 + 500 + 804 = 8,504
Cost per unit = Rs.38,410 8,504 = Rs.4.52
Cost of conversion in WIP ending = 60% of 1,340 Rs.4.52 =Rs.3,634.
52. Answer: (c )
Reason: All cost systems utilize some form of cost averaging and estimation. Therefore, (c) is
correct.
53. Answer: (c)
Reason: The number of equivalent units in mixing department =
45,000 transferred out + 3,000 (5,000 60%) in ending inventory = 48,000 units.
The number of equivalent units in finishing department =
40,000 transferred out + 3,000 (5,000 60%) in ending inventory = 43,000 units.
Transferred in cost Rs.90,000 (Rs.96,000 48,000 = Rs.2 per unit 45,000 units) +
Rs.168,000 added = Rs.2,58,000 43,000 equivalent units = Rs.6 per equivalent unit.
54. Answer : (a)
Reason: Sales are made at split off point:
Product Sales value at split off
point (Rs.)
Allocation of joint
costs (Rs.)
Net profit
(Rs.)
M 5,00,000 0.15 = 75,000 (75 97,600) 111 = 65,946 9,054

N 10,000 0.50 = 5,000 (5 97,600) 111 = 4,397 603

P 5,000 0.80 = 4,000 (4 97,600) 111 = 3,517 483
Q 9,000 3 = 27,000 (27 97,600) 111 = 23,740 3,260
Total 1,11,000 97,600 13,400
55. Answer : (c)
Reason :
Joint products
No. of
units
S.P.
per unit
Rs.
Sales
value
Rs.
A 500 18 9,000
B 900 8 7,200
C 400 4 1,600
D 200 11 2,200
Total sales value 20,000
Less: Budgeted profit (10%) 2,000
Total joint costs 18,000
Less: Other costs: Carriage inwards 1,000
Manufacturing overhead 2,000
Administration overhead 2,000
Direct wages 3,000 8,000
Maximum price to be paid for R.M. 10,000
56. Answer : (b)
Reason : Job costing is a type of specific order costing which applies where work is undertaken as an
identifiable unit. Under job costing method, cost of an individual job or work order is
ascertained separately. Hence it is ideal where the products are dissimilar and nonrepetitive
in nature.
57. Answer : (d)
Reason : The pre-separation costs of joint product when considered in relation to a further processing
decision are irrelevant costs. These are not incremental costs, avoidable costs, and
opportunity coasts and sunk costs.
58. Answer : (b)
Reason : Standard capacity expected = 250 72 100 = 180 hours
So, unavoidable idle time = 250 hours 180 hours = 70 hours
Capacity utilization ratio = 65%
So, actual hours worked = 180 65 100 = 117 hours.
59. Answer : (b)
Reason : BEP =
Fixedcost
Contributionperunit
Up to the product of 7,500 units

BEP =
Rs.80,000
Rs.25- 60%of Rs.25 =
Rs.80,000
Rs.10 = 8,000 units.
At any production level greater than 7,500 units, total fixed costs are Rs.1,20,000 but there
are two contribution margin. The first 7,500 units sold will produce a contribution margin
of Rs.75,000 (i.e.7,500 Rs.10). Hence, the other Rs.45,000 (i.e. Rs.1,20,000 Rs.75,000)
must be contributed. The contribution per unit is Rs.12.50 (i.e. Rs.25 50% of Rs.25)
Therefore, BEP = Rs.45,000 Rs.12.50 = 3,600 units.
Therefore, Total BEP = 7,500 units + 3,600 units = 11,100 units.
60. Answer : (b)
Reason : P/V ratio = (Rs.7.50 Rs.25) 100 = 30%;
Contribution per unit = Rs.25.00 (Rs.7.50 + Rs.6.25 + Rs.3.75) = Rs.7.50
Number of units sold at 80% level = Rs.8,00,000 Rs.25 = 32,000 units;
Maximum capacity = 32,000 80% = 40,000 units.
Fixed cost element in semi-variable cost = Rs.1,80,000 32,000 Rs.3.75 = Rs.60,000.
Total fixed cost up to 80% = Rs.90,000 + Rs.60,000 = Rs.1,50,000;
Activity level at break-even point = Fixed cost contribution per unit
= Rs.1,50,000 7.50 = 20,000
Activity level = 20,000 40,000 = 0.5 or 50%.
61. Answer : (d)
Reason :
Statement showing the cost and profit situation of two factories - X and Y
(Individually and Integrated)
Particulars
Factory X
@60%
capacity
Factory
X
@100%
capacity
Factory Y
@100%
capacity
Combined
@100%
capacity
Turnover 120 200 300 500
Variable cost 90 150 220 370
Contribution 30 50 80 130
Fixed cost 25 25 40 65
Profit 5 25 40 65
P/V ratio 25% 25% 26.67% 26%
Breakeven point Rs.100 Rs.100 Rs.150 Rs.250
BEP as % of turnover 83.3% 50% 50% 50%
Profit at 80% utilization of integrated capacity:
Turnover Rs.500 80% Rs.400 lakhs

Contribution (Rs.130 Rs.500) 400 Rs.104 lakhs

Fixed costs Rs. 65 lakhs
Profit Rs. 39 lakhs
Profit as % of turnover 9.75%
62. Answer : (d)
Reason :
Profit under absorption costing Rs.50,000
Less: Fixed overhead cost of
closing stock Rs.8 (40,500 38,000)
Rs.20,000
Profit under marginal costing Rs.30,000
63. Answer : (a)
Reason : If the break-even point is high and angle of incidence is small, it indicates the high fixed
costs and low margin of safety. Therefore, (a) is correct.
64. Answer : (c)
Reason :
Profit (Rs.) Sales (Rs.) Costs (Rs.)
Year I 20,000 1,20,000 1,00,000
Year II 25,000 1,40,000 1,15,000
Contribution to sales ratio = Change of Sales
Change of Profit
= Rs.1,40,000 Rs.1,20,000
Rs.25,000 Rs.20,000
= Rs.20,000
Rs.5,000
= 25%
Fixed cost (Year I) = 25% on Rs.1,20,000 Profit = Rs.30,000 Rs.20,000 = Rs.10,000.
Break even point =
Fixedcost
C/Sratio = 25%
Rs.10,000
= Rs.40,000
Other answers mentioned in (a), (b), (d) and (e) are not correct.
65. Answer : (b)
Reason :
Capacity 50% 60%
Units 5,000 6,000
Selling price per unit (Rs.) 100 98
Sales value (Rs.) 5,00,000 5,88,000
Material per unit (Rs.) 50 51
Labour & variable factory overheads(Rs.) 24 24
Variable admn. Overheads (Rs.) 5 5
Variable cost per unit (Rs.) 79 80
Total variable cost (Rs.) 3,95,000 4,80,000
Fixed overhead (Rs.) 55,000 55,000

Total cost (Rs.) 4,50,000 5,35,000

Profit (Rs.) 50,000 53,000
66. Answer: (e)
Reason: Contribution = Sales Variable cost. If sales price increase or variable cost decreases,
contribution per unit will be increased. Since, sales price is greater than variable cost, 20%
increase in sales price will help to increase contribution more than 20% decrease in variable
costs (which also helps to increase in contribution).
67. Answer: (a)
Reason: Total variable costs will change in direct proportion to output. Per unit variable cost is
constant irrespective of volume. If output increases, fixed cost per unit will fall but selling
price will not be increased. Therefore, (a) is correct.
68. Answer : (e)
Reason : All the statements given in (I), (II), (III) and (IV) are true. Hence, the correct answer is (e)
69. Answer : (b)
Reason : Breakeven point = Fixed cost (Selling price Unit variable cost)
= Rs.5 crore (Rs.3 Re.1) = Rs.5 crore Rs.2 = 2.5 crore units
After inflation, breakeven point = Rs.5 (1.05) [Rs.3 (1.04) Re.1 (1.10)]
= Rs.5.25 (Rs.3.12 Rs.1.10) = Rs.5.25 Rs.2.02 = 2.599 or 2.6 crore units
So the breakeven point will increase by 2.6 2.5 = 0.1 crore units or 10 lakh units
Percentage increase = 10 lakh 2.5 crore = 4%.
70. Answer : (c)
Reason : Total percentage of variable cost = 32.8 + 28.4 + 12.6 + 4.1 + 1.1 = 79%
Contribution to sales ratio = 21%
After reducing 10%, the budgeted sales = Rs.18,50,000 90% = Rs.16,65,000
Total fixed cost = Rs.1,89,900 + Rs.58,400 + Rs.66,700 = Rs.3,15,000
Profit of the company = 21% of Rs.16,65,000 Rs.3,15,000
= Rs.3,49,650 Rs.3,15,000 = Rs.34,650.
71. Answer : (c)
Reason : Cost-volume-profit analysis presumes that efficiency and productivity remain unchanged.
In other words, this analysis presents a static picture of a dynamic situation. Therefore,
option (c) is not correct. Other options given in (a), (b), (d) and (e) are correct.

1. Which of the following is not a general method for determining the transfer prices?
(a) Cost-based transfer pricing (b) Income-based transfer pricing
(c) Market-based transfer pricing (d) Negotiated transfer pricing
(e) Contribution based transfer pricing.
2. Which of the following is true in respect of full cost pricing method?
(a) It is used to recover market price plus mark-up
(b) It is used to recover standard cost plus mark-up
(c) It is used to recover fixed costs only
(d) It is used to recover variable costs only
(e) It is used if a company does not have the basic idea of demand for the product.
3. Which of the following statements is true with regard to the difference between a flexible budget
and a fixed budget?
(a) A flexible budget primarily is prepared for planning purposes while a fixed budget is prepared
for performance evaluation
(b) The variances are usually larger with a flexible budget than with a fixed budget
(c) A flexible budget includes only variable costs whereas a fixed budget includes only fixed costs
(d) A flexible budget is established by operating management while a fixed budget is determined by
top management
(e) A flexible budget provides cost allowances for different levels of activity whereas a fixed budget
provides costs for one level of activity.
4. The relationship between the budgeted number of working hours and the maximum possible
working
hours in a budgeted period is
(a) Efficiency ratio
(b) Activity ratio
(c) Calendar ratio
(d) Capacity usage ratio
(e) Capacity utilization ratio.
5. 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.
6. A favorable materials price variance coupled with an unfavorable materials usage variance
would most likely result from
(a) The purchase and use of higher than standard quality materials
(b) The purchase of lower than standard quality materials
(c) Product mix production changes
(d) Machine efficiency problems
(e) Labor efficiency problems.
7. The average human being has an inherent dislike of work and will avoid it if he can - this job
attitude is specifically dealt with in
(a) Herzbergs Two Factor Theory
(b) Douglas McGregors Theory Y
(c) The principles of human motivation as revealed by Abraham Maslow
(d) Douglas McGregors Theory X
(e) McDonalds Theory Z.

8. An organized creative approach, which emphasizes efficient identification of unnecessary cost is

known as
(a) Management by objective
(b) Activity based costing
(c) Target costing
(d) Value analysis
(e) Quality costing.
9. Which of the following statements is false with respect to target costing?
(a) Target costing is a customer oriented technique
(b) Target costing requires market research to determine the customers perceived value of the
product based on its functions and attributes
(c) The maximum advantage of adopting target costing is when it is deployed at the products
selling stage
(d) A major feature of target costing is that a team approach is adopted to achieve the target cost
(e) Target costs are conceptually different from standard costs.
10. A set of concepts and tools applied for getting all the employees focused on continuous
improvement in the eyes of the customers is popularly known as
(a) Quality control
(b) Total quality management
(c) Customer orientation
(d) Self management
(e) Cost control.
11. The following information pertains to Pawan Ltd. for its new product:
Production units 12,000 units
Investment for the new product Rs.3,00,000
Fixed costs Rs.1,08,000
Variable cost per unit Rs.28
If the company desires to earn 22% return on investment, the selling price should be
(a) Rs.44.60
(b) Rs.42.50
(c) Rs.40.00
(d) Rs.46.60
(e)Rs.46.40.
12. Shiva Ltd., manufacturing a single product, is operating at 70% level of capacity at which the
sales are Rs.7,35,000. The company has estimated the following data for the current year:
Variable cost Rs.150 per unit Semi-variable cost Rs.85,000 when output is nil plus variable portion
of Rs.200 for each additional 1% level of capacity Fixed cost Rs.2,20,000 at present level of activity.
This cost is estimated to be increased by Rs.60,000 if the level of activity exceeds
80% The company is facing a severe competition in the market. The management of the company is
considering a proposal to decrease the selling price by 10%. The present sale price is Rs.350.
The budgeted operating profit per unit at 90 % level of activity on the assumptions that the selling
price is reduced by 10%, is
(a) Rs.23.15
(b) Rs.32.55
(c) Rs.48.33
(d) Rs.35.44
(e)Rs.26.85.
13. TTD Ltd. has furnished the following data relating to its product for the month of March 2006:
Particulars Budget Actual
Sales in units 1,40,000 1,50,000
Production units 1,40,000 1,60,000
Direct labor hours 2,80,000 3,10,000
Machine hours 7,00,000 7,95,000
Fixed overhead (Rs.) 3,15,000 3,53,000
The fixed overhead capacity variance for the month is
(a) Rs.50,000 (F)
(b) Rs.50,000 (A)
(c) Rs.45,000 (F)

(d) Rs.45,000 (A)

(e) Rs.38,000 (A).

14. Vixon Ltd. has furnished the following information pertaining to its product:
Direct material Rs.15
Direct labor Rs.15
Production overheads Rs.25 (40% fixed)
Selling & administrative overheads Rs.30 (50% fixed)
Normal Production 1,000 units
The total costs for 980 units are
(a) Rs.77,500
(b) Rs.83,800
(c) Rs.83,300
(e) Rs.1,03,750.

(d) Rs.1,10,000

15. Santoshi Ltd. has furnished the following information pertaining to its business:
Sales Rs. 8,00,000
Variable costs Rs. 4,80,000
Traceable fixed costs Rs. 1,20,000
Average invested capital Rs. 4,50,000
Imputed interest rate 22%
The residual income of the company is
(a) Rs.1,01,000
(b) Rs.1,44,000
(c) Rs.1,08,000
(d) Rs.1,26,000
(e) Rs.1,24,000.
16. G Reddy Ltd. manufactures a single product at the operated capacity of 40,000 units while the
normal capacity of the plant is 50,000 units per annum. The company has estimated 20% profit on
sales realization and furnished the following budgeted information:
Particulars 50,000 units (Rs.)
40,000 units
(Rs.)
Fixed overheads 2,00,000 2,00,000
Variable overheads 3,50,000 2,80,000
Semi-variable overheads 3,50,000 3,00,000
Sales realization 19,00,000 15,20,000
The company has received an order from a customer for a quantity equivalent to 10% of the
normal capacity. It is noticed that prime cost per unit of product is constant. If the company desires
to maintain the same percentage of profit on selling price, the minimum price per unit to be quoted
for new order is
(a) Rs.26.63
(b) Rs.37.60
(c) Rs.25.40
(d) Rs.28.66
(e)Rs.28.63.
17. Narayana Ltd. manufactures and sells a special model of calculator NR69. The company has
estimated the following activity of the company for the month of May 2006:
Sales Rs.5,80,000 Gross profit on sales 25%
Increase in inventory during the month Rs.18,400
Decrease in sundry debtors Rs.12,500
Total selling and administrative expenses Rs.25,000 + 2.5% on sales
Depreciation expenses which is included in
fixed selling and administrative expenses
Rs.9,800
The net cash surplus or deficit for the month of May 2006 is
(a) Rs.1,02,400 (Surplus)
(b) Rs.65,000 (Deficit)
(c) Rs.1,09,400 (Surplus)
(d) Rs.1,02,600 (Deficit)
(e) Rs.1,11,400 (Surplus).

18. Victor Ltd. has estimated Rs.2,80,000 and Rs.2,20,000 for direct material and direct labor
respectively for the month of May 2006. It is the policy of the company to absorb overheads as
under: Factory overheads 50% of direct wages Administrative overheads 20% of works cost
Selling and distribution overheads 20% of works cost It is estimated that the selling and
distribution overheads will increase by 15% in May 2006. The company sells goods at a profit of
12.5% on sales. The budgeted sales for the month of May 2006 is
(a) Rs.9,96,914
(b) Rs.9,09,900
(c) Rs.10,31,771
(d) Rs.8,56,800
(e) Rs.9,15,652.
19. Leo Toys manufactures a toy monkey with moving parts and a built-in voice box. Projected
sales for 6 months are as follows:
Month Projected sales in units
May 2006 4,000
June 2006 4,300
July 2006 4,500
August 2006 4,250
September 2006 4,400
October 2006 4,500
Each toy requires direct materials from a supplier at Rs.25 for moving parts. Voice boxes are
purchased from another supplier at Rs.10 per toy. Labor cost is Rs.20 per toy and variable
overhead cost is Rs.5 per toy. Fixed manufacturing overhead applicable to production is Rs.39,000
per month. It is the practice of the company to manufacture an output in a month, which is
equivalent to 80% of the current month sales and 40% of the following month sales.
The production budget for the month of July 2006 and the production cost budget for the month of
August 2006 are
(a) 5,300 units and Rs.3,74,400 respectively
(b) 5,400 units and Rs.3,98,000 respectively
(c) 5,300 units and Rs.3,48,600 respectively
(d) 5,400 units and Rs.3,74,400 respectively
(e) 5,300 units and Rs.3,48,400 respectively.
20. Java Ltd. manufactures 5,000 units of Product JV at a cost of Rs.90 per unit. Presently, the
company is utilizing 50% of the total capacity. The information pertaining to cost per unit of the
product is as follows:
Material Rs.50
Labor Rs.20
Factory overheads Rs.20 (40% fixed)
Administrative overheads Rs.10 (50% fixed)
Other information:
i. The current selling price of the product is Rs.110 per unit.
ii. At 60% capacity level Material cost per unit will increase by 2% and current selling
price per unit will reduce by 2%.
iii. At 90% capacity level Material cost per unit will increase by 5% and current selling
price per unit will reduce by 5%.
The profit per unit of the product of the company at 60% and 90% capacity level will be
(a) Rs.8.83 and Rs.7.77 respectively
(b) Rs.8.97 and Rs.6.88 respectively
(c) Rs.8.97 and Rs.7.77 respectively
(d) Rs.6.63 and Rs.6.88 respectively
(e) Rs.8.97 and Rs.6.98 respectively.
21. Terry Tools Ltd. has a normal capacity of 50 machines working 8 hours per day of 25 days in a
month. The budgeted fixed overheads of a month are Rs.1,00,000. The standard time required to
manufacture one unit of product is 4 hours. In a particular month, the comp any worked for 24
days of 350 machine hours per day and produced 2,320 units of the product. The actual fixed

overheads incurred were

Rs.88,800.
The fixed overhead cost variance and fixed overhead expenditure variance are
(a) Rs.4,000 (A) and Rs.6,000(A) respectively (b)
Rs.4,000 (F) and Rs.11,200 (F) respectively (c)
Rs.10,000 (A) and Rs.11,200 (F) respectively (d)
Rs.5,000 (A) and Rs.7,200 (A) respectively (e)
Rs.4,000 (F) and Rs.7,200 (A) respectively.
22. Sai Apna Ltd. has furnished the following information relating to cost at a capacity level of 5,000
units: Particulars Rs.
Material cost 25,000 (100% variable)
Labour cost 15,000 (100% variable)
Power 1,250 (80% variable)
Repairs and maintenance 2,000 (75% variable)
Stores 1,000 (100% variable)
Inspection 500 (20% variable)
Administration overheads 5,000 (25% variable)
Selling overheads 3,000 (50% variable)
Depreciation 10,000 (100% fixed)
The production cost budget per unit, at the level of 6,500 units, is
(a) Rs.12.55
(b) Rs.13.37
(c) Rs.12.00
(d) Rs.11.79
(e) Rs.13.98.
23. A favorable variance of Rs.3,650 for the flexible budget demonstrates that
(a) Actual costs were Rs.3,650 more than the master budget
(b) Actual costs were Rs.3,650 less than for the planned level of activity
(c) The total of the planning and efficiency variances is Rs.3,650
(d) Actual costs were Rs.3,650 less than standard for the achieved level of activity
(e) The cost under master budget is Rs.3,650 more than the cost under planned level of activity.
24. Traditional cost management does not involve
(a) Market research into customer requirements
(b) Estimation of product cost
(c) Obtaining prices from suppliers
(d) Value engineering
(e) Overheads absorption.
25. When comparing performance report information of top management with that of lower level
management
(a) Top management reports are more detailed
(b) Lower level management reports are typically for longer time periods
(c) Top management reports show control over fewer costs
(d) Lower level management reports are likely to contain m ore quantitative data and less financial
data
(e) Top management reports are usually not of the exception type but present a complete analysis
of all variances.
26. A systematized approach known as zero-based budgeting (ZBB)
(a) Presents the plan for only one level of activity and does not adjust to change in the level of
activity

(b) Presents a statement of expectations for a period of time but does not present a firm
commitment
(c) Divides the activities of individual responsibility centers into a series of packages that are
prioritized
(d) Classifies budget requests by activity and estimates the benefits arising from each activity
(e) Commences with the current level of spending.
27. Sanu Ltd. has two divisions - A and B. The division A has the capacity to manufacture 1,20,000
units of a special component LJ annually and it has some idle capacity currently. The budgeted
residual income for the division A is Rs.7,00,000. The relevant details extracted from the budget of
A are as under: Sales (to outside customers) 1,00,000 units @ Rs.180 per unit
Variable cost per unit Rs.160
Divisional fixed cost Rs.8,00,000
Capital employed Rs.80,00,000
Cost of capital 12.5% per annum
Division B received an order for which it requires 20,000 units of a component similar to LJ. An
additional variable cost of Rs.3 per unit will be incurred to make minor modifications to LJ to suit
the requirements of Division B.
The minimum transfer price per unit which A should quote to B to achieve its budgeted residual
income is
(a) Rs.155
(b) Rs.188
(c) Rs.165
(d) Rs.177
(e) Rs.185.
28. The budget that describes the long term position, goals and objectives of an entity within its
environment is known as
(a) Capital budget
(b) Operating budget
(c) Cash management budget
(d) Strategic budget
(e) Financial budget.
29. Which of the following may be considered as an independent item in the preparation of the
master budget?
(a) Production budget
(b) Capital investment budget
(c) Pro forma income statement
(d) Pro forma statement of financial position
(e) Overhead expenses budget.
30. The following information is extracted from the books of Havate Ltd. for product H for the
month of March 2006:
Standard labor hours per unit 4 hours
Actual hours 196 hours
Labor rate variance Rs.147 (Adverse)
Actual labor rate Rs.11.75
Units produced 50 units
The labor efficiency variance is
(a) Rs.44 (Favorable)
(b) Rs.55 (Adverse)
(c) Rs.50 (Favorable)
(d) Rs.50 (Adverse)
(e) Rs.44 (Adverse).
31. The difference between budgeted fixed overhead costs and applied fixed overhead costs is
known as
(a) Fixed overhead costs variance
(b) Fixed overhead expenditure variance
(c) Fixed overhead volume variance
(d) Fixed overhead efficiency variance
(e) Fixed overhead capacity variance.

32. Kosha Ltd. has furnished the following data for the month of March 2006:
Particulars Standard Actual
Material 1,000 kg 1,150 kg
Material cost per kg. Rs.12 Rs.14
The material usage variance is
(a) Rs.1,800 (Adverse)
(b) Rs.2,100 (Adverse)
(c) Rs.3,000 (Adverse)
(d) Rs.2,100 (Favorable)
(e) Rs.1,800 (Favorable).
33. A profit making firm can increase its return on investment by
(a) Increasing sales revenue and operating expenses by the same amount in rupees.
(b) Increasing investment and operating expenses by the same amount in rupees.
(c) Decreasing sales revenue and operating expenses by the same percentage.
(d) Increasing sales revenue and operating expenses by the same percentage
(e) Decreasing investment and sales by the same percentage.
34. The costs that incurred in the past which are not relevant to a future decision are known as
(a) Discretionary costs
(b) Full absorption costs
(c) Unallocated indirect costs
(d) Sunk costs
(e) Opportunity costs.
35. A debit balance of labor rate variance indicates that
(a) Standard hours of labour exceed actual hours
(b) Actual hours of labor exceed standard hours
(c) Standard rate of labor exceeds actual rate
(d) Actual rate of labor exceeds standard rate
(e) Standard hours with actual rate exceed actual hours with actual rate.
36. Arpan Ltd. has furnished the following information:
Particulars Budget Actual
Output in units 6,000 6,150
Labor hours 6,000 6,500
Variable overhead costs Rs.12,000 Rs.12,800
The variable overhead cost variance is
(a) Rs.800 (Adverse)
(b) Rs.500 (Adverse)
(c) Rs.500 (Favorable)
(d) Rs.800 (Favorable)
(e) Rs.300 (Adverse).
37. Individual budget schedules are prepared to develop an annual comprehensive or master
budget. The budget schedule which provides the necessary input data for the Direct Labor Budget
is
(a) Sales budget
(b) Raw materials purchases budget
(c) Schedule of cash receipts and disbursements
(d) Schedule of manufacturing overhead
(e) Production budget.
38. The goals and objectives upon which an annual profit plan is most effectively based are
(a) Financial and quantitative measures
(b) A combination of financial, quantitative and qualitative measures
(c) Qualitative measures of organizational activity such as product innovation leadership, product
quality levels and product safety
(d) Quantitative measures such as growth in unit sales, number of employees and manufacturing

capacity
(e) Financial measures such as net income, return on investment and earning per share.
39. A fixed overhead volume variance based on standard direct labor hours measures
(a) Fixed overhead efficiency
(b) Fixed overhead use
(c) Deviation from the standard direct labor hours in the goods sold
(d) Deviation from the normal level of direct labor hours
(e) Deviation from the standard direct labor hours capacity.
40. If overhead is applied on the basis of units of output, the variable overhead efficiency variance
will be
(a) A function of the direct labor efficiency variance
(b) Favorable, if output exceeds the budgeted level
(c) Unfavorable, if output is less than the budgeted level
(d) Indeterminable from the information gi ven
(e) Zero.
41. Which of the following variances is of least significance from a behavioral control perspective?
(a) Unfavorable material quantity variance amounting to 20% of the quantity allowed for the
output attained
(b) Unfavorable labor efficiency variance amounting to 10% more than the budgeted hours for the
output attained
(c) Favorable labor rate variance resulting from an inability to hire experienced workers to replace
retiring workers
(d) Favorable material price variance obtained by purchasing raw material from a new vendor
(e) Fixed overhead volume variance resulting from managements decision midway through the
fiscal year to reduce its budgeted output by 20%.
42. The use of activity-based costing results in
(a) Substantially greater unit costs for low-volume products than is reported by traditional product
costing
(b) Substantially lower unit costs for low -volume products than is reported by tradit ional product
costing
(c) Decreased setup costs being charged to low volume products
(d) Equalizing setup cost for all product lines
(e) Substantially lower unit costs for low -volume products than is reported by direct product
costing.
43. Which of the following statements about ideal standards is false ?
(a) It is called theoretical or maximum efficiency standard
(b) These are standard costs that are set for production under optimal condition
(c) It does not make provision for workers with different degrees of experience and skill levels
(d) It makes no allowance for wastage, spoilage and machine breakdowns
(e) It can be used for cash budgeting or product costing.
44. A budget manual, which enhances the operation of a budgeting system, is most likely to include
(a) Employee training policies
(b) Distribution instructions for budget schedules
(c) Employee hiring policies
(d) Documentation of the accounting system

(e) Company policies regarding the authorization of transactions.

45. Which of the following is false with regard to product life cycle?
(a) Product cost, revenue and profit patterns tend to follow predictable courses through the
product life cycle
(b) The functional emphasis is the same in all phases of the product life cycle
(c) Profit per unit varies as products move through their life cycles
(d) The products have finite lives
(e) Each phase of product life cycle poses different threats and opportunities.
46. Which of the following information is required by Operating Management?
(a) Changes in government policies
(b) Overtime payments
(c) Working capital
(d) Order bookings
(e) Return on investment.
47. Basic standards are known as
(a) Ideal standards
(c) Measurement standards
(e) Expected standards

(b) Current standards

(d) High standards

48. Which of the following statements is false with reference to shadow price?
(a) The use of shadow price is incompatible with the philosophy of decentralization through
divisionalisation
(b) To derive the shadow price, one has to obtain the dual solution to the mathematical
programming model developed for solving the production planning problem of the buying division
(c) Assimilating the data and application of the model becomes a highly centralized affair
(d) Operating managers often do not understand and appreciate the concept of shadow price
(e) Shadow price can be used only when the resources are available in plenty.
49. Top-to-bottom budget is also known as
(a) Participative budget
(b) Imposed budget
(c) Zero-based budget
(d) Manpower budget
(e) Master budget.
50. Sankar Ltd. is preparing its cash budget for the next period. Sales are expected to be Rs.1,00,000
in May, Rs.2,00,000 in June, Rs.3,00,000 in July and Rs.1,00,000 in August. Half of all sales is cash
sales and the other half is on credit. Experience indicates that 70% of the credit sales will be
collected in the month following the month of sale, 20% of the credit sales will be collected in the
second month following the month of sales and 10% in the third month following the month of sale.
The budgeted collection for the month of August is
(a) Rs.1,30,000
(b) Rs.1,80,000
(c) Rs.2,60,000
(d) Rs.3,60,000
(e) Rs.2,00,000.
51. DKM Ltd. services washing machines and clothes dryers. It charges customers for the spare
materials with markup on cost. The company has four employees, each earning Rs.60,000 per year
and spending 2,000 hours per year on service calls. It sells parts that cost Rs.1,10,000 annually. The
company has other costs of Rs.1,00,000 a year, which is allocated two-thirds to labor and the
remainder to material. The amount of markup on parts, if the target profit of the company is
Rs.40,000 per annum, is
(a) Rs.75,000
(b) Rs.96,000
(c) Rs.30,000
(d) Rs.44,000
(e) Rs.27,000.

52. The following data pertaining t o Kiston Ltd., which is operating at 80% of the capacity:
Particulars At 80% capacity
(Rs.)
Variable overheads:
Indirect labor
Indirect material
Semi-variable overheads:
Power (30% fixed, 70 % variable)
Repairs and maintenance (60 % fixed, 40 % variable)
Fixed overheads:
Depreciation
Insurance
Others
10,000
4,000
20,000
2,000
11,000
4,000
10,000
Total 61,000
The estimated direct labor hours are 32,000. The overhead recovery rate per direct labor hour at
70% is
(a) 2.05
(b) 1.435
(c) 0.536
(d) 0.508
(e) 14.35.
53. Sumit Ltd., a manufacturer of a single product, uses standard absorption costing system. The
following data have been extracted from the budget for the month of March 2006:
Budgeted production units 10,000
Budgeted fixed production overhead cost Rs. 60,000
In the month of March 2006, the fixed production overhead cost is under absorbed by Rs.6,000 and
the fixed production overhead expenditure variance was Rs. 4,000 (Adverse). The actual number of
units produced by the company for the month was
(a) 10,600
(b) 9,800
(c) 10,000
(d) 11,000
(e) 9,667.
54. Bidushi Ltd. has two divisions - X and Y whose return on investment is 18% and 14%
respectively. Both the divisions are considering an outlay on new investment projects, the details of
which are as under:
Particulars Project of Division X Project of Division Y
Investment outlay Rs.1,50,000 Rs.2,00,000
Net annual return Rs. 30,000 Rs. 25,000
The cost of capital of the company is 15% per annum.
Which of the following statements is true in case the performance measurement used is Return on
Investment (ROI) and Residual Income (RI)?
(a) Using ROI or RI, Project of X will be accepted and project of Y will be rejected
(b) Using ROI or RI, Project of X will be rejected and project of Y will be accepted
(c) Using ROI, Project of X will be accepted and project of Y will be rejected whereas using RI,
Project of X will be rejected and project of Y will be accepted
(d) Using ROI, Project of X will be rejected and project of Y will be accepted whereas using RI,
Project of X will be accepted and project of Y will be rejected
(e) Using ROI, Project of X will be accepted and project of Y will be rejected whereas using RI, both
the projects will be rejected.

55. Consider the following details pertaining to Vishnu Ltd. for the month of March 2006:
Particulars Rs.
Sales 50,000
Direct materials 17,500
Direct labor 10,000
Variable overheads 5,000
Capital employed 50,000
The return on investment in March 2006 is 10%. In the month of April 2006, it is expected that the
volume of sales increases by 15%, the selling price increases by 2% and there is a reduction of all
the costs by 2%. The change in the return on investment for the month of April 2006 is
(a) Increase of 95.5%
(b) Increase of 92.16%
(c) Decrease of 6.5%
(d) Decrease of 6.5%
(e) Increase of 24.02%.
56. The estimated annual production of products A and B are 5,000 and 15,000 respectively. The
budgeted cost details of these products are as under:
Particulars A B
Direct materials per unit Rs.40 Rs.50
Direct labor per unit (@ Rs.9 per hour) Rs.36 Rs.27
Selling overheads per unit (40% variable) Rs. 5 Rs.10
The other overheads are charged to the products as follows:
Factory overheads (60% fixed) - 100% of direct wages
Administrative overheads (100% fixed) - 5% of factory cost
The fixed capital investment is Rs.10,00,000 and the working capital requirement is equivalent to 6
months stock of cost of sales of both the products. A return on investment of 20% is expected. The
expected return on capital employed is
(a) Rs.3,30,275
(b) Rs.3,00,000
(c) Rs.4,35,375
(d) Rs.4,40,100
(e) Rs.5,80,500.
57. X-Trim Ltd. manufactures and sells two products D and K. The company has furnished the
following
data pertaining to cost per unit of the products:
Particulars D (Rs.) K (Rs.)
Direct material 96 72
Direct labor (at the rate of Rs.20 per hour) 80 100
Variable production overheads at the rate of Rs.24 per hour 24 48
200 220
The fixed manufacturing overheads of the company are Rs.4,00,000 per month and the budgeted
direct
labor hours are 20,000 per month. The company has carried out an analysis of its production
support
activities and found that its fixed cost varies in accordance with non -volume-related factors, which
are
given under:
Activity Cost driver D
(No. of times)
K
(No. of times)
Total cost
(Rs.)

Setup Production run 30 20 52,000

Material handling Production run 20 30 1,20,500
Inspection Inspection 26 65 2,27,500
4,00,000
Budgeted production is 600 units of product D and 800 units of Product K. The company desires to
earn a profit of 20% on total production costs.
The selling prices of product K, using Activity based costing, is
(a) Rs.647.40
(b) Rs.528.80
(c) Rs.315.52
(d) Rs.366.24
(e) Rs.351.52.
58. Akshya Ltd. presents the following data for the last quarter of 2005-06:
Particulars Budget Actual
Number of working days 60 64
Man hours per day 800 ?
Output per man hour (units) 1 ?
Total output (units) 48,000 66,000
Fixed overhead expenditure Rs.4,800 Rs.5,300
The Overhead Efficiency Variance of the company for the quarter was Rs.640 (F). The actual man
hours per day (approximately) was
(a) 680 hours
(b) 966 hours
(c) 931 hours
(d) 880 hours
(e) 910 hours.
59. A company manufactures a single product with a capacity of 1,50,000 units per annum. The
summarized income statement for the year is as under:
Particulars Rs. Rs.
Sales (1,00,000 units @ Rs.15 per unit) 15,00,000
Cost of sales:
Direct materials 3,00,000
Direct labor 2,00,000
Variable production overhead 60,000
Fixed production overhead 3,00,000
Fixed administrative overhead 1,50,000
Variable selling & distribution overhead 90,000
Fixed selling & distribution overhead 1,50,000
Total costs 12,50,000
Profit 2,50,000
The company desires to increase the present level of sales from 1,00,000 units to 1,20,000 at a
price of
Rs.17 per unit. If an expenditure of Rs.4,50,000 is made on advertising, the profit of the company
will
be
(a) Rs.2,10,000
(b) Rs.2,60,000
(c) Rs.3,60,000
(d) Rs.4,20,000
(e) Rs.4,80,000.
60. Mahalaxmi Pump Ltd. manufactures water pumps and uses a standard cost system. The
following
standard factory overhead costs per water pump are based on direct labor hours:
Variable overheads (40 hours at the rate of Rs.8 per hour) = Rs.320
Fixed overheads (40 hours at the rate of Rs.5 per hour) = Rs.200
The additional information is available for the month of March 2006:

i. 2,200 pumps were produced although 2,500 had been scheduled for production
ii. The normal capacity level was 1,00,000 direct labor hours per month
iii. 94,000 direct labor hours were worked at a total cost of Rs.9,40,000
iv. The standard direct labor rate is Rs.9 per hour
v. The standard direct labor time per unit is 40 hours
vi. Variable overhead costs were Rs.7,40,000
vii. Fixed overhead costs were Rs.5,40,000
The fixed overhead expenditure variance and direct labor efficiency variance are
(a) Rs.40,000 (F) and Rs.54,000 (F) respectively
(b) Rs.40,000 (A) and Rs.54,000 (A) respectively
(c) Rs.54,000 (A) and Rs.40,000 (F) respectively
(d) Rs.44,000 (A) and Rs.50,000 (A) respectively
(e) Rs.44,000 (A) and Rs.54,000 (A) respectively.
61. In a day of 8 hours, a direct worker is expected to produce 20 units of product A or 10 units of
Product B or 16 units of product C. The budgeted production for the month of March 2006 is as
follows:
A250 units; B200 units; C300 units
During the month, 400 direct labor hours were worked and the actual production is as follows:
A260 units; B250 units; C200 units
The capacity ratio is
(a) 102.50%
(b) 101%
(c) 97.56%
(d) 101%
(e) 99%.
62. Nirala Ltd. manufactures two products - X and Y. A forecast of units to be sold in the next five
months of the year 2006-07 is given below:
Month X (units) Y (units)
May 1,000 2,800
June 1,200 2,800
July 1,600 2,400
August 2,000 2,000
September 2,400 1,600
Other information is as follows:
Cost per unit X (Rs.) Y (Rs.)
Direct material 12.50 19.00
Direct labour 4.50 7.00
Factory overhead per unit 3.00 4.00
There will be no opening or closing stock of work -in-progress (WIP) in any month. The finished
product (in units) equal to half of the budgeted sale of the next month should be in stock at the en d
of each month (including previous month April).
The total production cost budget of X and Y for the period from May to August is
(a) Rs.1,30,000
(b) Rs.2,82,000
(c) Rs.1,52,000
(d) Rs.3,75,000
(e) Rs.4,12,000.
63. The production budget of BRC Ltd. is 7,680 units per year and is spread over the quarters as
follows:
January to March 2,400 units
April to June 1,600 units
July to September 1,800 units
October to December 1,880 units
Budgeted fixed overheads for the year was Rs.57,600. The company works for 48 weeks in a year, 5
days per week, 8 hours per day. Standard output is 4 units per hour.

During April, 20 days were worked. Actual output was 700 units. Actual hours worked were 150
hours. Actual fixed overheads for the month was Rs.4,850.
The fixed overhead volume variance for the month of January was
(a) Rs.250 (F)
(b) Rs.400 (F)
(c) Rs.450 (F)
(d) Rs.400 (A)
(e) Rs.450 (A).
64. Variances themselves do not explain why budgeted operating income was not achieved.
However, variances
(a) Raise questions about potential problem areas and direct attention towards the same
(b) Must be studied, no matter how small it is
(c) Should not be examined unless they exceed 30% of the expected cost or Rs 50,000, whichever is
lower
(d) Can be safely ignored until a positive or negative trend begins to emerge
(e) Should not be examined if it is less than Rs.1,000.
65. Anoo Ltd. presents following data for the month of March 2006:
Particulars Budget Actual
Number of working days 25 22
Man hours per day 300 280
Output per man hour (kg) - 3.8
Standard fixed overhead rate per unit Rs.9.50 If the fixed overhead capacity variance was Rs.22,990 (A), the budgeted output per man hour was
(a) 2.7 kg
(b) 3 kg
(c) 4.2 kg
(d) 4.6 kg
(e) 5.5 kg.
66. Kewal Ltd. can produce 4,000 units of a certain product at 100% cap acity. The company has
furnished the following information:
Particulars June 2006 July 2006
Units produced 2,800 3,600
Overhead costs: Rs. Rs.
Repairs and maintenance 500 560
Power 1,800 2,000
Shop labor 700 900
Consumable stores 1,400 1,800
Salaries 1,050 1,050
Inspection 200 240
Depreciation 1,400 1,400
The rate of production per hour is 10 units. Direct material cost per unit is Rs.4 and direct wages
per hour is Rs.5. The cost of production per unit, at 60% level of capacity, is
(a) Rs.3.49
(b) Rs.4.15
(c) Rs.3.73
(d) Rs.7.25
(e) Rs.6.95.
67. One kilogram of product K requires two chemicals A and B. The following were the details of
product K for the month of December 2005:
i. Standard mix - Chemical A 50% and Chemical B 50%
ii. Standard price per kg of chemical A is Rs.12 and chemical B is Rs.15
iii. Actual input of chemical B is 70 kg
iv. Actual price per kg of chemical A is Rs.15
v. Standard normal loss is 10% of total input
vi. Material cost variance total is Rs.650 adverse
vii. Material yield variance total is Rs.135 adverse.
If the actual output is 90 kg, the standard yield for actual input is
(a) 40 kg
(b) 110 kg
(c) 100 kg
(d) 99 kg
(e) 85 kg.

68. Simon Processors Ltd. produces a commodity by blending two raw materials A and B. The
following are the details regarding the raw materials:
Material Standard mix Standard price per kg
A 40% Rs.4.00
B 60% Rs.3.00
The standard process loss is 15%. During the month of March 2006, the company produced 3,400
kg of finished product. The position of stock and purchases for the month of March 2006 is as
under: Material Stock as on
March 01, 2006
Stock as on
March 31, 2006
Purchases during
March 2006
A 70 kg 10 kg 1,600 kg Rs.6,800
B 80 kg 100 kg 2,400 kg Rs.6,000
The material yield variance of the company is
(a) Rs.1,200 (adverse)
(b) Rs.136 (adverse)
(c) Rs.119 (adverse)
(d) Rs.136 (favorable)
(e) Rs.119 (favorable).
69. Usha Chemicals manufactures three products in one common process but each product is
capable of being further processed separately after the split off point. The company has furnished
the following estimated cost of the three products:
Particulars
Product
A
Product
B
Product
C
Selling price per liter at split-off-point (Rs.) 12 16 18
Selling price per liter after further processing (Rs.) 20 40 60
Post separation point costs (Rs.) 40,000 40,000 45,000
Output in liter 3,500 2,500 2,000
Pre-separation joint costs are estimated at Rs.80,000 and it is the practice of the company to
apportion
the joint costs to the products on the basis of output. If the three products are processed further,
the
estimated profit or (loss) of product A and B are
(a) Rs.5,000 and Rs.55,000 respectively
(b) Rs.(5,000) and Rs.35,000 respectively
(c) Rs.(5,000) and Rs.55,000 respectively
(d) Rs.5,000 and Rs.35,000 respectively
(e) Rs.55,000 and Rs.40,000 respectively.
70. Customers perceive value-added costs as adding usefulness to the product or service for which
they are willing to pay. Which of the following does the customer not generally perceive as us eful
or valueadded?
(a) Glamour
(b) Designs or logos
(c) Factory working conditions
(d) Prompt customer service
(e) Quality checks.

Suggested Answers
1. Answer : (b)
Reason : Cost-based transfer pricing, Market-based transfer pricing, contribution based transfer
pricing and Negotiated transfer pricing are the general methods followed in determining
transfer pricing. Income-based transfer pricing is not a general method followed in
determining the transfer prices
2. Answer : (e)
Reason : Full cost pricing method is used if a company does not have the basic idea of demand for
the product. It is not used to recover the only fixed costs or only variable cost. It is not
used to recover market price plus mark-up or standard cost plus mark-up.
3. Answer : (e)
Reason : A flexible budget is a series of budgets prepared for different levels of activity. It allows
adjustments of the budget to the actual level of activity before comparing the budgeted
activity with actual result. Fixed budget is a budget prepared for one level of activity.
Therefore (e) is correct. Other statements mentioned in (a), (b), (c) and (d) are not correct.
4. Answer : (d)
Reason : The relationship between the budgeted number of working hours and the maximum
possible working hours in a budgeted period is capacity usage ratio. Hence the answer is
(d). The standard hours equivalent to the work produced expressed as a percentage of the
actual hours spent in producing that work is efficiency ratio. The activity ratio is the
number of standard hours equivalent to the work produced expressed as a percentage of
the budgeted standard hours. Calendar ratio is the relationship between the number of
working days in a period and the number of working days in the relative budget period.
Capacity utilization ratio is the relationship between the actual hours in a budget period
and the budgeted working hours in a given period.
5. Answer : (c)
Reason : Transfer prices are often used by profit centers and investment centers. Profit centers are
the most fundamental of these two centers because the investment centers are responsible
not only for the revenues and costs but also for invested capital. Answer (a) is incorrect
because a revenue center is responsible only for revenue generation, not cost control or
profitability. Answer (b) is incorrect because transfer prices are not used in a cost center.
Transfer prices are used to compute profitability but a cost center is responsible only for
cost control. Answer (d) is not correct because an investment center is not as fundamental
as a profit center. Answer (e) is not correct because a production center may be a cost
center, a profit center or even an investment center.
6. Answer : (b)
Reason : A favorable materials price variance is the result of paying less than the standard price for
materials. An unfavorable materials usage variance is the result of using an excessive
quantity of materials. If a purchasing manager is to buy substandard materials to achieve a
favorable price variance, an unfavorable quality variance could result from using an
excessive amount of poor quality materials.
7. Answer : (d)
Reason : McGregors Theory X is based on the conception that The average human being has an
inherent dislike of work and will avoid it if he can. Because of this human characteristic

of dislike for work most people must be coerced, controlled and directed towards the
achievement of goal. Option (b) is incorrect as this theory is based on the principles that
the average human being does not inherently dislike work. Option (c) is incorrect as it is
set forth hierarchy of human needs. Option (a) and (e) are not correct related to the
question asked. Therefore, (d) is correct.
8. Answer : (d)
Reason : An organized creative approach, which emphasizes efficient identification of unnecessary
cost i.e. cost that provides neither quality, nor use, nor life, nor appearance, nor
customers satisfaction is known as value-analysis
18
9. Answer : (c)
Reason : The major advantage of adopting target costing is that it is deployed during a products
design and planning stage so that it can have a maximum impact in determining the level
of the locked in costs. Target costing is not deployed at the product selling stage.
Therefore (c) is false.
10. Answer : (b)
Reason : Total quality management is often termed as a set of concepts and tools for getting all
employees focused on continuous improvement in the eyes of the customer. It is neither
quality control (a) nor cost control (e). Customer orientation is one of the core concepts of
total quality management. TQM aims at eliciting greater employee commitment through
shared decision-making and introduce various forms of self management (d). This is one
of the elements in TQM.
11. Answer : (b)
Reason : 22% return on investment = 22% of Rs.3,00,000 = Rs.66,000
Selling price per unit
= Variable cost p er unit + fixed costs per unit + profit per unit
= Rs.28 +
Rs.1,08,000 Rs.66,000
12,000units 12,000units
+
= Rs.28 + Rs.9 + Rs.5.50 = Rs.42.50.
12. Answer : (a)
Reason :
Level of activity 90%
Units 2,700
(Rs.)
a. Variable cost 4,05,000
b. Semi variable cost
Variable portion 18,000
Fixed portion 85,000
c. Fixed cost 2,80,000
Total cost 7,88,000
Level of activity 90%
Units 2,700
(Rs.)
i. Sale Price (Rs.350) 9,45,000

Less: Total cost 7,88,000

Profit 1,57,000
Profit per unit 58.15
ii. Sale price reduced by 10% (i.e., Rs.315) 8,50,500
Less: Total cost 7,88,000
Profit 62,500
Profit per unit 23.15
13. Answer : (c)
Reason :
Budget allowance for fixed overhead Rs.3,15,000
Fixed overhead applied:
1,60,000 units
Rs.3,15,000
1,40,000
Rs.3,60,000
Capacity variance Rs.45,000 (F)
14. Answer : (b)
Reason : Variable cost per unit = Rs.15 + Rs.15 + Rs.15 + Rs.15 = Rs.60
Fixed cost = Rs.10 1,000 units + Rs.15 1,000
units
= Rs.10,000 + Rs.15,000
= Rs.25,000
Cost of 980 units = 980 units Rs.60 + Rs.25,000
= Rs.58,800 + Rs.25,000 = Rs.83,800.
15. Answer : (a)
Reason :
Sales Rs.8,00,000
Less variable costs Rs.4,80,000
Rs.3,20,000
Less fixed costs (traced) Rs.1,20,000
Rs.2,00,000
Less interest (22% of Rs.4,50,000) Rs. 99,000
Residual income = Rs.1,01,000
16. Answer : (e)
Reason : Working Note 1: Computation of prime cost
Particulars Rs.
Sales (40,000 units) 15,20,000
Less: Profit margin 20% 3,04,000
Cost of sales (80% of Rs.15,20,000) 12,16,000
Less: Variable overheads Rs.2,80,000
Semi-variable overheads Rs.3,00,000
Fixed overheads Rs.2,00,000 7,80,000
Prime cost 4,36,000
Working Note 2: Semi-variable overheads:
Variable cost = Changein units
Changein cost
=

Rs.3,50,000-Rs.3,00,000
50,000units-40,000units
=
.50,000
10,000
Rs
units = Rs.5 per unit
At 40,000 units: Fixed cost = Total cost Variable cost
= Rs.3,00,000 40,000 units Rs.5 = Rs.1,00,000
At 45,000 units: Total cost = 45,000 units Rs.5 + Rs.1,00,000 = Rs.3,25,000
Computation of differential cost of production of 5,000 additional units
(i.e. 10% of normal capacity):
Element of cost 40,000 units
(Rs.)
45,000 units
(Rs.)
Differential cost
for
5000 units (Rs.)
Prime cost (Working Note 1) 4,36,000 4,90,500 54,500
Variable overhead 2,80,000 3,15,000 35,000
Semi variable overhead
(Working Note 2) 3,00,000 3,25,000 25,000
Fixed overhead 2,00,000 2,00,000
12,16,000 13,30,500 1,14,500
Cost per unit of new order =
.1,14,500
5,000
Rs
= Rs.22.90
Profit margin (20% on sale = 25% on cost) = Rs. 5.73
Minimum selling price per unit = Rs.28.63 .
17. Answer : (c)
Reason : Cash receipts = Sales + Decrease in sundry debtors
= Rs.5,80,000 + Rs.12,500 = Rs.5,92,500
Cash payment = Cost of goods sold (75%) + Inventory increased + Variable selling and
administrative expenses + Fixed (other than depreciation) selling & administrative
expenses = Rs.4,35,000 + Rs.18,400 + Rs.14,500 + Rs.15,200 = Rs.4,83,100
Surplus in cash = Rs.5,92,500 Rs.4,83,100 = Rs.1,09,400.
18. Answer : (a)
Reason :
Rs.
Direct material 2,80,000
Direct labor 2,20,000
Factory overheads (50% of direct labor) 1,10,000
Works cost 6,10,000
Administrative overheads (20% of works cost) 1,22,000
Selling and distribution expenses
(20% of works cost + 15%) (6,10,000 25% 11.5%)

1,40,300
8,72,300
Profit 12.5% on sales (i.e. 14.29% on cost) 1,24,614
Budgeted sales 9,96,914
19. Answer : (c)
Reason : The production budget for July 2006 = 4,500 units 0.8 + 4,250 0.4
= 3,600 units + 1,700 units = 5,300 units.
The production cost budget for August 2006
= (4,250 0.8 + 4,400 0.4) (Rs.25 + Rs.10 + Rs.20 + Rs.5) + Rs.39,000
=(3,400 + 1,760) Rs.60 + Rs.39,000 = 5,160 units Rs.60 + Rs.39,000
=Rs.3,09,600 + Rs.39,000 = Rs.3,48,600.
20. Answer : (c)
Reason :
Capacity 50% 60% 90%
Production (units) 5,000 6,000 9,000
(Rs.) (Rs.) (Rs.)
Material 50 51 52.50
Labor 20 20 20.00
Variable overheads
Factory 12 12 12.00
Administrative 5 5 5.00
87 88 89.50
Total variable cost 4,35,000 5,28,000 8,05,500
Fixed overheads
Factory 40,000 40,000 40,000
Administrative 25,000 25,000 25,000
5,00,000 5,93,000 8,70,500
Sale price per unit 110.00 107.80 104.50
Sales value 5,50,000 6,46,800 9,40,500
Profit 50,000 53,800 70,000
Profit per unit 10.00 8.97 7.77
21. Answer : (b)
Reason : Standard or Budgeted data
Budgeted fixed overheads
Budgeted output units
Budgeted hours (50 8 25)
Budgeted days
Standard labor hours per unit
Standard hours worked per day
Standard rate per unit (Rs.1,00,000 2,500)
Standard rate per hour Rs.1,00,000 10,000)
Standard fixed overhead rate per day (Rs.1,00,000 25)
Rs.1,00,000
2,500
10,000
25
4
400

Rs.40
Rs.10
Rs.4,000
Actual data
Actual fixed overheads (Rs.)
Actual output units
Actual hours
Actual days
88,800
2,320
8,400
24
Fixed overhead cost variance
= (Fixed overhead recovered on actual output ~ Actual fixed overhead incurred)
= (2,320 units Rs. 40 ~ Rs. 88,800) =Rs.92,800 ~ Rs.88,800 = Rs. 4,000 (F)
Fixed overhead expenditure variance
= Budgeted fixed overhead cost ~ Actual fixed overhead cost
= Rs.1,00,000 ~ Rs.88,800 = Rs.11,200 (F)
22. Answer : (d)
Reason : The production cost budget for 6,600 units:
Particulars Rs.
Material cost (variable) 32,500
Labor cost (variable) 19,500
Stores (variable) 1,300
Power (semi-variable) 1,550
Repairs and maintenance (semi-variable) 2,450
Inspection (semi-variable) 530
Administration overheads (semi-variable) 5,375
Selling overheads (semi-variable) 3,450
Depreciation (fixed) 10,000
Total 76,655
Cost per unit (Rs.76,655 6,500) 11.79
23. Answer : (d)
Reason : A favorable variance denotes that the actual cost for the achieved level of activity was
less than the standard. Here in this case option (d) which says costs were Rs.3,650 less
than standard for the achieved level of activity is correct .All other options are incorrect
24. Answer : (d)
Reason : Value engineering is a modern approach in cost management for various activities on the
value chain where as all other options are traditional approaches. So, (d) is correct.
25. Answer : (d)
Reason : The reports for the lower level of management are fairly detailed though limited in scope
and they are quantitative in nature. The reports for the top management are highly
summarized with financial data.
26. Answer : (c)
Reason : Zero-based budgeting is a technique by which manager of each decision unit is to justify
his entire budget request in complete detail with a zero base. The manager of the decision

unit has to isolate each item of his budget in order to analyze it in separate decision
packages, which are ranked in order of importance.
27. Answer : (b)
Reason :
Fixed costs 8,00,000
Return on capital employed (Rs.80,00,000 12.5%) 10,00,000
Residual income desired 7,00,000
Total desired contribution 25,00,000
Contribution per unit from outside sales = Rs.180 Rs.160 = Rs.20 per unit
Total contribution from outside sales = Rs.20 per unit 1,00,000 units
= 20,00,000
Minimum contribution to be earned from supply to division B
= Rs.25,00,000 Rs.20,00,000 = Rs. 5,00,000
Contribution per unit on additional 20,000 units =
Rs. 5,00,000
20,000 units = Rs.25 per unit
Variable cost for minor modification = Rs.3 per unit
Minimum transfer price per unit to be quoted = Rs.160 + Rs.25 + Rs.3 = Rs.188
28. Answer : (d)
Reason : Strategic budgeting is a form of long range planning based on identifying and specifying
organizational goals and objectives. The strength and weaknesses of the organization are
evaluated and risk levels are assessed. The influences of environment factors are forecast
to derive the best strategy for reaching the organizational goals. Hence (d) is correct.
29. Answer : (b)
Reason : The capital investment budget may be prepared more than a year in advance, unlike the
other elements of the master budget. In case of preparation of master budget, it requires
production budget, overhead expenses budget, proforma income statement and balance
sheet. It does not require capital investment budget at the time of its preparation.
30. Answer : (a)
Reason : Labor rate variance = Actual hours (Standard rate ~ Actual rate)
Rs.147 (A) = 196 hour (Standard rate ~ Rs.11.75)
Standard rate Rs.11.75 = Re.0.75 (A)
Standard rate = Rs.11.00
Labor efficiency variance = Standard rate (Standard hours Actual hours)
= Rs.11 (4 hours 50 units ~ 196 hours)
= Rs.11 (200 hours ~ 196 hours) = Rs.11 4 hours = Rs.44 (F).
31. Answer : (c)
Reason : Fixed overhead volume variance = Budgeted fixed overhead costs Applied fixed
overhead costs. Therefore, (c) is correct.
32. Answer : (a)
Reason : Material usage variance = Standard price per kg. (Standard usage ~ Actual usage)
= Rs.12 (1,000 kg ~ 1,150 kg)
= Rs.1,800 (Adverse).
33. Answer : (d)

Reason : Return on investment (ROI) equals to income divided by invested capital. If a firm is
already profitable, increasing sales and expenses by the same percentage will increase the
ROI. Other options given in (a), (b), (c) and (e) are not correct.
34. Answer : (d)
Reason : The costs that incurred in the past which are not relevant to a future decision is called
sunk cost. It represents an expenditure that has already been made or an irrecoverable
decision to incur the cost. Other costs mentioned in (a), (b), (c) and (e) are not correct.
35. Answer : (d)
Reason : A debit balance of labor rate variance means that the labor rate variance is adverse.
Adverse labor rate variance arises if the actual rate per hour or unit of labor exceeds
standard rate per hour or unit. It does not arise due to the difference between actual hours
and standard hours. Therefore (d) is correct.
36. Answer : (b)
Reason : Standard variable cost per unit = Budgeted units
Budgeted variable costs
=
Rs.12,000
6,000 = Rs.2
Variable overhead cost variance
= Actual variable overhead costs ~ Standard variable overhead cost per unit Actual
output
= Rs.12,800 ~ Rs.2 6,150 units = Rs.12,800 ~ Rs.12,300 = Rs.500 (Adverse)
37. Answer : (e)
Reason : A master budget typically begins with the preparation of a sales budget. The next step is
to prepare a production budget. Once the production budget has been completed, the next
step is to prepare the direct labor, raw material and overhead budgets. Thus, the
production budget provides the input necessary for the completion of direct labor budget.
Therefore, (e) is correct.
38. Answer : (b)
Reason : An annual profit plan should be based upon an organizations goal and objectives.
Objectives vary with the organizations type and stage of development. Broad objectives
should be established at the top and retranslated in more specific terms as they are
communicated downward in a means-end hierarchy. Each subunit may have its own
specific go als. A conflict sometimes exists in determining organizational objectives. For
example, customer service may be one objective but profitability or return on investment
may be a conflicting objective. Thus, the annual profit plan is usually based on a
combination of financial, quantitative and qualitative measures. Objectives and goals
change over time. A century ago, profits were the most important corporate objective.
Today, social responsibility also plays a role. Therefore, (b) is correct.
39. Answer : (d)
Reason : The fixed overhead volume variance measures the effect of not operating at the budgeted
activity level. It is the difference between budgeted fixed cost and the product of the
standard fixed overhead application rate and the standard activity level for the actual
output. A favorable variance means that activity was greater than expected and that fixed
overhead was over applied. It might be caused by, for example, hiring more workers to

provide an extra shift. An unfavorable volume variance means that activity was less than
budgeted overhead (or under applied), for example, because of insufficient sales or a labor
strike. Accordingly, the volume variance is usually outside the control of production
management. Moreover, unlike other variances, it does not directly reflect a difference
between actual and budgeted expenditure of resources.
Other options (a), (b), (c) & (e) are incorrect because the volume variance is not related to
direct labor or overhead efficiency, use or capacity.
40. Answer : (e)
Reason : The variable overhead efficiency variance equals the product of the variable overhead
application rate and the difference between the standard input for the actual output and
actual input. Hence, the variance will be zero if variable overhead is applied on the basis
of units of output because the difference between the actual and standard input cannot be
recognized.
Option (a) is incorrect because the correlation between the variable overhead and direct
labor efficiency variance occurs only when overhead is applied on the basis of direct
labor. Options (b), (c) and (d) are incorrect because the variance would be zero.
41. Answer : (e)
Reason : Most variances are of significance to someone who is responsible for that variance.
However, a fixed overhead volume variance is often not the responsibility of anyone
other than top management. The fixed overhead volume variance equals the difference
between budgeted fixed overhead and the amount applied (standard rate standard input
allowed for the actual output). It can be caused by economic downturns, labor strike, bad
weather, or a change in planned output. Thus, a fixed overhead volume variance resulting
from a top management decision to reduce output has fewer behavioral implications than
other variances.
Answer (a) is incorrect because an unfavorable materials quantity variance affects
production management and possibly the purchasing function. It may indicate an
inefficient use of materials or the use of poor quality materials. Answer (b) is incorrect
because an unfavorable labor efficiency variance reflects upon production workers who
have used too many hours. Answer (c) is incorrect because a favorable labor rate
variance related to hiring is a concern of the personnel function. The favorable rate
variance might be more than offset by an unfavorable labor efficiency variance or a
materials quantity variance (if waste occurred). Answer (d) is incorrect because the
purchasing function is responsible for a favorable materials price variance.
42. Answer : (a)
Reason : ABC differs from traditional product costing because it uses multiple allocation bases and
therefore allocates overhead more accurately. The result is that ABC often charges lowvolume
products with more overhead than traditional system. For example, the costs of
machine setup may be the same for production runs of widely varying sizes. This
relationship is reflected in an ABC system that allocates setup costs on the basis of the
number of setups. However, a traditional system using an allocation base such as
machine hours may under allocate setup costs to low-volume products. Many companies
adopting ABC have found that they have been losing money on low -volume products
because costs were actually higher than originally thought.
Answer (b) and (e) are incorrect because low-volume products are usually charged with
greater unit costs under ABC. Answer (c) is incorrect because greater setup costs are
usually charged to low -volume products under ABC. Answer (d) is incorrect because
setup costs will not be equalized unless setup time is equal for all products.

43. Answer : (e)

Reason : Ideal (perfect, theoretical or maximum efficiency)standards are standard costs that are set
for production under optimal conditions. They are based on the work of the most skilled
workers with no allowance for waste, spoilage, machine breakdowns, or other downtime.
Tight standards can have positive behavioral implications if workers are motivated to
strive for excellence. However, they are not in wide use because they can have negative
behavioral effects if the standards are impossible to attain. Ideal, or tight, standards are
ordinarily replaced by currently attainable standards for cash budgeting, product costing,
and budgeting departmental performance. Otherwise, accurate financial planning will be
impossible.
Answer (a) and (b) are incorrect because ideal standards are perfection standards.
Answer (c) is incorrect because ideal standards are based solely on the most efficient
workers. Answer (d) is incorrect because ideal standards assume optimal conditions.
44. Answer : (b)
Reason : A budget manual describes how a budget is to be prepared. Items usually included in a
budget manual are a planning calendar and distribution instructions for all budget
schedules. Distribution instructions are important because, once a schedule is prepared,
other departments within the organization will use the schedule to prepare their own
budgets. Without distribution instructions, someone who needs a particular schedule may
be overlooked.
Answer (a) is incorrect because the accounting manual includes a chart of accounts.
Answer (c) is incorrect because employee hiring policies are not needed for budget
preparation. They are already available in the personnel manual. Answer (d) is incorrect
because software documentation is not needed in the budget preparation process. Answer
(e) is incorrect because the authorization of transactions is not necessary for budget
preparation purposes.
45. Answer : (b)
Reason : Products require different functional emphasis in each phase of the product life cycle. For
example, R & D emphasis in the development phase and a cost control emphasis in the
decline. Product cost, revenue and profit patterns tend to follow predictable courses
through the product life cycle. Profit per unit varies as products move through their life
cycles. The products have finite lives and pass through the cycle of development,
introduction, growth, maturity, decline and deletion. Each phase of product life cycle
poses different threats and opportunities.
46. Answer : (b)
Reason : The operating management is responsible for executing various tasks within the
framework of plans, programs and schedules defined by executive management. They
need the information regarding the overtime payments. The information regarding the
changes in government policies, return on investment is required by top management and
the information regarding the working capital, order bookings, etc. is required by the
executive management.
47. Answer : (c)
Reason : Basic standards are known as measurement standards. These are established at a
particular time and remain unchanged over a period of time. These standards are not
revised frequently, but if they are revised, it is only due to changes in specification of
materials and technology. They may also be revised if there are substantial price changes.

48. Answer : (e)

Reason : Only a constrained resource has shadow price. Where resources are not fully utilized,
shadow price is zero. The shadow price can be used only when the resources are scarce.
Hence the answer is (e). The use of shadow prices is incompatible with the philosophy of
decentralization through divisionalisation. To derive at the shadow prices one has to
obtain the dual solution to the mathematical programming model developed for solving
the production-planning problem of the buying division. A great deal of data like the
market data for the buying division, cost data for the selling and buying divisions and
capacity data for both the divisions are required. Hence assimilating the data and
application of the model becomes a highly centralized affair. Operat ing managers do not
understand and appreciate the concept of shadow price.
49. Answer : (b)
Reason : Top-to-bottom budget is also known as imposed budget. In this type of budget, the
budgeted quantities are obtained from the top level managers and then communicated
downward to lower level managers. Lower level managers do not participate in this type
of budget. Hence the answer is (b). In participative budget, estimations of lower level
managers are coordinated and commun icated upward to the top level to the top level
managers. Zero-based budgeting is a method of budget review and evaluation that
requires all projects and programs to justify all resources. Manpower budget will take an
overall view of the organizations needs for manpower for all areas of activity for a period
of years. Master budget is a budget which is prepared from and summarizes the functional
budgets.
50. Answer : (b)
Reason : Collections from April cash sales will be half of total sales, or Rs. 50,000. from Mays
Rs. 50,000 of credit sales, collections should be 10% or Rs.5,000. From Junes Rs.
1,00,000 of credit sales, collections should be 20% or Rs.20,000. From Julys Rs.
1,50,000 of credit sales, collections will be 70% or Rs. 1,05,000. In the month of August,
50% of Rs. 1,00,000 i.e. Rs.50,000 Thus, total collections will be Rs. 1,80,000 (Rs.5,000
+ Rs.20,000 + Rs.1,05,000 + Rs.50,000).
Answer (a) is incorrect because Rs. 1,30,000 results from a failure to include the cash sales
for April. Answer (c) is incorrect because half of total sales is used to calculate collections
from credit sales, and Aprils cash sales must be included. Answer (d) is incorrect because
Rs. 3,60,000 results from using total sales for the first 3 months instead of credit sales.
51. Answer : (d)
Reason : Total labor cost 4 Rs. 60,000 = Rs. 2,40,000
Cost of parts = Rs. 1,10,000
Total variable cost Rs.3,50,000
Target profit = Rs. 40,000
Fixed cost =Rs.1,00,000
=Rs. 1,40,000
Mark up % = Rs. 1,40,000 Rs. 3,50,000 = 40%
Mark up on parts = 40% of Rs. 1,10,000 = Rs. 44,000
52. Answer : (a)
Reason : It is needed to work out variable cost per 10 % of the activity level as it is required to
work out flexible budget at 70% and 80% capacity level.

Variable overheads per 10% capacity level

1. Indirect labor = Rs. 10,000 10/80 = Rs. 1,250
2. Indirect material = Rs. 4,000 10/80= Rs. 500
Segregation of variable and fixed element of semi-variable overheads
1. Power (variable 70 %; fixed 30 %)
a. Variable overheads = 20,000 70% = Rs. 14,000
Variable overhead per 10 % capacity level = Rs. 14,000 10/80 = Rs. 1,750
b. Fixed overhead = 20,000 30% = Rs. 6,000
2. Repairs and maintenance (variable 40%, fixed 60%)
a. Variable overheads = 2,000 40% = Rs. 800
Variable overhead per 10% capacity level = Rs. 800 10/80 = Rs. 100
b. Fixed cost = 2,000 60% = Rs. 1,200
3. Estimated direct labor hours at 80% capacity = 1,24,000 hours
Variable with respect to 10 variation = 1,24,000 10/80 = 15,500 hrs.
Flexible budget for overhead
Particulars Variability for every
10% variation in
capacity level (Rs.)
At 70% capacity level
(Rs.)
1. Variable overhead:
(a) Indirect labor
(b) Indirect material
2. Variable portion of semi-variable overhead:
(a) Power
(b) Repairs and maintenance
1,250
500
1,750
100
8,750
3,500
12,250
700
Total variable (A) 25,200
3. Fixed portion of semi-variable overheads:
(a) Power
(b) Repairs and maintenance
4. Fixed overhead:
(a) Depreciation
(b) Insurance
(c) Others
6,000
1,200
11,000
4,000
10,000
Total Fixed (B) 32,200
5. Total overheads (A+B) 57,400
6. Estimated direct labor hrs. 4,000 28,000
7. Overhead recovery rate per direct labor hour

(56)
2.05
53. Answer : (e)
Reason :
Budgeted overhead cost Rs.60,000
Actual cost Rs. 64,000 {i.e. 60,000 + 4,000 (A) exp. var}
Absorbed overhead Rs. 58,000 [i.e. 64,000 6,000 (under absorbed)]
Overhead absorption rate per unit Rs.60,000 10,000 = Rs.6
Output Rs.58,000 Rs.6 = 9,666.66 or 9667 units
54. Answer : (a)
Reason :
Particulars Project X Project Y
Investment outlay Rs.1,50,000 Rs.2,00,000
Net annual return Rs. 30,000 Rs. 25,000
Return on investment
(Net annual return investment outlay)
20% 12.5%
Target return on investment 18% 14%
Using ROI, Project X will be accepted, as its ROI is more than the target ROI whereas
Project Y w ill be rejected.
Particulars Project X (Rs.) Project Y (Rs.)
Net annual return 30,000 25,000
Imputed interest (15% of Rs.1,50,000
and 2,00,000)
22,500 30,000
Residual income 7,500 (5,000)
Using RI, Project X will be accepted as it has a positive RI whereas Project Y will be rejected,
as its RI is negative. Thus the answer is (a).
55. Answer : (a)
Reason : The budgeted increase
Particulars March
2006
(Rs.)
Increase
in sales
volume
Effect of change Rs.
Sales 50,000 57,500 57,500 102% = 58,650.00
Direct materials 17,500 20,125 20,125 98% = 19,722.50
Direct labor 10,000 11,500 11,500 98% = 11,270.00
Variable overheads 5,000 5,750 5,750 98% = 5,635.00
Fixed overheads* 12,500 12,500 98% = 12,250.00
Profit 5,000 9,772.50
Capital employed 50,000 50,000.00
Return on investment 10% 19.55%
*Return on investment in March 2006 is 10%. Hence profit is Rs.50,000 10% =
Rs.5,000
Hence fixed overheads is sales variable expenses profit = Rs.50,000Rs.32,500

Rs.5,000 = Rs.12,500.
% Increase in return on investment =
19.55% 10%
10%
= 95.5%
56. Answer : (d)
Reason :
Particulars A B
Total cost Variable cost Total cost Variable cost
Direct material 40.0 40.0 50.00 50.0
Direct labor 36.0 36.0 27.00 27.0
Factory overheads 36.0 14.4 27.00 10.8
Total factory cost 112.0 90.4 104.00 87.8
Administrative overheads 5.6 5.20
Selling overheads 5.0 2.0 10.00 4.0
Total cost per unit 122.6 92.4 119.20 91.8
Total cost = (Rs.122.6 5,000 units) + (Rs.119.20 15,000 units) =Rs.24,01,000
Particulars Rs.
Fixed capital 10,00,000
Working capital (Rs.24,01,000 6/12) 12,00,500
Total capital employed 22,00,500
Expected ROI = 20%; Expected ret urn = Rs.22,00,500 20% = Rs.4,40,100
57. Answer : (a)
Reason : Using ABC, overheads will be allocated on the basis of cost driver
D K Total
Particulars
(Rs.) (Rs.) (Rs)
Set ups (30:20) 31,200 20,800 52,000
Materials handling (20:30) 48,200 72,300 1,20,500
Inspection (26:65) 65,000 1,62,500 2,27,500
Total 1,44,400 2,55,600 4,00,000
Budgeted units 600 units 800 units
Overheads per unit Rs.240.67 Rs.319.50
Particulars D K
Price of the products
Variable costs Rs.200.00 Rs.220.00
Fixed manufacturing costs Rs.240.67 Rs.319.50
Rs.440.67 Rs.539.50
Profit mark-up (20%) Rs. 88.13 Rs.107.90
Rs.528.80 Rs.647.40
58. Answer : (c)
Reason : Let the actual man hours per day be X.
Standard production in actual hours worked
= Actual hours worked Standard output per hour
= 64 days X hours 1.0 units = 64X units
Actual production = 66,000units
Difference = 66,000units 64 X units

Standard overhead rate per unit = 4,800 48,000 = Re. 0.10

Efficiency variance
= (66,000 units ~ 64 X units) Standard overhead rate per unit
= (66,000 units ~ 64 X units) 0.10= Rs.640 (F).
= 66,000 units ~ 64X units = Rs.6400 (F).
Standard production in actual hours = 60,060 units
Therefore X = 59,600 64 = 931 hours.
59. Answer : (a)
Reason : Total fixed cost = Rs.3,00,000 + Rs.1,50,000 + Rs.1,50,000 = Rs.6,00,000;
Revised fixed cost = Rs.6,00,000 + Rs.4,50,000 = Rs.10,50,000
Selling price p er unit = Rs.17
Variable cost per unit = Rs.3.00 + Rs.2.00 + Re.0.60 + Re.0.90 = Rs.6.50;
Total contribution = 1,20,000 (Rs.17 - Rs.6.50) = Rs.12,60,000;
Profit = Rs.12,60,000 Rs.10,50,000 = Rs.2,10,000
60. Answer : (b)
Reason : Budgeted expenses = 2,500 Rs.200 = Rs.5,00,000
Fixed overhead expenditure variance = Budgeted expenses ~ Actual expenses
= Rs.5,00,000 ~ Rs.5,40,000 = Rs.40,000 (A)
Direct labor efficiency variance = Standard rate (Actual time ~ Standard time)
= Rs.9 (94,000 ~ 40 hours 2,200 units)
= Rs.9 6,000 hrs = Rs.54,000 (A).
61. Answer : (c)
Reason : Standard time
A=8
20
= 0.4
B=8
10
= 0.8
C=8
16
= 0.5
Budgeted Hours
A = 250 .4 = 100
B = 200 0.8 = 160
C = 300 0.5 = 150
410
Standard hours for actual production
A = 260 .4 = 104
B = 250 .8 = 200
C = 200 .5 = 100
404
Actual hours 400
Capacity ratio=
400
410 = 97.56%

62. Answer : (e)

Reason :
Budgeted production =
Budgeted sales + Desired closing inventory Opening inventory
Planned inventory level
(units)
Projected
Sales
Closing Opening
Budgeted
Production
(units)
Months
XYXYXYXY
January 1,000 2,800 600 1,400 500 1,400 1,100 2,800
February 1,200 2,800 800 1,200 600 1,400 1,400 2,600
March 1,600 2,400 1,000 1,000 800 1,200 1,800 2,200
April 2,000 2,000 1,200 800 1,000 1,000 2,200 1,800
Total Budgeted Production in units 6,500 9,400
Total production cost of X and Y
= 6,500 (Rs.12.50 + Rs.4.50 + Rs 3.00) + 9,400 (Rs.19.00 + Rs.7.00 + Rs.4.00) = 6,500
Rs. 20 + 9,400 Rs. 30 = Rs.1,30,000 + Rs.2,82,000 = Rs. 4,12,000.
63. Answer : (c)
Reason : Actual production in terms of standard hours:
= 700 units 0.25 hours = 175 standard hours
Standard rate per hour
= Budgeted expenses for the year Budgeted hours for the year
=Rs.57,600 ( 48 5 8) hours = Rs.57,600 1,920 hours = Rs.30 per hour
Average budgeted hours per month
=Budget hours for the year 12 =1,920 12 = 160 hours.
Average budgeted hours: 160
Standard hours for actual production = 175
Difference = 160 175 = 15 (F)
Fixed overhead volume variance = 15 Rs.30 = Rs.450 (F).
64. Answer: (a)
Reason: Managers must consider the cost-benefit balance in deciding when it is appropriate to
raise questions or to direct attention to variances. If managers wait until trends appear
before they investigate, it may be too late to take action and to bring the situation under
control. However, variances raise questions about to potential problem areas and direct
attention towards the same.
65. Answer : (e)
Reason : Let the budgeted output per man hour be X kg.
Man hours that should have been worked in actual number of days
=Actual number of days standard hours per day
=22 300 = 6,600 man hours
Actual hours worked =actual number of days Actual hours per day
= 22 280 = 6,160 man hours
Difference = (6,160 6,600) hours = 440 hours (A)

Difference in output due to less hours worked

= Additional hours worked Budgeted output per hour = 440 X
Fixed overhead capacity variance = 440 X 9.50= 22,990 (A)
Therefore, X = 5.5 kg.
66. Answer : (d)
Reason : COST OF PRODUCTION UNDER FLEXIBLE BUDGET
Item Capacity
100% 60%
Units 4,000 2,400
Production hours - @ 10 units per hour 400 240
Rs. Rs.
Direct material 16,000 9,600
Direct wages 2,000 1,200
Prime cost 18,000 10,800
Production overhead variable:
Shop labour 1,000 600
Consumer stores 2,000 1,200
Semi-Variable:
Power 2,100 1,700
Repair & Maintenance 590 470
Inspection 260 180
Fixed:
Depreciation 1,400 1,400
Salaries 1,050 1,050
Total overhead costs 8,400 6,600
Cost of production 26,400 17,400
Cost of production per unit 6.60 7.25
Working:
Calculation of semi-variable overheads: Power
Difference in capacity Difference in overhead (Rs.)
20% 200
1% 10
At 80% variable cost is 80 Rs.10 = Rs.800 and fixed cost is Rs.1,100.
In the same way it can be calculated for 100% and 60% capacity. Same way may be
followed for repair and maintenance and inspection.
67. Answer : (d)
Reason : Standard cost of standard mix of input
Particulars Quantity
Kg
Price Rs.
Amount
Rs.
Chemical A (50% of 100 kg) 50 12 600
Chemical B (50% of 100 kg) 50 15 750
Input 100 1,350
Standard loss 10
Output 90 1,350
Standard rate of output per kg = Rs.1,350 90 = Rs.15

Yield variance = Standard rate of output (Actual yield ~ Standard yield for actual input)
Rs.135 (A) = Rs.15 (90 kg ~ Standard yield for actual input)
9 kg (A) = 90 kg ~ Standard yield for actual input
Standard yield for actual input = 90 + 9 = 99kg.
68. Answer : (b)
Reason : Actual material consumption:
Particulars A B
Stock as on March 01, 2006 70 80
Add: Purchases during the month of March 2006 1,600 2,400
1,670 2,480
Less: Stock as on March 31, 2006 10 100
Material consumed during the month of March 2006 1,660 2,380
Total material consumption = 1,660 + 2,380 = 4,040 kg
Standard cost:
Quantity (kg) Price (Rs.) Amount (Rs.)
A 1,600 4 6,400
B 2,400 3 7,200
4,000
Loss: 600
Output 3,400 13,600
Standard yield =
Actualstandardoutput 85kg.
Actualinput = 4,040kg.=3,434kg.
Standard input 100kg.

Material yield variance = Standard rate of output (Actual yield Standard yield)
=
Rs.13,600
(3,400kg. - 3,434kg.)
3,400 = Rs.136 (Adverse)
69. Answer : (b)
Reason :
Particulars Product A Product B Product C
Rs. Rs. Rs.
Revenue 70,000 1,00,000 1,20,000
Pre-Separation Joint costs: 35,000 25,000 20,000
A = Rs.80,000
3,500
8,000
B = Rs.80,000
2,500
8,000
C = Rs.80,000
2,000
8,000
Post-separation cost 40,000 40,000 45,000
Profit/(Loss) (5,000) 35,000 55,000

70. Answer : (c)

Reason : A value added activity contributes to customer satisfaction or meets a need of the entity.
A non-value adding activity does not make such a contribution. It can be eliminated,
reduced or redesigned without impairing quantity, quality or responsiveness of the
product or service desired by customers or entity. In this context of Customers perceive
value-added costs as adding usefulness to the product or service for which they are
willing to pay the factory conditions is not a value added item to customers. So option
(c) is correct.