ADVANCED MANAGEMENT ACCOUNTING (MCQs SET 37)

Q1: Given the following data for the month of June:

Actual direct labor rate Rs. 7.50

Standard direct labor hours allowed 11,000

Actual direct labor hours 10,000

Direct labor rate variance- Favorable Rs. 5500

What was the standard direct labor rate used during June?

a) Rs. 8.00

b) Rs. 6.95

c) Rs. 8.05

d) Rs. 9.00

Answer:

Direct labor rate variance= Actual hour x actual rate = 10,000 x 7.50 =75000

Less: Actual hours x std. rate = 10,000 x 8.05 = 80500

= (Rs. 5500)

Q2: Cost-volume-profit analysis includes some inherent, simplifying assumptions. Which of the
following is not one of the assumptions?

a) Sales mix will change as fixed costs increased beyond the relevant range.

b) Variable costs fluctuate proportionately with volume.

c) Changes in beginning and ending inventory levels are significant in amount.

d) Cost and revenues are predictable and are linear over the significant range.

Q3: Al jaded manufacturing sold 20,000 units of its product for Rs. 100 per unit in the current year.
Variable cost per unit is Rs. 60 and total fixed costs are Rs. 200,000. Al jaded manufacturing’s current
manufacturing process is labor intensive. Raheem, the production manager, has proposed investing in
state-of-the art manufacturing equipment, which will increase the annual fixed costs to Rs. 700,000.
The variable costs are expected to decrease to Rs. 30 per unit. The company expects to maintain the
same sales volume and selling price next year. What was new contribution margin and operating
income of the company?

a) Rs. 1300,000 and Rs. 600,000.

b) Rs. 1400,000 and Rs. 700,000.

c) Rs. 1500,000 and Rs. 800,000.

d) Rs. 1600,000 and Rs. 900,000.

Old New

Sales 100 100 2000,000 2000,000

Variable cost 60 30 (1200,000) (600,000)

Contribution 800,000 1400,000

Fixed cost (200,000) (700,000)

Profit 600,000 700,000

Q4: The Barnes corporation has just acquired a large account. As a result, it needs an additional Rs.
75,000 in working capital immediately. It has been determined that there are three feasible sorces of
funds:

a) Trade credit: the company buys about Rs. 50,000 of material per month on terms of 3/30 net 90.
Discounts are taken.

b) Bank loan: The firm’s bank will lend Rs. 100,000 at 13 percent. A 10 percent compensating balance
will be required, which otherwise would not be maintained by the company.

c) A factor will buy the company’s receivables (Rs. 100,000 per month), which have a collection period of
60 days. The factor will advance up to 75 percent of the face value of the receivables at 12 percent on an
annual basis. The factor will also charge a 2 percent fee on all receivables purchased. It was been
estimated that the factor’s services will save the company a credit department expense and bad-debt
expense of Rs. 1500 per month.

What are the costs of trade credit and bank loan?

a) 19.7% and 15.9%.

b) 18.8% and 14.4%.

c) 19.8% and 17.4%.

d) 18.2% and 14.7%.

Answer:

Annualized costs are as follows:

a. Trade credit: If discounts are not taken, up to $97,000 (97% × $50,000 per month × 2
months) can be raised after the second month. The cost would be
(3/97)(365/60) = 18.8%

b. Bank loan: Assuming that the compensating balance would not otherwise be maintained,
the cost would be
($106,000 × 0.13)/($106,000 × 0.90) = 14.4%

c. Factoring: Factor fee for the year would be

2% × ($150,000 × 12) = $36,000

The savings effected, however, would be $30,000, giving a net factoring cost of $6,000.
Borrowing $95,000 on the receivables would thus cost approximately
[(0.12 × $95,000) + $6,000]/$95,000 = 18.3%
Bank borrowing would thus be the cheapest source of funds

Q5: Voltar company manufactures and sells a specialized cordless telephone for high electromagnetic
radiations environments. The company’s contribution format income statement for the most recent
year is given below:

Total (Rs.) Per unit (Rs.) Percent of Sales

Sales (20,000 units) 1200,000 60 100%

Variable Expenses (900,000) (45) ?%

Contribution Margin 300,000 15 ?%

Fixed Expenses (240,000)

Net Operating Income 60,000 .

Assume that sales increase by Rs. 400,000 next year. If cost behavior patterns remain unchanged, the
company’s net operating income will increase by .

a) Rs. 100,000

b) Rs. 60,000

c) Rs. 70,000.

d) Rs. 80,000

Answer:

Total (Rs.) Per unit (Rs.) Percent of Sales

Sales (20,000 units) 1600,000 60 100%

Variable Expenses (1200,000) (45) ?%

Contribution Margin 400,000 15 ?%

Fixed Expenses (240,000)

Net Operating Income 160,000 .

Less: old income (60,000)

Increase in income 100,000

Q6: Falcon limited has key resources (bottle necks) of Facility X, which is available for 6260 minutes
per period. Budgeted factory costs and data on two products A and B are shown below:

Product Selling price per unit Material cost per unit Time in facility A

Rs. Rs. Minutes

A 1400 800 1

B 1400 700 2

Budgeted factory costs per week in as under:

Rs.

Direct labor 1000,000

Indirect labor 500,000

Power 70,000

Depreciation 900,000

Spare costs 320,000

Engineering 140,000

Administration 200,000

During a week, actual production was 4750 units of Product A and 650 unit of Product B. What is
efficiency rate?

a) 92.3%

b) 103.5%

c) 108.7%

d) 96.6%

Answer:

Total cost = 1000,000 + 500,000 + 70,000 + 900,000 + 320,000 + 140,000 + 200,000 = Rs. 3130,000
Cost per factory minute = 3130,000/6260 = 500.

Standard minutes of throughput for the week: = (4,750 × 1) + (650 × 2) = 6,050

Throughput cost for the week: = 6,050 × 500 per min = 3025,000

Efficiency ratio = throughput cost/ budgeted total cost x 100

Efficiency ratio = 3025,000/3130,000 x 100 = 96.6 %

Q7: Cycle inventory help in:

a) taking advantage of economics of scale and reducing cost within the supply chain.

b) taking care of any special event that does not regular basis.

c) providing flexibility to each decision making unit to manage its operations independently.

d) finding out the amount of stock required during a finite period in order to move the materials from
one location to another.

Q8: Delhi sports (DS) operates a megastore featuring sports merchandise. It uses an EOQ decision
model to make inventory decisions. It is now considering inventory decisions for its new Vest product
line. This is a highly popular item. Data for 2011 are:

Expected annual demand for Vests: 10,000.

Ordering costs for purchase order: Rs. 225.

Carrying costs per year: Rs. 10 per Vest.

Each Vests costs DS Rs. 40 and sells for Rs. 75. The Rs. 10 carrying costs per Vest per year comprises the
required rate of return on investment of Rs. 4.80 (12% x Rs. 40 purchase price) plus Rs. 5.20 is relevant
insurance, handling and theft-related costs. The purchasing lead time is 7 days. DS is open 365 days a
year.

DS intends to install computer software that would enable its customers to conduct “one-stop”
purchasing using state-of-the art web site technology. DS’s ordering cost per purchase order will be
reduced to Rs. 20 using this new technology.

The sizeable reduction in ordering cost (from Rs. 225 to Rs. 20 per purchase order) would reduce the
EOQ by .

a) 671 vests.

b) 471 vests.

c) 554 vests.

d) 200 vests.
Old EOQ =
√ 2 x 10,000 x 225 = 671 units
10

New EOQ =
√ 2 x 10,000 x 20 = 200 units
10
Reduction in EOQ = 671 – 200 = 471 units.

Q9: Galp limited is manufacturer of single product named “k”. The product is manufactured using a
single grade labor. Following details are extracted from sales, inventory and finished goods budget:

Units.

Finished goods (opening) 160

Sales 800

Additional information:

 Once the production work is completed the goods undergoes inspection process.
 20% of the finished goods are budgeted to be scrapped.
 The company maintains the finished goods inventory at the level equal to 3 month’s sales.

The number of units required for production .

a) 4200

b) 5250

c) 1050

d) 2560

Answer:

Opening finished goods = 160 units.

Closing finished goods inventory = 800 x 3 = 2400 units.

Sales = 800 units.

Scrapped units = 2400 x 0.20 = 480 units.

Sales + ending – opening – scrapped = production

800 + 2400 – 160 – 480 = 2560 units

Q10: Al jaded manufacturing sold 20,000 units of its products for Rs. 100 per unit in the current year.
Variable cost per unit is Rs. 60 and total fixed costs are Rs. 200,000. What are contribution margin and
operating income of the company?
a) Rs. 600,000 and Rs. 800,000.

b) Rs. 500,000 and Rs. 700,000.

c) Rs. 700,000 and Rs. 500,000.

d) Rs. 800,000 and Rs. 600,000.

Answer:

Old

Sales 2000,000

Variable cost (1200,000)

Contribution 800,000

Fixed cost (200,000)

Profit 600,000