ACC 256 Advanced Cost and Management Accounting Practice Sets & Model Questions — TU BBS Fourth Year

PAPER KHOJ

Practice Examination — Set 1

For BBS · Fourth Year

Based on the prescribed TU Faculty of Management syllabus and examination structure

Independently prepared by Paper Khoj. This is not an official Tribhuvan University or Dean's Office question paper.

Course: ACC 256 · Advanced Cost and Management Accounting

Level: Bachelor of Business Studies (BBS) · Fourth Year

Full Marks: 100

Time: 3 hrs.

Candidates are required to give their answers in their own words as far as practicable. The figures in the margin indicate full marks.

Group 'A'

Brief Answer Questions. Attempt ALL questions.

[10 × 2 = 20]

[2]
Define ‘Management Accounting’.

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Concept: The application of professional accounting techniques and concepts to process historical and projected financial data to assist management in planning, decision-making, and control.
[2]
What is the ‘High-Low Method’ of cost estimation?

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Concept & Formula: A technique to separate mixed costs into fixed and variable components:
$\text{Variable Cost per Unit} = \frac{\text{Cost at Highest Activity} - \text{Cost at Lowest Activity}}{\text{Highest Activity} - \text{Lowest Activity}}$
. Fixed cost is found by substitution.
[2]
What is a ‘Cost Pool’ and ‘Cost Driver’ in ABC?
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Definitions:
- Cost Pool: An aggregation of all overhead costs associated with a specific business activity (e.g. machine setup pool).
- Cost Driver: The factor that causes or triggers the cost of that activity (e.g. number of setups).
[2]
State the formula for Contribution Margin Ratio (P/V Ratio).

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$\text{P/V Ratio} = \frac{\text{Sales} - \text{Variable Cost}}{\text{Sales}} \times 100 = \frac{\text{Contribution Margin}}{\text{Sales}} \times 100 = \frac{\Delta \text{Profit}}{\Delta \text{Sales}} \times 100$
[2]
Define ‘Margin of Safety’.

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$\text{Margin of Safety} = \text{Actual Sales} - \text{Break-Even Sales}$
It represents the cushion of sales revenue that can fall before the firm incurs a loss.
[2]
What are ‘Equivalent Units of Production’ in Process Costing?

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Concept: The expression of partially completed work-in-progress (WIP) in terms of fully finished units based on their percentage degree of completion.
[2]
Define ‘Normal Loss’ and ‘Abnormal Gain’ in process costing.
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Definitions:
- Normal Loss: Inherent, unavoidable loss expected under standard production conditions; absorbed in good unit cost.
- Abnormal Gain: Production yield exceeding normal expected output due to superior efficiency; credited to P&L.
[2]
State the formula for Material Price Variance (MPV).

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$\text{MPV} = \text{Actual Quantity} \times (\text{Standard Price} - \text{Actual Price})$
[2]
What is a ‘Flexible Budget’?

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Concept: A budget designed to change dynamically in relation to the level of activity actually attained, adjusting variable costs while keeping fixed costs constant.
[2]
What is ‘Target Costing’?

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Formula & Concept:
$\text{Target Cost} = \text{Competitive Selling Price} - \text{Required Profit Margin}$
. Costs are managed and engineered downward during the design phase.

Group 'B'

Short Answer / Descriptive Questions. Attempt any FIVE questions.

[5 × 10 = 50]

[10]
Company records show the following activity levels and total overhead costs:
- High Month: 20,000 Machine Hours, Total Cost = Rs. 350,000
- Low Month: 12,000 Machine Hours, Total Cost = Rs. 230,000 Calculate variable cost per hour, total fixed cost, and estimated cost for 18,000 hours.
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Step 1: Variable Cost per Hour:
$\text{Variable Cost per Hour} = \frac{350,000 - 230,000}{20,000 - 12,000} = \frac{120,000}{8,000} = \textbf{Rs. 15 per hour}$

Step 2: Total Fixed Cost:
$\text{Fixed Cost} = \text{Total Cost} - (\text{Variable Cost/hr} \times \text{Hours}) = 350,000 - (15 \times 20,000) = 350,000 - 300,000 = \textbf{Rs. 50,000}$

Step 3: Estimated Cost for 18,000 Hours:
$\text{Total Cost} = 50,000 + (15 \times 18,000) = 50,000 + 270,000 = \textbf{Rs. 320,000}$
[10]
Differentiate between Traditional Volume-Based Costing and Activity-Based Costing (ABC).
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Key Differences:
1. Cost Allocation Base: Traditional costing uses a single volume driver (direct labor hours, machine hours); ABC uses multiple activity cost drivers (setups, inspections, orders).
2. Overhead Assignment: Traditional assumes volume drives all overhead; ABC recognizes complexity, batch size, and product diversity drive overhead.
3. Product Cost Distortion: Traditional overcosts high-volume simple products and undercosts low-volume complex products; ABC eliminates cross-subsidization.
[10]
Given: Selling Price = Rs. 50 per unit; Variable Cost = Rs. 30 per unit; Fixed Cost = Rs. 200,000. Calculate: (a) P/V Ratio, (b) BEP in units and rupees, (c) Sales required to earn a profit of Rs. 60,000.
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Calculations:
1. Contribution Margin per unit = $50 - 30 = \text{Rs. } 20$ .
  $\text{P/V Ratio} = \frac{20}{50} \times 100 = \textbf{40\%}$
2. Break-Even Point:
  $\text{BEP (Units)} = \frac{\text{Fixed Cost}}{\text{CMPU}} = \frac{200,000}{20} = \textbf{10,000 units}$
  
  $\text{BEP (Rupees)} = 10,000 \times 50 = \textbf{Rs. 500,000}$
3. Required Sales for Profit of Rs. 60,000:
  $\text{Required Sales (Units)} = \frac{200,000 + 60,000}{20} = \frac{260,000}{20} = \textbf{13,000 units}$
  
  $\text{Required Sales (Rs.)} = 13,000 \times 50 = \textbf{Rs. 650,000}$
[10]
Explain the concept of Transfer Pricing. Describe the Market-based, Cost-based, and Negotiated Transfer Pricing methods.
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1. Concept: The internal price charged by one autonomous division (selling division) for supplying goods/services to another division (buying division) within the same enterprise. 2. Methods:
- Market-Based: Uses prevailing external market price; preserves divisional autonomy and performance measurement.
- Cost-Based: Full cost, variable cost, or cost-plus markup; used when no reliable external market exists.
- Negotiated Price: Mutually agreed price between division managers through bargaining.
[10]
Explain the calculation and significance of Material Variances (Price, Usage, and Mix).
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Formulas & Roles:
1. Material Cost Variance (MCV) = $(\text{SQ} \times \text{SP}) - (\text{AQ} \times \text{AP})$ .
2. Material Price Variance (MPV) = $\text{AQ} \times (\text{SP} - \text{AP})$ : evaluates purchasing department efficiency.
3. Material Usage Variance (MUV) = $\text{SP} \times (\text{SQ} - \text{AQ})$ : evaluates factory production efficiency.
- Verification: $\text{MCV} = \text{MPV} + \text{MUV}$ .
[10]
Explain the modern strategic cost management tools: Life Cycle Costing, Kaizen Costing, and Just-In-Time (JIT).
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Concepts:
- Life Cycle Costing: Accumulates costs over entire product lifespan (R&D, manufacturing, warranty, disposal).
- Kaizen Costing: Focuses on continuous, incremental improvements and cost reductions during the active manufacturing phase.
- JIT: Inventory management philosophy aiming for zero inventory by producing goods only when ordered.

Group 'C'

Comprehensive / Analytical Questions. Attempt any TWO questions.

[2 × 15 = 30]

[15]
In Process A, 2,000 units of material were introduced at a cost of Rs. 100,000. Other expenditures were: Direct Wages Rs. 40,000; Production Overhead Rs. 20,000. Normal loss is estimated at 10% of input, realizable at Rs. 10 per unit. Actual output was 1,750 units. Prepare: (a) Process A Account, (b) Normal Loss Account, and (c) Abnormal Loss Account.
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Step 1: Quantity & Cost Analysis:
- Units input = 2,000 units.
- Normal loss = $10\% \times 2,000 = 200 \text{ units}$ , Scrap value = $200 \times 10 = \text{Rs. } 2,000$ .
- Expected output = $2,000 - 200 = 1,800 \text{ units}$ .
- Actual output = 1,750 units.
- Abnormal Loss = $1,800 - 1,750 = \textbf{50 units}$ .
Step 2: Cost per Unit of Normal Output:
$\text{Cost per unit} = \frac{\text{Total Cost} - \text{Scrap Value}}{\text{Expected Output}} = \frac{(100,000 + 40,000 + 20,000) - 2,000}{1,800} = \frac{158,000}{1,800} = \textbf{Rs. 87.78 per unit}$

Step 3: Valuations:
- Normal Loss: 200 units @ Rs. 10 = Rs. 2,000.
- Abnormal Loss: 50 units @ Rs. 87.78 = Rs. 4,389.
- Output transferred to Process B: 1,750 units @ Rs. 87.78 = Rs. 153,611.
Step 4: Process A Account:
- Debit: Material (2,000 units, Rs. 100,000) + Wages (Rs. 40,000) + Overhead (Rs. 20,000) = 2,000 units, Rs. 160,000.
- Credit: Normal Loss (200 units, Rs. 2,000) + Abnormal Loss (50 units, Rs. 4,389) + Process B A/c (1,750 units, Rs. 153,611) = 2,000 units, Rs. 160,000 (Balanced).
[15]
A company produces two products A and B. Budgeted overhead costs: Machine Setup: Rs. 180,000 (Cost driver: 60 setups); Quality Inspection: Rs. 140,000 (Cost driver: 70 inspections). Data:
- Product A: 1,000 units, 20 setups, 30 inspections.
- Product B: 2,000 units, 40 setups, 40 inspections. Calculate overhead cost per unit for Product A and Product B under Activity Based Costing.
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Step 1: Calculate Cost Driver Rates:
1. Setup Rate = $\frac{\text{Rs. } 180,000}{60 \text{ setups}} = \textbf{Rs. 3,000 per setup}$ .
2. Inspection Rate = $\frac{\text{Rs. } 140,000}{70 \text{ inspections}} = \textbf{Rs. 2,000 per inspection}$ .
Step 2: Assign Overhead Costs to Products:
- Product A:
  
  Setup cost: $20 \times 3,000 = \text{Rs. } 60,000$ .
  
  Inspection cost: $30 \times 2,000 = \text{Rs. } 60,000$ .
  
  Total Overhead for A = Rs. 120,000.
  
  Units = 1,000 units $\to$ Overhead per unit A = $\frac{120,000}{1,000} = \textbf{Rs. 120 per unit}$ .
- Product B:
  
  Setup cost: $40 \times 3,000 = \text{Rs. } 120,000$ .
  
  Inspection cost: $40 \times 2,000 = \text{Rs. } 80,000$ .
  
  Total Overhead for B = Rs. 200,000.
  
  Units = 2,000 units $\to$ Overhead per unit B = $\frac{200,000}{2,000} = \textbf{Rs. 100 per unit}$ .
[15]
Standard mix to produce 100 units of Product X is: Material A: 60 kg @ Rs. 10/kg; Material B: 40 kg @ Rs. 20/kg. Actual production was 1,000 units of Product X, using: Material A: 650 kg @ Rs. 12/kg; Material B: 380 kg @ Rs. 18/kg. Calculate: (a) Material Cost Variance, (b) Material Price Variance, (c) Material Usage Variance, and verify your results.
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Step 1: Standard Quantities for Actual Output (1,000 units):
- For 100 units, A = 60 kg, B = 40 kg. For 1,000 units:
  
  Standard Quantity A ( $SQ_A$ ) = $60 \times 10 = 600 \text{ kg}$ . Standard Price ( $SP_A$ ) = Rs. 10.
  
  Standard Quantity B ( $SQ_B$ ) = $40 \times 10 = 400 \text{ kg}$ . Standard Price ( $SP_B$ ) = Rs. 20.
- Actuals: $AQ_A = 650 \text{ kg}$ , $AP_A = \text{Rs. } 12$ ; $AQ_B = 380 \text{ kg}$ , $AP_B = \text{Rs. } 18$ .
Step 2: Material Price Variance (MPV):
- $MPV_A = AQ_A \times (SP_A - AP_A) = 650 \times (10 - 12) = 650 \times (-2) = \text{Rs. } 1,300 \text{ (A)}$
- $MPV_B = AQ_B \times (SP_B - AP_B) = 380 \times (20 - 18) = 380 \times (+2) = \text{Rs. } 760 \text{ (F)}$
- Total MPV = $1,300 (A) - 760 (F) = \textbf{Rs. 540 (Adverse)}$
Step 3: Material Usage Variance (MUV):
- $MUV_A = SP_A \times (SQ_A - AQ_A) = 10 \times (600 - 650) = 10 \times (-50) = \text{Rs. } 500 \text{ (A)}$
- $MUV_B = SP_B \times (SQ_B - AQ_B) = 20 \times (400 - 380) = 20 \times (+20) = \text{Rs. } 400 \text{ (F)}$
- Total MUV = $500 (A) - 400 (F) = \textbf{Rs. 100 (Adverse)}$
Step 4: Material Cost Variance (MCV):
- Standard Cost = $(600 \times 10) + (400 \times 20) = 6,000 + 8,000 = \text{Rs. } 14,000$ .
- Actual Cost = $(650 \times 12) + (380 \times 18) = 7,800 + 6,840 = \text{Rs. } 14,640$ .
- Total MCV = $14,000 - 14,640 = \textbf{Rs. 640 (Adverse)}$ .
Verification:
$\text{MCV} = \text{MPV} + \text{MUV} \implies 540 \text{ (A)} + 100 \text{ (A)} = \textbf{640 (A)}$
(Verified!).

Advanced Cost and Management Accounting

Practice sets and model questions

Practice Set 1

Practice Examination — Set 1

Brief Answer Questions. Attempt ALL questions.

Short Answer / Descriptive Questions. Attempt any FIVE questions.

Comprehensive / Analytical Questions. Attempt any TWO questions.