INTERMEDIATE EXAMINATION SET - 2

MODEL ANSWERS TERM – DECEMBER 2024

PAPER – 12 SYLLABUS 2022
MANAGEMENT ACCOUNTING

Time Allowed: 3 Hours Full Marks: 100

The figures in the margin on the right side indicate full marks.

SECTION – A (Compulsory)
1. Choose the correct option: [15 x 2 = 30]
(i) In the context of budgeting, what is a 'flexible budget'?
a) A budget that remains unchanged regardless of actual performance
b) A budget that adjusts to changes in activity levels
c) A budget that is created after the actual results are known
d) A budget that includes only fixed costs.

(ii) Which of the following methods is used to allocate overhead costs based on the
activities that consume resources?
a) Traditional Costing
b) Direct Costing
c) Activity-Based Costing (ABC)
d) Standard Costing

(iii) In budgeting, what does a 'master budget' encompass?

a) Only the sales budget
b) The comprehensive set of budgets including sales, production, and cash budgets
c) The production budget alone
d) Only the cash flow budget

(iv) Marginal costing is also known as __________.

a) Direct Costing
b) Variable Costing
c) Contribution Costing
d) All of A, B and C

(v) Fixed cost: - ₹ 2,80,000

Sales: - ₹ 1000,000
P/v ratio: - 30%
Calculate the amount of profit.
a) ₹50,000
b) ₹40,000
c) ₹45,000
d) ₹20,000

(vi) Calculate the material price variance from the following:

Actual Quantity - 3.5 kgs
Standard Price - ₹ 4 per kg
Actual Price - ₹ 8 per kg
Standard Quantity - 4 kgs

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Directorate of Studies, The Institute of Cost Accountants of India
 INTERMEDIATE EXAMINATION SET - 2
MODEL ANSWERS TERM – DECEMBER 2024
PAPER – 12 SYLLABUS 2022
MANAGEMENT ACCOUNTING

a) ₹ 3(F)
b) ₹ 14(A)
c) ₹ 12(A)
d) ₹ 6 (F)

(vii) In the context of cost accounting, what does the term 'relevant cost' refer to?
(a) Costs that have already been incurred and cannot be changed
(b) Costs that are pertinent to a specific decision and will be directly affected by that
decision
(c) Costs that are allocated equally across all products
(d) Costs that are used to determine standard pricing.

(viii) A company has a Net Profit Margin of 0.25, total asset turnover is 1.6 times and
equity multiplier is 2.5. Calculate ROE as per Du Pont analysis.
a) 0.625
b) 4
c) 1
d) 1.5

(ix) During September, 400 labour hours were worked for a total cost of ₹ 8,800. The
variable overhead expenditure variance was ₹ 800 (A). Overheads are assumed to be
related to direct labour hours of active working. What was the standard cost per
labour hour?
a) ₹ 20
b) ₹ 16.50
c) ₹ 17.50
d) ₹ 18

(x) Responsibility accounting primarily measures which two aspects of responsibility

centers?
a) Costs and expenses
b) Budgets and actual results
c) Revenues and sales
d) Employee performance and satisfaction.

(xi) A strategy that yields an expected monetary payoff of zero is called a:

a) Risk-neutral strategy
b) Fair game
c) Zero-sum game
d) Certainty equivalent.

(xii) According to Kaplan & Norton, which of the balanced scorecard perspectives serves
as the focus of the other perspectives?
a) Financial
b) Customer
c) Internal business processes
d) Learning & growth.

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Directorate of Studies, The Institute of Cost Accountants of India
 INTERMEDIATE EXAMINATION SET - 2
MODEL ANSWERS TERM – DECEMBER 2024
PAPER – 12 SYLLABUS 2022
MANAGEMENT ACCOUNTING

(xiii) Which of the following would be considered an operating asset in return on

investment computations?
a) Land being held for plant expansion
b) Treasury stock
c) Accounts receivable
d) Common stock.

(xiv) What is a primary function of Key Performance Indicators (KPIs) in the role of a
Management Accountant?
a) Monitoring compliance
b) Assessing organizational performance
c) Implementing cost reduction strategies
d) Conducting variance analysis

(xv) In a decentralized organization, what role does responsibility accounting play?

a) It helps organization to focus on human resources.
b) It acts as the key management control tool.
c) It limits the authority of lower-level managers.
d) It focuses only on the company’s profit margins.
Answer:
(i) (ii) (iii) (iv) (v) (vi) (vii) (viii) (ix) (x) (xi) (xii) (xiii) (xiv) (xv)
b c b d d b b c a b b a c c b

SECTION – B
(Answer any five questions out of seven questions given. Each question carries 14 marks.)
[5 x 14 = 70]
2. (a) How do you classify the functions of the management accountant? [7]
(b) ABC Company manufactures four products, A, B, C and D, using the same
manufacturing process. The following data are available relating to a production period:
Product Volume Material Direct Labour Machine Time Labour Cost
Cost per unit (₹) per unit per unit per unit (₹)
A 700 10 0.75 hour ¼ hour 5
B 5,800 15 0.75 hour ¼ hour 7
C 800 18 2 hours 1 hour 12
D 7,500 25 2.25 hours 1.75 hours 11
Total Production Overheads are as under
Particulars ₹
Machine related Costs 37,800
Set-up Costs 4,500
Ordering Costs 2,020
Material Handling Costs 8,400
Spare parts Administration Costs 5,950
58,670

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Directorate of Studies, The Institute of Cost Accountants of India
 INTERMEDIATE EXAMINATION SET - 2
MODEL ANSWERS TERM – DECEMBER 2024
PAPER – 12 SYLLABUS 2022
MANAGEMENT ACCOUNTING

The Company absorbs factory overheads to the products by machine hour rate
method and the hourly rate per machine hour is ₹4.80. The overheads cost of the
products are as under:
Product ₹
A 1.2
B 1.2
C 4.8
D 7.2
The production overheads activities for the period reveal the following:
Products No. of Set-ups No. of Materials No. of times Number of
Orders Materials Spare parts
handled
A 2 2 2 2
B 6 3 9 6
C 3 2 5 2
D 7 3 12 4
Prepare a Statement of Overhead Cost for all the Products, by using Activity Based
Costing and compare the results with Traditional Costing. [7]

Answer:
(a) The functions of a management accountant can be categorized as below:
 Planning and Accounting - Management accountants prepare an accounting system
covering costs, sales forecasts, profit planning, production planning, and allocation of
resources. It should also include capital budgeting, short-term and long-term financial
planning. They also prepare the procedures necessary to implement the plan effectively.
 Controlling - Management accountants assist in the control of an organisation’s performance
through the use of standard costing, budget control, accounting ratios, funds flow statements,
cost-cutting initiatives, and assessing capital expenditure proposals and returns on
investment.
 Reporting - Management accountants assist the top management in finding out the root
cause of an unfavourable operation or event by identifying the real reasons for the adverse
events as well as the responsible parties and comprehensively reporting them.
 Coordinating - Management accountants improve an organisation’s efficiency and profits by
providing various coordination tools such as budgeting, financial reporting, financial analysis
and interpretation, and so on. These tools aid management by comparing cost and financial
records, preparing financial budgets and establishing standard costs, and analyzing cost
deviations to enable management by exception.
 Communication- Management accountants create a wide range of reports to communicate
results to the superiors. Through published financial statements and returns, they also
inform the outside world about their company’s success.
 Financial evaluation and Interpretation - Management accountants analyze the data and
present it to the management in a non-technical approach, together with their comments
and ideas, so that the shareholders and senior management can understand it and make
informed decisions.

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Directorate of Studies, The Institute of Cost Accountants of India
 INTERMEDIATE EXAMINATION SET - 2
MODEL ANSWERS TERM – DECEMBER 2024
PAPER – 12 SYLLABUS 2022
MANAGEMENT ACCOUNTING

 Tax Administration- Management accountants are in charge of tax policies and processes.
They make the reports that are required by various authorities. Further, they ensure that
quarterly tax payments are made in advance, as required by the relevant Act, to prevent
the payment of penal interest on late tax payments.
 Evaluation of external effects - There may be changes in government policy and existing laws.
These amendments and policy changes can affect business goals. Management accountants
assess the extent of any impact of these external factors on the business and report it to the
stakeholders to take necessary precautionary measures.
 Economic appraisal - When the government makes regular announcements about the
country’s economic situation, management accountants are entrusted with making the
economic study and determining the influence of current economic conditions on the
company’s operations. They compile a report containing their observations and present it
to high management.
 Asset Protection - Management accountants separate fixed asset registers for each type
and provide internal checks and controls to protect the company’s assets. They also create
the rules and regulations for each type of fixed asset and get insurance coverage for all
types of fixed assets.

(b) No. of Activities:

Set-ups = (2+6+3+7) = 18
Ordering = (2+3+2+3) =10
Handling = (2+ 9+ 5 +12) = 28
Spare parts= (2+ 6+ 2 + 4) = 14
Machine Hours = (175 + 1450 + 800 + 13,125) = 15,550

ABC Cost Pool

Overhead Costs Amount (₹) Cost Driver Activity Nos. Cost Driver Rate
(₹)
Machine related 37,800 Machine Hours 15,550 2.4308
Set-up Costs 4,500 No. of Set-ups 18 250
Ordering Costs 2,020 No. of Orders 10 202
Material 8,400 No. of times 28 300
Handling
Spare parts 5,950 No. of Spares 14 425

Statement of Overhead Costs (₹)

Product A B C D
No of Units 700 5,800 800 7,500
Overhead Costs: 500 1,500 750 1,750
Set-up Costs @ ₹250
Material Ordering@ ₹202 404 606 404 606
Material Handling@ ₹300 600 2,700 1,500 3,600
Spare parts @ ₹425 850 2,550 850 1,700

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Directorate of Studies, The Institute of Cost Accountants of India
 INTERMEDIATE EXAMINATION SET - 2
MODEL ANSWERS TERM – DECEMBER 2024
PAPER – 12 SYLLABUS 2022
MANAGEMENT ACCOUNTING

Machine related@ ₹2.4308 425 3,525 1,945 31,905

(Balance)
Total Overheads 2,779 10,881 5,449 39,561
Overheads Cost /unit (ABC) 3.97 1.87 6.81 5.27
Overheads Cost /unit (Traditional) 1.20 1.20 4.80 7.20
Difference 2.77 0.67 2.01 (1.93)

3. Division A is a profit centre, which produces four products P, Q, R and S. Each product
is sold in the external market also. Data for the period is as follows:
P Q R S
Market Price per unit (₹) 350 345 280 230
Variable Cost of Production per unit (₹) 330 310 180 185
Labour hours required per unit 3 4 2 3
Product S can be transferred to Division B but the maximum quantity that might be
required for transfer is 2,000 units of S.
The maximum sales in the external market are:
P - 3,000 units
Q - 3,500 units
R - 2,800 units
S - 1,800 units
Division B can purchase the same product at a slightly cheaper price of ₹ 225 per unit
instead of receiving transfers of products S from Division A.
Calculate the transfer price for each unit for 2,000 units of S, if the total labour hours
available in Division A are:
(i) 24,000 hours?
(ii) 32,000 hours? [14]

Answer:
Statement Showing Contribution per unit and per labour hour
Particulars P Q R S
Selling Price per unit (₹) 350 345 280 230
Variable Cost per unit (₹) 330 310 180 185
Contribution per unit (₹) 20 35 100 45
Labour Hours per unit 3 4 2 3
Contribution per labour hour (₹) 6.67 8.75 50 15
Ranking IV III I II

Statement Showing Production Plan

Total Hours Products Hours/unit Allocation of Hours
24,000 P 3 -
Q 4 13,000
R 2 5,600

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Directorate of Studies, The Institute of Cost Accountants of India
 INTERMEDIATE EXAMINATION SET - 2
MODEL ANSWERS TERM – DECEMBER 2024
PAPER – 12 SYLLABUS 2022
MANAGEMENT ACCOUNTING

S 3 5,400
24,000

Statement Showing Transfer Price per unit of the product S

Total labour hours required for S (2000 units × 3 hours per unit) 6,000
Hours diverted from Product Q (1,500 units × 4 hours per unit) 6,000
Variable Manufacturing cost for Product ‘S’ (2000 × ₹ 185) = ₹ 3,70,000
Contribution foregone/ Opportunity Cost of Product Q (1500 × ₹35) ₹ 52,500
₹ 4,22,500
(i) Hence, Transfer Price per unit (₹4,22,500 ÷ 2,000 units) = ₹211.25

Statement Showing Production Plan

Total Hours Products Hours/unit Allocation of Hours
32,000 P 3 7,000
Q 4 14,000
R 2 5,600
S 3 5,400
32,000

Statement Showing Transfer Price per unit of the product S

Total labour hours required for Product S (2000 × 3 hours per unit) 6,000
Hours diverted from Product P (2,000 × 3 hours per unit) 6,000
Variable Manufacturing cost for Product S (2000 × ₹ 185) = ₹ 3,70,000
Contribution foregone /Opposition cost for Product P (2000 × ₹20) = ₹ 40,000
₹ 4,10,000
(ii) Hence, Transfer Price per unit (₹4,10,000 ÷ 2,000 units) = ₹205.00

4. (a) Fashionable Clothing’s revenues and cost data for 2023 are as follows:

Particulars ₹ ₹
Revenues 9,00,000
Cost of goods sold 4,00,000
Gross margin 5,00,000
Operating costs:
Salaries (fixed) 2,70,000
Sales commissions (10% of sales) 90,000
Depreciation of equipment and fixtures 40,000

Store rent (4,500 per month) 54,000

Other operating costs 70,000 5,24,000
Operating income (loss) (24,000)

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Directorate of Studies, The Institute of Cost Accountants of India
 INTERMEDIATE EXAMINATION SET - 2
MODEL ANSWERS TERM – DECEMBER 2024
PAPER – 12 SYLLABUS 2022
MANAGEMENT ACCOUNTING

Ms. Alpana, the owner of the store, is unhappy with the operating results. An analysis
of other operating costs reveals that it includes ₹ 65,000 variable costs, which vary with
sales volume, and ₹ 5,000 (fixed) costs.
i. Calculate the contribution margin of Fashionable Clothing.
ii. Calculate the contribution margin percentage.
iii. Ms. Alpana estimates that she can increase revenues by 20% by incurring
additional advertising costs of ₹ 38,000. Calculate the impact of the additional
advertising costs on operating income. [7]

(b) The Management Accountant of XYZ ltd., has prepared the following estimates of
working results for the year ending 31st December, 2022 for the purpose of preparing
the budgets for the year ending 31st December, 2023.
Year ending 31/12/2022
Direct material ₹/unit 16.00
Direct wages ₹/unit 40.00
Variable overheads ₹/unit 12.00
Selling price ₹/unit 125.00
Fixed expenses ₹ 6,75,000 p.a.
Sales ₹ 25,00,000 p.a.
During the year 2023, it is expected that the material prices and variable overheads
will go up by 10% and 5% respectively. As a result of re-organisation of production
methods the overall direct labour efficiency will increase by 12% but the wage rate
will go up by 5%. The fixed overheads are also expected to increase by ₹1,25,000. The
technical director states that the same level of output as obtained in 2022 should be
maintained in 2023 also and efforts should be made to maintain the same level of
profit by suitably increasing the selling price. The marketing director states that the
market will not absorb any increase in the selling price. On the other hand he proposes
that publicity involving advertisement expenses in the proportions will increase the
quantity of sales as under:
Advertisement expenses (₹) 80,000 1,94,000 3,20,000 4,60,000
Additional units of sales 2,000 4,000 6,000 8,000
(i) Prepare an income statement for the year 2023.
(ii) Calculate the revised price and the percentage of increase in the price for 2023 if
the Technical Directors’ views are accepted.
(iii) Evaluate the four alternative proposals put forth by the Marketing Director,
determine the best output level to be budgeted and prepare an overall income
statement for 2023 at that level of output. [7]

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Directorate of Studies, The Institute of Cost Accountants of India
 INTERMEDIATE EXAMINATION SET - 2
MODEL ANSWERS TERM – DECEMBER 2024
PAPER – 12 SYLLABUS 2022
MANAGEMENT ACCOUNTING

Answer:
(a)
Particulars ₹ ₹
Revenues 9,00,000
Deduct variable costs:
Cost of goods sold 4,00,000
Sales commissions 90,000
Other operating costs 65,000 5,55,000
Contribution margin 3,45,000
Contribution margin percentage = 3,45,000/9,00,000 = 0.38

Particulars Details ₹
Incremental revenue (20% × 900,000) = 1,80,000
Incremental contribution margin (38% × 1,80,000) = 68,400
Incremental fixed costs (advertising) 38,000
Incremental operating income 30,400

If Ms. Alpana spends ₹38,000 more on advertising, the operating income will increase
by ₹30,400.

(b)
(i) Statement of profit at budget
Particulars Amount (₹)
(i) Selling price 125
(ii) Variable cost
A. direct material 16
B. direct wages 40
C. variable overheads 12
68
(iii) Contribution (i-ii) 57
(iv) No. of units (25,00,000/125) 20,000
(v) Total contribution 11,40,000
(vi) Less: Fixed cost 6,75,000
(vii) Profit (v-vi) 4,65,000

(ii) Computation of selling price, if the technical director views are implemented
Variable cost Workings Amount (₹)
Direct material (16 × 110%) 17.60
Direct wages [(40 × 105%) × (100/112)] 37.50
Variable overheads (12 × 105%) 12.60
67.70

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Directorate of Studies, The Institute of Cost Accountants of India
 INTERMEDIATE EXAMINATION SET - 2
MODEL ANSWERS TERM – DECEMBER 2024
PAPER – 12 SYLLABUS 2022
MANAGEMENT ACCOUNTING

In order to get the same profit contribution to be recovered is as follows:

Particulars Amount (₹)

Existing fixed overheads 6,75,000
Add :Expected increase 1,25,000
8,00,000
Add : desired profit 4,65,000
Desired contribution 12,65,000

Therefore contribution per unit (12,65,000/20,000) ₹ 63.25

Required selling price = variable cost + contribution = 67.7+63.25 ₹ 130.95
% increase in sale price = [{(130.95-125)/125}×100] 4.76%

(iii) Computation of additional profit at four alternatives proposed by marketing director:

Additional Units 2,000 4,000 6,000 8,000

Amount (₹)
a. contribution per unit (125-67.7) 57.30 57.30 57.30 57.30
b. Total contribution 1,14,600 2,29,200 3,43,800 4,58,400
c. additional fixed cost 80,000 1,94,000 3,20,000 4,60,000
d. Profit/(loss) 34,600 35,200 23,800 (1,600)
Statement showing overall income for the year 2023
a. No. of units 24,000
Amount (₹)
b. Contribution per unit 57.30
c. Total contribution 13,75,200
d. Fixed cost (8,00,000+1,94,000) 9,94,000
e. Profit 3,81,200

5. The standard material cost for 100 kg of chemical D is made up:

Chemical A 30 kg. @ ₹ 4 per kg
Chemical B 40 kg. @ ₹ 5 per kg
Chemical C 80 kg. @ ₹ 6 per kg
In a batch 500 kg.of chemical D were produced from a mix of
Chemical A 140 kg. @ ₹588
Chemical B 220 kg. @ ₹1,056
Chemical C 440 kg. @ ₹2,860
Calculate the different variance in the actual cost per 100 kg. of chemical D over the
standard cost. [14]

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Directorate of Studies, The Institute of Cost Accountants of India
 INTERMEDIATE EXAMINATION SET - 2
MODEL ANSWERS TERM – DECEMBER 2024
PAPER – 12 SYLLABUS 2022
MANAGEMENT ACCOUNTING

Answer:
Analysis of Given Data
Chemical Standard Data Actual Data
Quantity Price (₹) Value (₹) Quantity Price (₹) Value (₹)
A 30 4 120 28 4.2 117.60
B 40 5 200 44 4.8 211.20
C 80 6 480 88 6.5 572.00
150 800 160 900.80
Less: Loss 50 - 60 -
100 800 100 900.80

Computation of Required Values

Chemical (1) SQSP (₹) (2) RSQSP (₹) (3) AQSP (₹) (4) AQAP (₹)
A 30 × 4 =120 32.00 x 4 = 128.00 28 x 4 = 112.00 117.60
B 40 × 5 =200 42.67 x 5= 213.35 44 x 5 = 220.00 211.20
C 80 × 6= 480 85.33 x 6= 512.00 88 x 6 = 528.00 572.20
800.00 853.35 860.00 900.80

Computation of RSQ:
𝑆𝑄 𝑓𝑜𝑟 𝑡ℎ𝑎𝑡 𝑝𝑟𝑜𝑑𝑢𝑐𝑡
RSQ = × AQ for all products
𝑆𝑄 𝑓𝑜𝑟 𝑎𝑙𝑙 𝑝𝑟𝑜𝑑𝑢𝑐𝑡𝑠

30
For A = 150 × 160 = 32.00 units
40
For B = 150 × 160 = 42.67 units
80
For C = 150 × 160 = 85.33 units

Where (1) SQSP = Standard cost for Standard material = ₹800

(2) RSQSP = Revised standard cost of material = ₹853.35
(3) AQSP = Standard cost of actual material = ₹860.00
(4) AQAP = Actual cost of material = ₹900.80

Computation of Required Variances:

(A) Material yield variance = (1) – (2) = ₹53.35 (A) [₹800 – ₹853.35]
(B) Material Mix variance = (2) – (3) = ₹6.65 (A) [₹853.35 – ₹860]
(C) Material usage variance = (1) – (3) = ₹60 (A) [₹800 – ₹860]
(D) Material price variance = (3) – (4) = ₹40.80 (A) [₹860 – ₹900.80]
(E) Material cost variance = (1) – (4) = ₹100.80 (A) [₹800 – ₹900.80]

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Directorate of Studies, The Institute of Cost Accountants of India
 INTERMEDIATE EXAMINATION SET - 2
MODEL ANSWERS TERM – DECEMBER 2024
PAPER – 12 SYLLABUS 2022
MANAGEMENT ACCOUNTING

6. a) Budgeted and actual sales for the month of March, 2024 of two products A and B of
M/s. XY Ltd. were as follows:
Budgeted Actual
Product Budgeted Units Sales Price/Unit (₹) Actual Units Sales Price / Unit (₹)
A 8,000 ₹8 7,500 8.00
1,000 7.75
B 14,000 ₹4 10,500 4.00
1,750 3.50
Budgeted costs for Products A and B were ₹7.00 and ₹3.50 per unit respectively.
Calculate the following variances from the above data:
Sales Volume Variance, Sales Value Variance, Sales Price Variance, Sales Sub Volume
Variance, Sales Mix Variance. [7]

b) The following data on production, materials required for products X and Y, and
inventory pertain to the budget of LMN Company:

Particulars Product X Product Y

Production (Units) 2000 3000
Material (Units)
A 3.0 1.0
B 4.0 6.5

Particulars Beginning Desired Price/unit

Ending
Material inventory:
A 2000 3000 ₹2
B 6000 6000 ₹ 1.2

i. Analyse the number of material units needed to produce products X and Y

ii. Calculate the cost of materials used for production.
iii. Analyse the number of materials units to be purchased.
iv. Calculate the cost of materials to be purchased. [7]

Answer:
a)
(1) (2) (3) (4)
Product
AQAP (₹) AQSP (₹) RSQSP (₹) SQSP (₹)
A 7,500 × 8.00 8,500 × 8 7,545.45 × 8 8,000 × 8
1,000 × 7.75
B 10,500 × 4.00
1,750 × 3.50 12,250 × 4 13,204.54×4 14,000 × 4

A 60,000 68,000 60,363.6 64,000

7,750

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Directorate of Studies, The Institute of Cost Accountants of India
 INTERMEDIATE EXAMINATION SET - 2
MODEL ANSWERS TERM – DECEMBER 2024
PAPER – 12 SYLLABUS 2022
MANAGEMENT ACCOUNTING

B 42,000
6,125 49,000 52,818.16 56,000
Total ₹1,15,875 ₹1,17,000 ₹1,13,182 ₹1,20,000
Revised Standard Quantity for
A = 8,000/22,000 × 20,750 = 7,545.45 units
B = 14,000/22,000 × 20,750 = 13,204.54 units
AQAP = Actual Sales = ₹1,15,875
AQSP= Actual Quantity of Sales at Standard Price = ₹1,17,000
RSQSP = Revised Budgeted or Standard Sales = ₹1,13,182
SQSP = Standard or Budgeted Sales = ₹1,20,000
a) Sales Sub Volume or Quantity Variance = 3 – 4 = ₹6,818 (A)
b) Sales Mix Variance = 2 – 3 = ₹3,818 (F)
c) Sales Volume Variance = 2 – 4 = ₹3,000 (A)
d) Sales Price Variance = 1 – 2 = ₹1,125 (A)
e) Sales Value Variance = 1 – 4 = ₹4,125 (A)

b) Number of material units needed to produce products X and Y

Particulars Material Material
A B
Number of product X to be produced 2,000 2,000
Number of material units needed per product X 3.0 4.0
Material required ( a × b) 6,000 8,000

Particulars Material A Material B

Number of product Y to be produced 3,000 3,000

Number of material units needed per product Y 1.0 6.5
Material required ( a × b) 3,000 19,500

Particulars Material A Material B

Total number of material units needed for production

of Product X and Product Y
(6000+3000) 9,000
(8000+19500) 27,500

Cost of materials used for production

Particulars Material A Material B

Total number of material units 9,000 27,500

Unit Price ₹ 2 ₹ 1.20
Cost of material used for production ₹ 18,000 ₹ 33,000

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Directorate of Studies, The Institute of Cost Accountants of India
 INTERMEDIATE EXAMINATION SET - 2
MODEL ANSWERS TERM – DECEMBER 2024
PAPER – 12 SYLLABUS 2022
MANAGEMENT ACCOUNTING

Number of materials units to be purchased.

Particulars Material A Material B

Total number of material units required for production 9,000 27,500

Add: Desired ending inventory 3,000 6,000

12,000 33,500
Less: Beginning inventory 2,000 6,000

Material to be purchased 10,000 27,500

Cost of materials to be purchased

Particulars Material A Material B
Material to be purchased 10,000 27,500
Unit price ₹2 ₹1.2
Cost of materials to be purchased ₹20,000 ₹33,000

7. a) XYZ Corporation has three divisions whose income statements and balance sheets are
summarized below:

Division X Division Y Division Z

Sales ₹5,00,000 (d) (g)
Operating income ₹25,000 ₹30,000 (h)
Operating assets ₹1,00,000 (e) ₹2,50,000
Asset Turnover (a) (f) 0.4
Margin (b) 0.4% 5%
Return on investment (ROI) (c) 2% (i)
(i) Calculate the missing data in the table above and summarize the results.
(ii) Comment on the relative performance of each division. What questions can be
raised as a result of theirperformance? [7]

b) The usual learning curve model is y = axb where, ‘y’ is the average time per unit for x units;
‘a’ is the time for first unit; x is the cumulative number of units; b is the learning coefficient
and is equal to log 0.8 ÷ log 2 = – 0.322 for a learning rate of 80%. Given that a = 10 hours
and learning rate 80%, you are required to calculate:
(i) The average time for 20 units.
(ii) The total time for 30 units.
(iii) The time for units 31 to 40.
Given that log 2 = 0.301, Antilog of 0.5811 = 3.812; log 3 = 0.4771, Antilog of 0.5244 =
3.345, log 4 = 0.6021, Antilog of 0.4841 = 3.049. [7]

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Directorate of Studies, The Institute of Cost Accountants of India
 INTERMEDIATE EXAMINATION SET - 2
MODEL ANSWERS TERM – DECEMBER 2024
PAPER – 12 SYLLABUS 2022
MANAGEMENT ACCOUNTING

Answer:
a) Return on investment (ROI) = Operating income ÷ Operating assets
= (Operating income ÷ Sales) × (Sales ÷ Operating assets)
= Margin × Asset Turnover
(a) Asset Turnover = ₹5,00,000 ÷ ₹1,00,000 =5 times
(b) Margin = (₹ 25,000 ÷ ₹ 5,00,000) × 100 = 5%
(c) ROI = Asset Turnover × Margin = 5 times × 5% = 25%
(d) Margin = 0.4% = 0.004 = Operating income ÷ Sales (d);
d = ₹30,000 ÷ 0.004 = ₹ 75,00,000
(e) ROI = 2% = Operating income ÷ Operating assets (e) = 30,000 ÷ Operating assets
or, e = ₹30,000 ÷ 0.02 = ₹15,00,000
(f) Asset Turnover = d ÷ e = ₹ 75,00,000 ÷ ₹15,00,000 = 5 times
(g) Asset Turnover = 0.4 = Sales (g) ÷ ₹ 2,50,000 or, g = 0.4 × ₹ 2,50,000 = ₹ 1,00,000
(h) Margin = 5% = Operating income (h) ÷ Sales (g) = (h) ÷ ₹ 1,00,000, h = ₹ 1,00,000 × 5%
= ₹ 5,000
(i) ROI = 0.4 times × 5% = 2% or = 5,000 ÷ ₹ 2,50,000 = 2%
(ii) Division X performed best. It appears that Divisions Y and Z are in trouble. Division Y
turns over its assets as often as Division X, but Y’s margin on sales is much lower. Thus,
Division Y must work on improving its margin. The following questions are raised about
Division Y Is the low margin due to inefficiency? Is it due to excessive material, labour,
and/or overhead costs? Division Z, on the other hand, does just as well as Division X in
terms of profit margin- both divisions earn 5 percent on sales.
But Division 2 has a much lower turnover of capital than Division X. Therefore, Division
Z should take a close look at its investment. Is too much tied up in inventories and
receivables? Are there unused fixed assets? Is there idle cash sitting around?

b)
(i) y = axb or, y = 10(20) -0.322
Taking log on both sides
Log y = log 10 + log 20(-0.322)
Log y = log 10 – (0.322) log 20
= 1 – (0.322) log 20
= 1- (0.322) × log (2×10)
= 1- (0.322) × (log2 + log10)
= 1- (0.322) × (1.3010) = 1- 0.41892 = 0.5811
Log y = 0.5811
y = Anti log (0.5811) = 3.812 hrs (average time)
Total Time = 3.812 × 20 = 76.24 hours

(ii) Log y = log 10 + log 30(-0.322)

Log y = 1- (0.322) × (1.4771)
= 1 - (0.4756) = 0.5244
y = anti log (0.5244) = 3.345 hrs (average time)
Total time = 3.345 × 30 = 100.35 hrs

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Directorate of Studies, The Institute of Cost Accountants of India
 INTERMEDIATE EXAMINATION SET - 2
MODEL ANSWERS TERM – DECEMBER 2024
PAPER – 12 SYLLABUS 2022
MANAGEMENT ACCOUNTING

(iii) Log y = log 10 + log 40 (-0.322)

= 1- (0.322) × (1.6021)
Log y = 0.4841
y = anti log (0.4841) = 3.049 hrs
Total time = 40 × 3.049 = 121.96 hrs
Time from 31 to 40 units = 121.96 – 100.35 = 21.61 hrs

8. a) Describe decision making under certainty with examples. [7]

b) Explain the characteristics of responsibility accounting. [7]

Answer:
a) Decision making is about selecting the best alternative from among an array of alternatives. The
‘best’ alternative refers to that particular alternative which helps a firm to maximise its profit or
minimise its cost. In decision theory, the alternatives are referred to as acts and the possible
events are referred to as states of nature (outcomes of a random process).
The condition of certainty implies that the future is known and thus the probability of happening/
not happening of an event is one.

If the decision maker is certain as regards to the probability of happening/ not happening of an
outcome, he is said to operate under a condition of certainty. On the contrary, if the decision
maker has imperfect information or no information about the happening/ or not happening of an
event he is said to operate under conditions of uncertainty or risk. Thus it may be stated that in
the realm of decision making, under the condition of certainty, each action will lead invariably
to a specific outcome. In this situation, only one state of nature exists and its probability is one.

Example:
Mr. Pratap is considering setting up his stall in the playground on the evening of a particular day,
say 20th April 2024. He has the option of selling ice creams or coffee. He has the option of
buying Ice creams from a whole seller @ ₹56 each and selling them for @ ₹60 each. Thus he
would make a profit of ₹4 on each Ice cream cone. On a sunny day he sales 200 cones, but if it
is a rainy day then sales fall and thus he can sell only 80 cones. On the contrary, he can sell
coffee whereby he can make a profit of ₹6 per cup. On a sunny day he sales 100 cones, but if it
is a rainy day then sales increase and thus he can sell 160 cups.
This can be represented in the following pay off matrix:

Particulars States of Nature

Acts Sunny Day Rainy Day
Sale Ice Cream ₹ 800 ₹ 320
Sale Coffee ₹ 600 ₹ 960
Now, on the morning of 20th August 2024 he wakes up and find that it has been raining from the

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Directorate of Studies, The Institute of Cost Accountants of India
 INTERMEDIATE EXAMINATION SET - 2
MODEL ANSWERS TERM – DECEMBER 2024
PAPER – 12 SYLLABUS 2022
MANAGEMENT ACCOUNTING

previous day night and for clarification he calls the met office and they confirm that it would rain
for the whole day. Thus he faces a situation of certainty as there is only one state of nature and
that is it being a rainy day. Thus his decision whether he would sell Ice cream or Coffee is based
on one certain information and thus the above payoff matrix may be reduced to one with a single
state of nature (Rainy Day).

Particulars States of Nature

Acts Rainy Day
Sale Ice Cream ₹ 320
Sale Coffee ₹ 960
Thus Mr. Pratap is better off if he sales Coffee on 20th April 2024, at the playground as the payoff
(₹960) from selling coffee is higher than the payoff from selling ice cream. This is particularly
because of the fact that it is known with certainty that the 20th April 2024 would be a rainy day.

b) Characteristics of responsibility reporting are: -

 Reports should fit the organization chart, that is, the report should be addressed to the
individual responsible for the items covered by it, who, in turn, will be able to control those
costs under his jurisdiction. Managers must be educated to use the results of the reporting
system.
 Report should be prompt and timely. Prompt issuance of a report requires that cost records
be organized so that information is available when it is needed.
 Reports should be issued with regularity. Promptness and regularity are closely tied up with
mechanical aids used to assemble and issue reports.
 Reports should be easy to understand. Often they contain accounting terminology that
managers with little or no accounting training find difficult to understand, and vital
information may be incorrectly communicated. Therefore, accounting terms should be
explained or modified to fit the user. Top management should have some knowledge of the
kind of items chargeable to an account as well as the methods used to compute overhead
rates, make cost allocations and analyze variances.
 Reports should convey sufficient but not excessive details. The amount and nature of the
details depend largely on the management level receiving the report. Management reports
should neither be flooded with immaterial facts nor so condensed that management lacks
vital information essential to carrying out its responsibilities.
 Reports should give comparative figures, i.e., a comparison of actual with budgeted figures
or of predetermined standards with actual results and the isolation of variances.
 Reports should be analytical. Analysis of underlying papers, such as time tickets, scraps
tickets, work orders, and materials requisitions, provide reasons for poor performance
which might have been due to power failure, machine breakdown, an inefficient operator,
poor quality of materials, or many other similar factors.
 Reports for operating management should, if possible, be stated in physical units as well as

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Directorate of Studies, The Institute of Cost Accountants of India
 INTERMEDIATE EXAMINATION SET - 2
MODEL ANSWERS TERM – DECEMBER 2024
PAPER – 12 SYLLABUS 2022
MANAGEMENT ACCOUNTING

in terms of money since monetary information may give a foreman not trained in the
language of the accountant a certain amount of difficulty.
 Reports may tend to highlight departmental efficiencies and inefficiencies, results achieved
future goals or targets.

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Directorate of Studies, The Institute of Cost Accountants of India