CAF-5 · Chapter 17

Mixed Practice Challenge I MCQs with Answers

20 multiple-choice questions on Mixed Practice Challenge I for CAF-5 Management Accounting. Try each one before revealing the answer and explanation.

1. Question 1

   (Standard Costing & Learning Curve) A company is introducing a new product and standard costs must be set. The first unit is expected to take 100 labour hours. The workforce is expected to follow an 80% learning curve. The standard labour rate is Rs. 50 per hour. During the first month, the company produces exactly 4 units, but the total actual labour hours worked were 270 hours. What is the Labour Efficiency Variance for the month?

   • A) Rs. 700 Adverse
   • B) Rs. 2,500 Adverse
   • C) Rs. 700 Favourable
   • D) Rs. 500 Adverse
   Show answer & explanation

   Answer: A) Rs. 700 Adverse

   Calculate the standard time for 4 units using the learning curve: Y=ax^b. b for 80% = log(0.8)/log(2)=-0.3219. Y=100*4^-0.3219 = 100*0.64 = 64 hours (Cumulative average time per unit). Total standard hours allowed for 4 units = 64*4 = 256 hours. Actual hours taken = 270 hours. Variance = (Standard Hours - Actual Hours) * Standard Rate = (256 - 270) * Rs. 50 = -Rs. 700 (Adverse, as actual time exceeded standard).

2. Question 2

   (Relevant Costing & Joint Products) Products Alpha and Beta are joint products emerging at a split-off point with total joint costs of Rs. 200,000. Product Alpha can be sold at the split-off point for Rs. 100,000. Alternatively, it can be processed further and sold for Rs. 125,000. The further processing department incurs costs of Rs. 40,000, which includes Rs. 10,000 of general factory overheads absorbed based on machine hours. What is the financially optimal decision regarding Product Alpha?

   • A) Process further, as it yields an incremental profit of Rs. 15,000.
   • B) Sell at split-off, as further processing yields an incremental loss of Rs. 5,000.
   • C) Process further, as the final sales value exceeds the relevant processing costs by Rs. 85,000.
   • D) Sell at split-off, as the joint costs allocated to Alpha exceed its final sales value.
   Show answer & explanation

   Answer: B) Sell at split-off, as further processing yields an incremental loss of Rs. 5,000.

   Joint costs (Rs. 200,000) are sunk and irrelevant. Incremental Revenue = Rs. 125,000 (Final) - Rs. 100,000 (Split-off) = Rs. 25,000. Incremental Cost = Total further processing (Rs. 40,000) - Absorbed general overheads (Rs. 10,000 non-cash/unavoidable) = Rs. 30,000 relevant cost. Incremental Profit = 25,000 - 30,000 = (Rs. 5,000) Loss. It is better to sell at split-off.

3. Question 3

   (CVP Analysis & Limiting Factor) A company produces two products, X and Y. Product X yields a contribution of Rs. 40 per unit and requires 2 machine hours. Product Y yields a contribution of Rs. 50 per unit and requires 5 machine hours. Fixed costs are Rs. 100,000. Market demand for both products is unlimited, but the factory is restricted to a maximum of 4,000 machine hours. If the company aims to maximize profit, what will be the net financial result?

   • A) Net Profit of Rs. 80,000
   • B) Net Profit of Rs. 60,000
   • C) Net Loss of Rs. 20,000
   • D) Net Loss of Rs. 60,000
   Show answer & explanation

   Answer: C) Net Loss of Rs. 20,000

   Rank by limiting factor (Machine Hours). X: Rs. 40 / 2 hrs = Rs. 20 per hour. Y: Rs. 50 / 5 hrs = Rs. 10 per hour. Produce X to maximize profit. 4,000 hours / 2 hrs = 2,000 units of X. Total Contribution = 2,000 units * Rs. 40 = Rs. 80,000. Net Profit = Contribution (80,000) - Fixed Costs (100,000) = (Rs. 20,000) Loss.

4. Question 4

   (Marginal vs. Absorption Costing & Inventory Flow) A manufacturing firm has no opening inventory. During the year, it produced 10,000 units and sold 8,000 units. The variable production cost is Rs. 50 per unit, and total fixed production overheads are Rs. 200,000. If the net profit calculated under the marginal costing system is Rs. 150,000, what would be the net profit under an absorption costing system?

   • A) Rs. 190,000
   • B) Rs. 110,000
   • C) Rs. 150,000
   • D) Rs. 250,000
   Show answer & explanation

   Answer: A) Rs. 190,000

   Fixed Overhead Absorption Rate (OAR) = Rs. 200,000 / 10,000 units = Rs. 20 per unit. Inventory change = Production (10,000) - Sales (8,000) = +2,000 units. Difference in profit = Change in inventory * OAR = 2,000 * Rs. 20 = Rs. 40,000. Because production > sales, Absorption Profit is higher. Absorption Profit = Marginal Profit (150,000) + 40,000 = Rs. 190,000.

5. Question 5

   (Target Costing & Pricing) A company intends to launch a new product with a highly competitive target selling price of Rs. 500. The board of directors mandates a target profit margin of 20% on cost. Currently, the expected actual cost to manufacture the product is Rs. 430. What is the Target Cost Gap?

   • A) Rs. 30.00
   • B) Rs. 13.33
   • C) Rs. 16.67
   • D) Rs. 0 (The expected cost is below the target cost)
   Show answer & explanation

   Answer: B) Rs. 13.33

   The required margin is 20% on cost, meaning Sales = Cost * 1.20. Target Cost = Target Sales / 1.20 = Rs. 500 / 1.20 = Rs. 416.67. Cost Gap = Expected Cost (Rs. 430) - Target Cost (416.67) = Rs. 13.33.

6. Question 6

   (Process Costing & Abnormal Loss) In Process 1, 5,000 kg of materials were input at a total cost of Rs. 50,000. Conversion costs incurred were Rs. 30,000. The normal loss is strictly estimated at 10% of the input, and the scrap value of the loss is Rs. 5 per kg. At the end of the period, the actual good output was exactly 4,400 kg. What is the value of the abnormal loss to be charged to the costing P&L?

   • A) Rs. 1,722
   • B) Rs. 1,777
   • C) Rs. 2,222
   • D) Rs. 500
   Show answer & explanation

   Answer: A) Rs. 1,722

   Normal loss = 10% of 5,000 = 500 kg. Expected output = 4,500 kg. Total Cost = 50k (Mat) + 30k (Conv) = Rs. 80,000. Scrap of normal loss = 500 * 5 = Rs. 2,500. Net Cost = 80,000 - 2,500 = Rs. 77,500. Cost per Equivalent Unit = 77,500 / 4,500 expected units = Rs. 17.222/kg. Actual output is 4,400, meaning Abnormal Loss is 100 kg. Value = 100 kg * 17.222 = Rs. 1,722.

7. Question 7

   (Inventory Management & Safety Stock) A company’s annual demand for a component is 120,000 units (assume 12 equal months). The cost of placing an order is Rs. 500, and the annual holding cost per unit is Rs. 1.20. The supplier’s lead time is strictly 1 month. If management decides to hold a safety stock of 2,000 units to hedge against demand spikes, what is the Re-Order Level (ROL)?

   • A) 10,000 units
   • B) 12,000 units
   • C) 7,000 units
   • D) 2,000 units
   Show answer & explanation

   Answer: B) 12,000 units

   Average monthly demand = 120,000 / 12 = 10,000 units. Re-Order Level (ROL) = (Average Demand * Average Lead Time) + Safety Stock. ROL = (10,000 * 1 month) + 2,000 = 12,000 units.

8. Question 8

   (Overheads & Simultaneous Equations) Service Department X incurs initial overheads of Rs. 40,000 and receives 20% of Service Department Y's costs. Service Department Y incurs initial overheads of Rs. 30,000 and receives 10% of Service Department X's costs. Using the simultaneous equation method, what are the total overheads of Department X before final apportionment to production?

   • A) Rs. 46,000
   • B) Rs. 46,939
   • C) Rs. 45,800
   • D) Rs. 47,200
   Show answer & explanation

   Answer: B) Rs. 46,939

   Equation 1: X = 40,000 + 0.2Y. Equation 2: Y = 30,000 + 0.1X. Substitute Y into Equation 1: X = 40,000 + 0.2(30,000 + 0.1X). X = 40,000 + 6,000 + 0.02X. 0.98X = 46,000. X = 46,000 / 0.98 = Rs. 46,938.77 (rounded to 46,939).

9. Question 9

   (Variance Analysis: Mix & Yield) A product requires a standard mix of two materials: 60% of Material A (Std price Rs. 10/kg) and 40% of Material B (Std price Rs. 15/kg). During the period, 1,000 kg of materials were input into the process in the following actual mix: 700 kg of Material A and 300 kg of Material B. What is the Material Mix Variance?

   • A) Rs. 500 Favourable
   • B) Rs. 500 Adverse
   • C) Rs. 1,000 Favourable
   • D) Rs. 1,500 Favourable
   Show answer & explanation

   Answer: A) Rs. 500 Favourable

   Standard mix for actual input (1,000 kg): Mat A = 600 kg, Mat B = 400 kg. Actual mix used: Mat A = 700 kg, Mat B = 300 kg. Difference: Mat A used 100 kg MORE (Adverse). Mat B used 100 kg LESS (Favourable). Variance A = -100 kg * Rs. 10 = -Rs. 1,000. Variance B = +100 kg * Rs. 15 = +Rs. 1,500. Net Mix Variance = 1,500 (Fav) - 1,000 (Adv) = Rs. 500 Favourable. (Because they used more of the cheaper material).

10. Question 10

    (Relevant Costing & Non-Continuous Materials) A special contract requires 500 kg of Material Z. The company currently holds 300 kg of Material Z in inventory, purchased years ago at Rs. 12/kg. Material Z is no longer in regular use and has no alternative use other than being sold as scrap for Rs. 10/kg. The current market replacement cost of Material Z is Rs. 15/kg. What is the total relevant material cost for the 500 kg needed for this contract?

    • A) Rs. 7,500
    • B) Rs. 6,600
    • C) Rs. 6,000
    • D) Rs. 4,500
    Show answer & explanation

    Answer: C) Rs. 6,000

    Total needed is 500 kg. For the 300 kg in inventory (no alternative use), the relevant cost is the opportunity cost of lost scrap value: 300 kg * Rs. 10 = Rs. 3,000. For the remaining 200 kg, the company must buy it at replacement cost: 200 kg * Rs. 15 = Rs. 3,000. Total relevant cost = 3,000 + 3,000 = Rs. 6,000.

11. Question 11

    (ABC vs. Traditional Costing) A factory uses traditional absorption based on machine hours. Total overheads are Rs. 500,000 and total machine hours are 10,000. Under an ABC analysis, it is discovered that Rs. 200,000 of the total overhead is strictly driven by machine setups (total factory setups = 200), and the remaining Rs. 300,000 is driven by machine hours. Product K uses 2,000 machine hours and requires 50 setups. What is the difference in the overhead allocated to Product K when shifting from Traditional to ABC?

    • A) Rs. 10,000 higher under ABC
    • B) Rs. 10,000 lower under ABC
    • C) Rs. 20,000 higher under ABC
    • D) No difference
    Show answer & explanation

    Answer: A) Rs. 10,000 higher under ABC

    Under Traditional: Blanket Rate = 500k / 10k hrs = Rs. 50/hr. K's allocation = 2,000 hrs * 50 = Rs. 100,000. Under ABC: Setup Rate = 200,000 / 200 = Rs. 1,000/setup. Machine Rate = 300,000 / 10,000 = Rs. 30/hr. K's allocation = (50 setups * 1,000) + (2,000 hrs * 30) = 50,000 + 60,000 = Rs. 110,000. Difference = 110k (ABC) - 100k (Trad) = Rs. 10,000 higher under ABC.

12. Question 12

    (Decision Making: Make or Buy with Limiting Factor) A company lacks sufficient machine hours to meet demand and must outsource one of its components. Component A costs Rs. 40 to make (requiring 2 machine hours) and Rs. 50 to buy. Component B costs Rs. 60 to make (requiring 4 machine hours) and Rs. 75 to buy. To minimize the financial penalty, which component should be outsourced first?

    • A) Component A, because its external purchase price is lower.
    • B) Component A, because it saves more machine hours.
    • C) Component B, because the extra cost per machine hour saved is lower.
    • D) Component B, because the absolute savings to make is higher.
    Show answer & explanation

    Answer: C) Component B, because the extra cost per machine hour saved is lower.

    Extra cost to buy Component A = 50 - 40 = Rs. 10. Savings = 2 hours. Extra cost per hour saved = 10 / 2 = Rs. 5/hr. Extra cost to buy Component B = 75 - 60 = Rs. 15. Savings = 4 hours. Extra cost per hour saved = 15 / 4 = Rs. 3.75/hr. Outsourcing B yields a smaller financial penalty per scarce hour saved.

13. Question 13

    (CVP Analysis & Multi-Product Break-even) A company sells a fixed bundle of 2 units of Product A and 1 unit of Product B. Product A has a selling price of Rs. 50 and a variable cost of Rs. 30. Product B has a selling price of Rs. 100 and a variable cost of Rs. 60. Total fixed costs are Rs. 200,000. If the company is currently generating Rs. 1,200,000 in total sales revenue, what is its Margin of Safety (in percentage)?

    • A) 41.67%
    • B) 60.00%
    • C) 58.33%
    • D) 75.00%
    Show answer & explanation

    Answer: C) 58.33%

    Contribution of bundle (2A + 1B) = 2(50-30) + 1(100-60) = 40 + 40 = Rs. 80. Revenue of bundle = 2(50) + 1(100) = Rs. 200. C/S Ratio = 80 / 200 = 40%. Break-even Sales = Fixed Costs (200k) / 0.40 = Rs. 500,000. Margin of Safety % = (Actual Sales - BE Sales) / Actual Sales = (1.2m - 0.5m) / 1.2m = 700k / 1.2m = 58.33%.

14. Question 14

    (Standard Costing: Working Backwards) A company uses standard absorption costing. Budgeted fixed overheads were Rs. 300,000 and budgeted production was 15,000 units. The actual fixed overheads incurred were Rs. 310,000. If the Fixed Production Overhead Volume Variance was Rs. 20,000 Adverse, what was the actual number of units produced?

    • A) 14,000 units
    • B) 16,000 units
    • C) 15,500 units
    • D) 13,500 units
    Show answer & explanation

    Answer: A) 14,000 units

    Standard OAR = Budgeted Fixed OH / Budgeted Units = 300,000 / 15,000 = Rs. 20 per unit. Volume Variance = (Actual Units - Budgeted Units) * OAR. -20,000 (Adverse) = (Actual Units - 15,000) * 20. -1,000 = Actual Units - 15,000. Actual Units = 14,000.

15. Question 15

    (Process Costing: FIFO Equivalent Units) At the start of the month, Work-In-Process was 2,000 units (60% complete as to conversion). During the month, 10,000 units were started. At the end of the month, 3,000 units remained in WIP (40% complete as to conversion). Assuming FIFO is used and materials are added at the beginning of the process, what are the Equivalent Units of Production for conversion costs?

    • A) 9,000 units
    • B) 8,200 units
    • C) 9,400 units
    • D) 10,000 units
    Show answer & explanation

    Answer: A) 9,000 units

    Under FIFO, equivalent units evaluate work done in the current period. Total output = 2,000 (Op) + 10,000 (Started) - 3,000 (Cl) = 9,000 units completed. Completed from Op WIP = 2,000 units * 40% (remaining to finish) = 800 EU. Started & Completed = 7,000 units * 100% = 7,000 EU. Closing WIP = 3,000 units * 40% (completed this period) = 1,200 EU. Total Conversion EU = 800 + 7,000 + 1,200 = 9,000 units.

16. Question 16

    (Job Costing & Absorption) A specific job incurs prime costs of Rs. 60,000. It requires 500 direct labour hours in Department A and 300 machine hours in Department B. Department A absorbs overheads at Rs. 25 per labour hour, and Department B absorbs overheads at Rs. 40 per machine hour. Administrative overheads are strictly absorbed at 20% of the total factory (production) cost. What is the total cost of the job?

    • A) Rs. 101,400
    • B) Rs. 84,500
    • C) Rs. 108,000
    • D) Rs. 96,500
    Show answer & explanation

    Answer: A) Rs. 101,400

    Prime Cost = Rs. 60,000. Absorbed Overheads Dept A = 500 * 25 = Rs. 12,500. Absorbed Overheads Dept B = 300 * 40 = Rs. 12,000. Total Factory Cost = 60,000 + 12,500 + 12,000 = Rs. 84,500. Administrative Overheads = 20% of 84,500 = Rs. 16,900. Total Job Cost = 84,500 + 16,900 = Rs. 101,400.

17. Question 17

    (Labour Costing: Premium Bonus Plan) A factory sets a standard time of 30 minutes to produce one unit. The standard basic wage is Rs. 80 per hour. An employee produces 100 units in a 40-hour work week. Under a premium bonus scheme, the employee is paid a bonus equal to 50% of the time saved, valued at the basic hourly rate. What is the total labour cost per unit produced by this employee?

    • A) Rs. 32.00
    • B) Rs. 36.00
    • C) Rs. 40.00
    • D) Rs. 28.00
    Show answer & explanation

    Answer: B) Rs. 36.00

    Standard time allowed for 100 units = 100 * 0.5 hours = 50 hours. Actual time taken = 40 hours. Time saved = 10 hours. Basic pay = 40 hours * Rs. 80 = Rs. 3,200. Bonus = 50% * 10 hours saved * Rs. 80 = Rs. 400. Total Earnings = 3,200 + 400 = Rs. 3,600. Labour Cost per unit = Rs. 3,600 / 100 units = Rs. 36.00.

18. Question 18

    (Decision Making: Shut Down) Product Line Z generates sales revenue of Rs. 200,000 and incurs variable costs of Rs. 140,000. It is allocated Rs. 100,000 in fixed costs, resulting in a net loss of Rs. 40,000. If Product Line Z is shut down, Rs. 30,000 of its fixed costs (specific supervisor salaries) can be completely avoided, but the remaining Rs. 70,000 (general factory rent) must still be absorbed by other products. What is the true financial impact on the company of shutting down Product Z?

    • A) Profit increases by Rs. 40,000
    • B) Profit increases by Rs. 30,000
    • C) Profit decreases by Rs. 30,000
    • D) Profit decreases by Rs. 60,000
    Show answer & explanation

    Answer: C) Profit decreases by Rs. 30,000

    Contribution margin currently generated by Z = Sales (200,000) - VC (140,000) = Rs. 60,000. If Z is dropped, the company loses 60,000 in contribution but saves 30,000 in avoidable fixed costs. The remaining 70,000 fixed costs stay. Net impact = 60,000 lost cash inflow vs 30,000 saved cash outflow = Net profit decreases by Rs. 30,000.

19. Question 19

    (Relevant Costing: Special Order Pricing with Spare Capacity Constraints) A factory produces 10,000 units currently (maximum capacity is 15,000 units). The regular selling price is Rs. 100, and variable costs are Rs. 60 per unit. A customer offers a special order for 6,000 units. To accept this entire order, the company must sacrifice some of its regular sales. What is the absolute minimum price per unit the company must charge for the special order to break even on the decision?

    • A) Rs. 60.00
    • B) Rs. 66.67
    • C) Rs. 100.00
    • D) Rs. 75.00
    Show answer & explanation

    Answer: B) Rs. 66.67

    Capacity is 15,000. Current is 10,000. Spare is 5,000. Special order is for 6,000 units. Thus, 1,000 units of regular sales must be sacrificed. Relevant Variable Cost for order = 6,000 units * Rs. 60 = Rs. 360,000. Opportunity cost of lost sales = 1,000 units * Contribution (100 - 60) = Rs. 40,000. Total Relevant Cost = 360,000 + 40,000 = Rs. 400,000. Minimum Price = 400,000 / 6,000 units = Rs. 66.67.

20. Question 20

    (Cost Flow & Interlocking Ledgers) In an interlocking cost ledger system, the opening balance of Raw Materials was Rs. 20,000. During the month, Rs. 100,000 of raw materials were purchased. At month-end, physical inventory was Rs. 15,000. During the month, Rs. 10,000 was issued as indirect materials to the factory floor, and a fire destroyed Rs. 5,000 worth of materials (abnormal loss). What is the total debit to the Work in Process (WIP) Control account for direct materials issued?

    • A) Rs. 105,000
    • B) Rs. 90,000
    • C) Rs. 95,000
    • D) Rs. 85,000
    Show answer & explanation

    Answer: B) Rs. 90,000

    Total raw materials removed from the store = Opening (20k) + Purchases (100k) - Closing (15k) = Rs. 105,000. Out of this 105k, Rs. 10,000 goes to Production Overheads (Indirect) and Rs. 5,000 goes to Abnormal Loss. Direct materials charged to WIP = Total (105k) - Indirect (10k) - Abnormal (5k) = Rs. 90,000.