CAF-5 · Chapter 18

Mixed Practice Challenge II MCQs with Answers

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

1. Question 1

   (Target Costing & Learning Curve) A company is developing a new specialized product with a target selling price of Rs. 2,000 per unit. The company requires a profit margin of 25% on sales. The first batch of 50 units will take 200 labour hours in total. The workforce is expected to follow a 90% learning curve (index = -0.152) until the 4th batch is completed. If the standard labour rate is Rs. 150 per hour and other variable costs total Rs. 800 per unit, what is the expected target cost gap for the first 4 batches (200 units)?

   • A) Rs. 54,000
   • B) Rs. 4,200
   • C) Rs. 21,200
   • D) Rs. 0 (Expected cost is below target cost)
   Show answer & explanation

   Answer: D) Rs. 0 (Expected cost is below target cost)

   Target Revenue for 200 units = 200 * Rs. 2,000 = Rs. 400,000. Target Profit (25% on sales) = Rs. 100,000. Total Target Cost = Rs. 300,000. Expected Cost Calculation: Learning curve for 4 batches (200 units): Y=ax^b. Y=200 hours*4^-0.152 = 200*0.81 = 162 hours per batch. Total expected hours for 4 batches = 162*4 = 648 hours. Labour cost = 648 hours*Rs. 150 = Rs. 97,200. Variable costs = 200 units*Rs. 800 = Rs. 160,000. Total Expected Cost = 97,200 + 160,000 = Rs. 257,200. Since expected cost (257,200) is lower than Target Cost (300,000), there is NO gap.

2. Question 2

   (CVP Analysis & Multi-Product Limiting Factor) Gamma Ltd produces two products, G1 and G2. G1 has a selling price of Rs. 150, variable cost of Rs. 90, and requires 3 machine hours. G2 has a selling price of Rs. 200, variable cost of Rs. 120, and requires 5 machine hours. Total fixed costs are Rs. 300,000. The maximum market demand is 8,000 units for G1 and 6,000 units for G2. If maximum machine hours available are 39,000, what is the maximum net profit Gamma Ltd can achieve?

   • A) Rs. 360,000
   • B) Rs. 420,000
   • C) Rs. 120,000
   • D) Rs. 60,000
   Show answer & explanation

   Answer: B) Rs. 420,000

   Rank products by CM per limiting factor. G1 CM = 60; CM/hr = 60/3 = Rs. 20/hr. G2 CM = 80; CM/hr = 80/5 = Rs. 16/hr. Priority: G1 first. G1 demand = 8,000 units * 3 hrs = 24,000 hrs. Remaining hours = 39,000 - 24,000 = 15,000 hrs. G2 production = 15,000 / 5 = 3,000 units. Total CM = (8,000 * 60) + (3,000 * 80) = 480k + 240k = Rs. 720,000. Net Profit = 720k - Fixed Costs (300k) = Rs. 420,000.

3. Question 3

   (Marginal/Absorption Costing & Variance Analysis) Budgeted fixed overheads for the year were Rs. 500,000 based on a budgeted capacity of 25,000 units. Actual production was 22,000 units, while actual sales were 20,000 units. The net profit calculated under Marginal Costing was Rs. 350,000. The Fixed Overhead Expenditure Variance was Rs. 15,000 Favourable. What would be the net profit under Absorption Costing?

   • A) Rs. 390,000
   • B) Rs. 310,000
   • C) Rs. 405,000
   • D) Rs. 375,000
   Show answer & explanation

   Answer: A) Rs. 390,000

   OAR = 500k / 25k = Rs. 20/unit. Change in inventory = Production (22k) - Sales (20k) = +2,000 units. Profit diff = 2,000 * 20 = Rs. 40,000. Since inventory increased, Absorption profit is higher. Absorption Profit = 350k + 40k = Rs. 390,000. (Expenditure variance is a distractor for profit reconciliation).

4. Question 4

   (Relevant Costing & Inventory Valuation) A special contract requires 800 kg of Material Alpha. The company has 500 kg of Alpha in inventory, originally purchased for Rs. 40/kg. Alpha is used regularly in normal production. An additional 300 kg must be purchased. The current market replacement price is Rs. 55/kg. The inventory could be sold as scrap for Rs. 20/kg. What is the relevant cost of Material Alpha for this special contract?

   • A) Rs. 44,000
   • B) Rs. 36,500
   • C) Rs. 26,500
   • D) Rs. 16,000
   Show answer & explanation

   Answer: A) Rs. 44,000

   Since Material Alpha is in regular use, any quantity taken from inventory must be replaced for normal production. Therefore, historical cost and scrap value are irrelevant. The entire 800 kg must be valued at the current replacement cost: 800 kg * Rs. 55 = Rs. 44,000.

5. Question 5

   (Relevant Costing & Labour Shortage) A special order requires 500 hours of skilled labour. The workforce is currently operating at full capacity. To execute this order, workers must be diverted from normal production where they earn a contribution margin of Rs. 60 per hour. The standard wage rate is Rs. 150 per hour. Alternatively, the company can hire temporary workers at Rs. 180 per hour, but they will require an existing supervisor to spend 50 hours overseeing them. The supervisor is paid Rs. 250 per hour and has spare capacity. What is the lowest relevant cost of labour for this special order?

   • A) Rs. 105,000
   • B) Rs. 90,000
   • C) Rs. 102,500
   • D) Rs. 75,000
   Show answer & explanation

   Answer: B) Rs. 90,000

   Option 1 (Divert): CM lost + Wages = (60+150)*500 = Rs. 105,000. Option 2 (Temp): Temp wages = 500*180 = Rs. 90,000. The supervisor's cost is sunk as they have spare capacity. Lowest cost = Rs. 90,000.

6. Question 6

   (Inventory Management & Quantity Discounts) The annual demand for a raw material is 30,000 units. The ordering cost is Rs. 800 per order, and the holding cost is Rs. 12 per unit per year. The basic purchase price is Rs. 50 per unit. The supplier offers a 2% discount if the company orders in batches of 5,000 units. What is the net financial impact (savings or extra cost) of accepting the discount offer compared to ordering at the Economic Order Quantity (EOQ)?

   • A) Net savings of Rs. 8,400
   • B) Net savings of Rs. 19,200
   • C) Extra cost of Rs. 6,000
   • D) Net savings of Rs. 25,200
   Show answer & explanation

   Answer: B) Net savings of Rs. 19,200

   EOQ = sqrt(2*30,000*800/12) = 2,000 units. Total cost at EOQ: (30k/2k)*800 + (2k/2)*12 + 30k*50 = 12k + 12k + 1.5m = 1,524,000. Total cost at 5,000 batch: (30k/5k)*800 + (5k/2)*12 + 30k*49 = 4,800 + 30k + 1.47m = 1,504,800. Net savings = 1,524,000 - 1,504,800 = Rs. 19,200.

7. Question 7

   (Process Costing: Weighted Average & Variances) Opening WIP is 2,000 units (40% complete for conversion) valued at Rs. 12,000 for conversion. During the month, 12,000 units were started. Conversion costs incurred were Rs. 96,400. Closing WIP is 3,000 units (60% complete for conversion). Normal loss is 10% of total input (1,400 units). What is the cost per equivalent unit for conversion using the Weighted Average method?

   • A) Rs. 8.03
   • B) Rs. 9.51
   • C) Rs. 9.19
   • D) Rs. 10.04
   Show answer & explanation

   Answer: B) Rs. 9.51

   Total output = 2,000+12,000-1,400-3,000 = 9,600 units. EU (Conv) = 9,600 (Completed) + 1,800 (Cl WIP: 3,000*60%) = 11,400. Total Conv Cost = 12,000 + 96,400 = 108,400. Cost per EU = 108,400 / 11,400 = Rs. 9.51.

8. Question 8

   (Joint Products & By-Products with NRV) A joint process incurs Rs. 400,000 and yields 10,000 kg of M, 5,000 kg of N, and 2,000 kg of By-product B (NRV Rs. 10/kg). NRV of M is Rs. 50/kg at split-off. N needs Rs. 20/kg further processing to sell for Rs. 80/kg. Using NRV method, what Joint Cost is allocated to Product N?

   • A) Rs. 114,000
   • B) Rs. 142,500
   • C) Rs. 126,667
   • D) Rs. 150,000
   Show answer & explanation

   Answer: B) Rs. 142,500

   Net Joint Cost = 400,000 - (2,000*10) = 380,000. NRV(M) = 10k*50 = 500k. NRV(N) = 5k*(80-20) = 300k. Total NRV = 800k. Allocation to N = (300k/800k)*380,000 = Rs. 142,500.

9. Question 9

   (Job Costing & Interlocking Ledgers) Opening WIP was Rs. 40,000. During the period, materials of Rs. 150,000 and labour of Rs. 90,000 were charged. Overheads are applied at 120% of direct labour. Completed jobs transferred to finished goods were Rs. 320,000. What is the closing balance of the WIP Control Account?

   • A) Rs. 50,000
   • B) Rs. 68,000
   • C) Rs. 108,000
   • D) Rs. 120,000
   Show answer & explanation

   Answer: B) Rs. 68,000

   Total Debits = 40k (Op) + 150k (Mat) + 90k (Lab) + 108k (OH: 120% of 90k) = 388,000. Closing WIP = 388k - 320k (Transferred) = Rs. 68,000.

10. Question 10

    (CVP Analysis: Target Profit after Tax) A company sells for Rs. 800 (VC Rs. 480). Fixed costs are Rs. 1,500,000. Tax rate 30%. How many units must be sold for a profit after tax of Rs. 1,050,000?

    • A) 4,688 units
    • B) 7,969 units
    • C) 9,375 units
    • D) 8,500 units
    Show answer & explanation

    Answer: C) 9,375 units

    Target PBT = 1,050,000 / 0.7 = 1,500,000. CM per unit = 800 - 480 = 320. Units = (1.5m Fixed + 1.5m PBT) / 320 = 9,375 units.

11. Question 11

    (Standard Costing: Missing Figures & Yield Variance) A chemical process mixes Material X (Std: 60%, Rs. 20/kg) and Material Y (Std: 40%, Rs. 30/kg). Standard yield is 90% of input. During the period, 10,000 kg were input, producing 8,800 kg of good output. What is the Material Yield Variance?

    • A) Rs. 4,800 Adverse
    • B) Rs. 5,280 Adverse
    • C) Rs. 4,400 Adverse
    • D) Rs. 4,800 Favourable
    Show answer & explanation

    Answer: A) Rs. 4,800 Adverse

    Standard Yield for 10,000 kg input = 9,000 kg. Actual Yield = 8,800 kg. Yield Variance = (8,800 - 9,000) * Std Mix Cost per input kg. Std Mix Cost = (0.6*20 + 0.4*30) = Rs. 24/kg input. Variance = 200 kg * 24 = Rs. 4,800 Adverse.

12. Question 12

    (Decision Making: Shut Down) Dept Z contribution Rs. 200,000. It is allocated Rs. 280,000 fixed overheads (Rs. 150,000 avoidable). What is the net impact on overall profit if Z is shut down?

    • A) Profit will increase by Rs. 80,000
    • B) Profit will decrease by Rs. 50,000
    • C) Profit will decrease by Rs. 200,000
    • D) Profit will increase by Rs. 150,000
    Show answer & explanation

    Answer: B) Profit will decrease by Rs. 50,000

    Impact = Contribution lost vs Avoidable Fixed Costs saved = 200,000 lost - 150,000 saved = Rs. 50,000 decrease.

13. Question 13

    (Labour Variances & High Day-Rate) Std labour rate Rs. 100/hr, 2 hrs per unit. New rate Rs. 120/hr. In first month, 5,000 units produced using 9,000 actual hours. What are the Labour Efficiency and Rate Variances?

    • A) Efficiency: 100,000 Fav / Rate: 180,000 Adv
    • B) Efficiency: 120,000 Fav / Rate: 180,000 Adv
    • C) Efficiency: 100,000 Fav / Rate: 100,000 Adv
    • D) Efficiency: 120,000 Adv / Rate: 180,000 Fav
    Show answer & explanation

    Answer: A) Efficiency: 100,000 Fav / Rate: 180,000 Adv

    Efficiency = (10,000 Std hrs - 9,000 Act hrs) * 100 = 100,000 Fav. Rate = (100 Std - 120 Act) * 9,000 = 180,000 Adv.

14. Question 14

    (Activity-Based Costing & Product Profitability) Total OH Rs. 800,000 (Inspection: 300k, 600 total; Machine: 500k, 10,000 total). Product Omega uses 2,000 MH and 250 inspections. What is the difference (ABC - Traditional)?

    • A) ABC allocates Rs. 65,000 more to Omega
    • B) ABC allocates Rs. 125,000 more to Omega
    • C) ABC allocates Rs. 35,000 less to Omega
    • D) No difference
    Show answer & explanation

    Answer: A) ABC allocates Rs. 65,000 more to Omega

    Traditional: (800k/10k)*2k = 160,000. ABC: (300k/600)*250 + (500k/10k)*2k = 125,000 + 100,000 = 225,000. Diff = 225k - 160k = Rs. 65,000 higher under ABC.

15. Question 15

    (Relevant Costing & Further Processing under Capacity Constraints) Joint Product Alpha sells for Rs. 50 at split-off or Rs. 80 as Super-Alpha (incremental processing Rs. 25, 2 machine hours). Opportunity cost of MH is Rs. 4/hr (loss of contribution). Should Alpha be processed further?

    • A) Yes, because incremental revenue (Rs. 30) exceeds incremental processing cost (Rs. 25).
    • B) Yes, because the net benefit is Rs. 5 per unit.
    • C) No, because total relevant incremental cost (Rs. 33) exceeds incremental revenue (Rs. 30).
    • D) No, because joint costs must be allocated first.
    Show answer & explanation

    Answer: C) No, because total relevant incremental cost (Rs. 33) exceeds incremental revenue (Rs. 30).

    Incremental Revenue = 80 - 50 = Rs. 30. Total Incremental Cost = VC (25) + Opp Cost (2 hrs * 4 = 8) = Rs. 33. Since cost (33) > revenue (30), the processing results in a net loss of Rs. 3 per unit.

16. Question 16

    (Inventory Management: Safety Stock & Lead Time Probabilities) Consumption is 100 units/day. Lead time is normally 5 days (60%), 6 days (30%), or 7 days (10%). If ROL is set at maximum expected demand, what is the average buffer (safety) stock held?

    • A) 200 units
    • B) 150 units
    • C) 700 units
    • D) 0 units
    Show answer & explanation

    Answer: B) 150 units

    ROL = Max Demand during Lead Time = 100 * 7 = 700 units. Average Lead Time = (5*0.6 + 6*0.3 + 7*0.1) = 5.5 days. Average Demand during LT = 100 * 5.5 = 550 units. Safety Stock = ROL - Avg Demand during LT = 700 - 550 = 150 units.

17. Question 17

    (Simultaneous Equations & Factory Overheads) Dept P costs = Rs. 100,000 + 10% Q. Dept Q costs = Rs. 80,000 + 20% P. What is the total cost of Dept P?

    • A) Rs. 108,000
    • B) Rs. 110,204
    • C) Rs. 102,040
    • D) Rs. 180,000
    Show answer & explanation

    Answer: B) Rs. 110,204

    P = 100k + 0.1Q; Q = 80k + 0.2P. P = 100k + 0.1(80k + 0.2P) = 108k + 0.02P. 0.98P = 108,000. P = 110,204.

18. Question 18

    (Standard Costing: Working Backwards for Material Price) Price Variance is Rs. 12,000 Adverse. Usage Variance is Rs. 8,000 Favourable. Std cost for actual production was Rs. 200,000 (Std Qty = 10,000 kg). What was the actual price paid per kg?

    • A) Rs. 18.75
    • B) Rs. 21.25
    • C) Rs. 20.00
    • D) Rs. 19.20
    Show answer & explanation

    Answer: B) Rs. 21.25

    Std Price (SP) = 200k/10k = Rs. 20. Usage Variance = (10k - AQ) * 20 = 8,000 Fav -> 400 = 10k - AQ -> AQ = 9,600 kg. Price Variance = (20 - AP) * 9,600 = -12,000 Adv -> -1.25 = 20 - AP -> AP = Rs. 21.25.

19. Question 19

    (CVP Analysis: Margin of Safety Ratio) C/S ratio 40%. Fixed costs Rs. 600,000. Operating at Margin of Safety of 25%. What is the actual sales revenue?

    • A) Rs. 2,000,000
    • B) Rs. 1,500,000
    • C) Rs. 2,400,000
    • D) Rs. 1,875,000
    Show answer & explanation

    Answer: A) Rs. 2,000,000

    BE Sales = 600k / 0.4 = 1,500,000. MoS % = (Actual - BE) / Actual. 0.25 = (Actual - 1.5m) / Actual -> 0.75 Actual = 1.5m -> Actual Sales = Rs. 2,000,000.

20. Question 20

    (Make or Buy & Shutdown Combination) VC to make Rs. 40. Buy price Rs. 48. Making internally incurs avoidable fixed costs of Rs. 60,000 and lost rental income of Rs. 50,000. At what volume is the company indifferent?

    • A) 7,500 units
    • B) 11,000 units
    • C) 13,750 units
    • D) 6,000 units
    Show answer & explanation

    Answer: C) 13,750 units

    48Q (Buy) = 40Q (Make) + 60,000 (Fixed) + 50,000 (Opp Cost). 8Q = 110,000. Q = 13,750 units.