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Cost and Management Accounting
Jun 2026 Examination
Q1.
A home appliance manufacturing company is preparing a cost sheet to analyze the
production cost of its newly launched electric kettles. During the month of
April 2026, the company produced 5,000 units. The following cost information is
available: Direct Materials Rs.3,00,000; Direct Labour Rs.2,00,000; Direct
Expenses Rs.50,000; Factory Rent Rs.60,000; Factory Power and Fuel Rs.40,000;
Office and Administrative Expenses Rs.70,000; Selling and Distribution Expenses
Rs.80,000. The company desires a profit of 20% on Cost. Required: a) Prepare a
Cost Sheet showing Prime Cost, Factory Cost, Cost of Production, Total Cost
(Cost of Sales). b) Calculate the Selling Price per Unit if profit is 20% on
total cost. (10 Marks)
Ans
1.
Introduction
A cost
sheet is a structured statement that classifies and accumulates all costs
incurred during the production and sale of a product. It helps management
understand cost behavior at each stage of the production cycle and provides the
basis for pricing decisions. For the electric kettle manufacturing company,
preparing a cost sheet for April 2026 will reveal how resources are consumed
across production, administration, and distribution, and will support the
setting of a selling price that ensures the desired profit level is achieved
Q2
(A). A fast-growing electric scooter company has recently expanded production
due to increasing demand. However, the CEO notices that despite higher sales,
overall profitability is not improving significantly. The finance team suggests
implementing budgeting, variance analysis, and performance reports to better
understand cost behavior and operational efficiency. Explain how Management
Accounting techniques can help the company improve planning, cost control, and
strategic decision-making in this situation. Support your explanation with
relevant examples. (5 Marks)
Ans
2(A).
Introduction
When a
company's sales grow but profits do not, the root cause is almost always a cost
management problem rather than a revenue problem. For an electric scooter
company scaling rapidly, expanding production without a corresponding
improvement in cost discipline creates a situation where higher volumes simply
amplify existing inefficiencies. Management accounting techniques provide the
visibility and control mechanisms needed to diagnose the problem and
Q2
(B). A consumer electronics company producing Bluetooth headphones reported
different profit figures under Marginal Costing and Absorption Costing during
the same financial period. The finance manager observed that production was
higher than sales, resulting in unsold inventory at the end of the period. The
management wants to understand why profit figures differ under the two costing
methods. Explain how Marginal Costing and Absorption Costing treat fixed
manufacturing overheads differently, and how this difference leads to variation
in reported profit when production exceeds sales. (5 Marks)
Ans
2(B).
Introduction
The
reporting of different profit figures under Marginal Costing and Absorption
Costing for the same period is not an error but a consequence of how each
method treats fixed manufacturing overheads. When production exceeds sales and
closing inventory builds up, the two methods diverge in profitability because
they treat the period's fixed costs differently in relation to that unsold
inventory.
Concept
and
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