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CA Intermediate · Cost and Management Accounting · Budgets and Budgetary Control

A factory budgeted variable overhead of ₹4 per machine hour and fixed overhead of ₹90,000 for a period at 8,000 machine hours. Actual machine hours were 9,000 and actual overhead incurred was ₹1,30,000. Compared with the flexed budget for actual hours, the overhead variance is:

The variance is ₹4,000 adverse. The flexed budget for 9,000 hours is ₹36,000 variable plus ₹90,000 fixed, totalling ₹1,26,000. Actual overhead of ₹1,30,000 is higher by ₹4,000, so it is adverse.

  1. A₹4,000 adverseCorrect
  2. B₹8,000 adverse
  3. C₹4,000 favourable
  4. D₹7,250 favourable

Explanation

Flexed budget at 9,000 hours = variable 9,000 × 4 = 36,000 plus fixed 90,000 = ₹1,26,000. Actual overhead ₹1,30,000 exceeds this by ₹4,000, so the variance is adverse. Comparing with the original budget of ₹1,22,000 would give ₹8,000 adverse, which ignores the change in activity.

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