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CMA Intermediate · Cost Accounting · Budget and Budgetary Control

A municipal corporation uses performance budgeting for its road repair programme. Budgeted target: 80 km of road at a standard cost of Rs 2,50,000 per km. Actual: 72 km repaired at a total cost of Rs 1,94,40,000. What is the variance between the flexed budget for actual output and the actual cost, and its nature?

The variance is Rs 14,40,000 adverse. The budget flexed to the actual 72 km is Rs 1,80,00,000 (72 x Rs 2,50,000), while actual cost was Rs 1,94,40,000. Comparing against the original Rs 2,00,00,000 budget would wrongly show a favourable figure because the output was lower.

  1. ARs 14,40,000 adverseCorrect
  2. BRs 5,60,000 adverse
  3. CRs 14,40,000 favourable
  4. DRs 5,60,000 favourable

Explanation

Flexed budget = 72 km x Rs 2,50,000 = Rs 1,80,00,000. Actual cost Rs 1,94,40,000 exceeds this by Rs 14,40,000, so it is adverse. Comparing with the original budget (80 x 2,50,000 = Rs 2,00,00,000) would wrongly show Rs 5,60,000 favourable, because output was lower.

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