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

A plant's total cost at 60% capacity is ₹9,80,000 and at 80% capacity is ₹11,40,000. Fixed cost stays constant and variable cost varies in direct proportion to capacity. What is the budgeted total cost at 90% capacity?

The budgeted cost at 90% capacity is ₹12,20,000. The cost rise of ₹1,60,000 for 20% capacity means variable cost is ₹80,000 per 10%, giving fixed cost of ₹5,00,000. Adding ₹80,000 to the 80% cost, or computing fixed plus variable at 90%, gives the same figure.

  1. A₹11,80,000
  2. B₹12,20,000Correct
  3. C₹12,82,500
  4. D₹14,70,000

Explanation

Variable cost for 20% extra capacity = 11,40,000 - 9,80,000 = 1,60,000, so 10% capacity costs ₹80,000. Variable cost at 60% = 4,80,000, so fixed cost = 9,80,000 - 4,80,000 = 5,00,000. At 90%, variable = 7,20,000, so total = ₹12,20,000. Scaling the whole 80% cost by 90/80 gives ₹12,82,500, which wrongly treats fixed cost as variable.

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