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

Aarav Ltd. has a fixed overhead budget of Rs 2,40,000 per month at 80% capacity, with variable overhead of Rs 3 per unit. At 100% capacity the plant makes 10,000 units per month. A flexible budget is prepared for 90% capacity. What is the total overhead budgeted?

The flexible budget at 90% capacity totals Rs 2,67,000. Fixed overhead stays at Rs 2,40,000, and variable overhead is 9,000 units at Rs 3, giving Rs 27,000. Fixed costs do not change with activity in the relevant range.

  1. ARs 2,67,000Correct
  2. BRs 2,70,000
  3. CRs 2,40,000
  4. DRs 2,64,000

Explanation

Fixed overhead stays at Rs 2,40,000 within the relevant range. Output at 90% = 9,000 units. Variable overhead = 9,000 x 3 = Rs 27,000. Total = 2,40,000 + 27,000 = Rs 2,67,000. Rs 2,70,000 wrongly scales fixed cost up with activity.

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