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CMA Foundation · Fundamentals of Financial and Cost Accounting · Meaning and Significance of Cost Accounting and its Relationship with Financial Accounting

Budhia Engineering budgeted the cost of 2,000 units at ₹150 per unit. Actual output was 2,200 units at a total actual cost of ₹3,52,000. Management uses cost control by comparing actual cost with the cost allowed for actual output. What is the variance and its nature?

The cost allowed for actual output of 2,200 units at ₹150 is ₹3,30,000. Actual cost was ₹3,52,000, so spending exceeded the allowance by ₹22,000, an adverse variance. Comparing with the original 2,000-unit budget would wrongly give ₹52,000.

  1. A₹22,000 adverseCorrect
  2. B₹22,000 favourable
  3. C₹52,000 adverse
  4. D₹8,000 favourable

Explanation

Allowed cost for actual output = 2,200 × 150 = ₹3,30,000. Actual cost is ₹3,52,000, so the variance is 3,52,000 − 3,30,000 = ₹22,000 adverse. The ₹52,000 option compares with the budgeted output cost of ₹3,00,000, ignoring the volume change.

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