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ACCA Applied Knowledge · Management Accounting · Nature and purpose of budgeting

Dorado Ltd budgets for sales of 10,000 units each year. Last year's budget for administration costs was $240,000. Using incremental budgeting, management expects 5% general inflation on last year's costs and a one-off extra cost of $18,000 for new software, which is not subject to inflation. What is this year's incremental administration budget?

The budget is $270,000. Last year's $240,000 is increased by 5% to $252,000, and the uninflated one-off software cost of $18,000 is then added. Omitting inflation or inflating the software cost would give a wrong figure.

  1. A$252,000
  2. B$270,000
  3. C$258,000Correct
  4. D$265,200

Explanation

Inflate last year's budget: 240,000 × 1.05 = 252,000. Add the one-off software cost of 18,000 (not inflated): 252,000 + 18,000 = 270,000. Option $252,000 omits the new cost; $258,000 is 240,000 + 18,000 without inflation; $265,200 inflates the software cost too.

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