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CMA Intermediate · Cost Accounting · Budget and Budgetary Control

Gupta Industries budgeted 20,000 units with sales Rs 40,00,000, variable cost Rs 22,00,000 and fixed cost Rs 8,00,000. Actual output and sales were 18,000 units at the budgeted price and unit variable cost, with actual fixed cost Rs 8,40,000. What is the actual profit compared with the flexible budget profit at 18,000 units?

Actual profit is Rs 40,000 lower than the flexible budget profit. At 18,000 units the flexible budget profit is Rs 8,20,000, while actual profit is Rs 7,80,000, because fixed cost exceeded the budgeted Rs 8,00,000 by Rs 40,000.

  1. AActual Rs 40,000 lower than flexible budget profitCorrect
  2. BActual Rs 40,000 higher than flexible budget profit
  3. CActual Rs 1,00,000 lower than flexible budget profit
  4. DActual equal to flexible budget profit

Explanation

Price = Rs 200; variable cost = Rs 110 per unit. Flexible profit at 18,000 = 18,000 x 90 - 8,00,000 = 16,20,000 - 8,00,000 = Rs 8,20,000. Actual profit = 16,20,000 - 8,40,000 = Rs 7,80,000, so Rs 40,000 lower, from the fixed cost overrun. Comparing with the original budget profit (Rs 10,00,000) would wrongly give a Rs 2,20,000 gap.

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