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

Pooja Garments has a flexible budget showing total cost of Rs 3,10,000 at 8,000 units and Rs 3,50,000 at 10,000 units. Selling price is Rs 40 per unit. If actual activity is 9,000 units and actual total cost is Rs 3,40,000, what is the variance between the flexed budget cost and actual cost, and its nature?

The variance is Rs 10,000 adverse. The cost behaviour is Rs 20 variable per unit and Rs 1,50,000 fixed, so the flexed budget at 9,000 units is Rs 3,30,000. Actual cost of Rs 3,40,000 is higher by Rs 10,000, hence adverse.

  1. ARs 10,000 adverseCorrect
  2. BRs 10,000 favourable
  3. CRs 20,000 adverse
  4. DRs 30,000 adverse

Explanation

Variable cost per unit = (3,50,000 - 3,10,000) / (10,000 - 8,000) = Rs 20. Fixed cost = 3,50,000 - 2,00,000 = Rs 1,50,000. Flexed cost at 9,000 units = 1,50,000 + 1,80,000 = Rs 3,30,000. Actual 3,40,000 exceeds this by Rs 10,000, which is adverse. Check at 8,000: 1,50,000 + 1,60,000 = 3,10,000.

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