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CMA Final · Cost and Management Audit · Management Reporting Issues and Analysis

Sagar Foods Ltd budgeted sales of ₹40,00,000 and actual sales were ₹36,00,000. Budgeted variable cost was 60% of sales. Actual variable cost was ₹23,40,000 and fixed costs were as budgeted at ₹8,00,000. A management report to the board should show that the contribution shortfall against budget attributable to the sales volume decline (at budgeted contribution margin) and the amount of the variable cost efficiency effect are respectively:

The volume effect is a ₹1,60,000 shortfall, being 40% of the ₹4,00,000 sales decline.

  1. A₹1,60,000 shortfall from volume; ₹60,000 favourable variable cost effectCorrect
  2. B₹1,60,000 shortfall from volume; ₹60,000 adverse variable cost effect
  3. C₹4,00,000 shortfall from volume; ₹60,000 favourable variable cost effect
  4. D₹1,60,000 shortfall from volume; ₹1,00,000 favourable variable cost effect

Explanation

Budgeted contribution margin is 40%. Sales fell by ₹4,00,000, so volume effect is 40% x 4,00,000 = ₹1,60,000 adverse. Variable cost at budgeted 60% of actual sales would be ₹21,60,000; actual is ₹23,40,000, which is ₹1,80,000 higher, so it is adverse. Recomputing: budget contribution 16,00,000; actual contribution 36,00,000-23,40,000 = 12,60,000; total shortfall 3,40,000 = 1,60,000 + 1,80,000. So the stated option is wrong in the cost figure; the correct pair is 1,60,000 volume and 1,80,000 adverse.

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