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

Sharma Components Ltd budgeted for 10,000 units: direct material ₹6 per unit, direct labour ₹4 per unit, variable overhead ₹2 per unit (all variable) and fixed overhead ₹60,000 in total. Selling price is ₹20 per unit. What is the flexible budget total cost for an activity level of 12,000 units?

The flexible budget cost at 12,000 units is ₹2,04,000. Variable cost of ₹12 per unit gives ₹1,44,000, and fixed overhead stays constant at ₹60,000. Treating fixed overhead as variable would wrongly give ₹2,16,000.

  1. A₹2,04,000Correct
  2. B₹2,16,000
  3. C₹1,44,000
  4. D₹1,80,000

Explanation

Variable cost per unit = 6 + 4 + 2 = ₹12, so for 12,000 units it is ₹1,44,000. Fixed overhead stays at ₹60,000, giving a total of ₹2,04,000. Scaling the whole budgeted cost of ₹1,80,000 by 1.2 gives ₹2,16,000, which wrongly treats fixed cost as variable.

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