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

Sharma Textiles budgets production of 8,000 units at a total cost of Rs 6,40,000, of which Rs 2,40,000 is fixed. Using a flexible budget, what is the budgeted total cost at an activity level of 10,000 units?

The flexible budget cost is Rs 7,40,000. Variable cost is Rs 50 per unit, giving Rs 5,00,000 for 10,000 units, and fixed cost stays at Rs 2,40,000. Scaling total cost proportionally to Rs 8,00,000 is wrong because fixed cost does not change with activity.

  1. ARs 7,40,000Correct
  2. BRs 8,00,000
  3. CRs 7,60,000
  4. DRs 6,40,000

Explanation

Variable cost at 8,000 units = 6,40,000 - 2,40,000 = Rs 4,00,000, i.e. Rs 50 per unit. At 10,000 units variable cost = Rs 5,00,000. Adding fixed cost Rs 2,40,000 gives Rs 7,40,000. Rs 8,00,000 wrongly scales the total cost, treating the fixed cost as variable.

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