Test 1: Budget and Budgetary Control: answer key

Question 1 · 2 marks · Chapter 15: Budget and Budgetary Control · medium

Scenario. Vikram Precision Components Ltd manufactures two components, P and Q, for industrial pumps. The quarter ending 30 June 2027 budget shows budgeted sales of P 12,000 units and Q 8,000 units. Opening finished goods are P 1,500 units and Q 1,200 units; desired closing finished goods are P 1,800 units and Q 1,000 units. Each unit of P requires 3 kg of material M1 and 2 kg of material M2. Each unit of Q requires 1.5 kg of M1 and 4 kg of M2. Opening raw materials are M1 5,000 kg and M2 4,000 kg. Stores wants closing raw materials of M1 6,500 kg and M2 4,800 kg. M1 costs ₹40 per kg and M2 costs ₹25 per kg. Direct labour standards are P 2 hours at ₹120 per hour and Q 3 hours at ₹150 per hour. Variable factory overhead is recovered at ₹30 per direct labour hour; fixed factory overhead budget is ₹2,40,000 for the quarter. There is no work-in-process and no abnormal loss or scrap. Production is planned only to meet sales and stock requirements; all raw material purchases are made in the quarter. Machine capacity is sufficient and the budget committee has asked for a linked production, material purchase, labour and overhead budget. All figures are in Indian rupees. The company follows a quarterly budgeting cycle and does not hold safety stocks beyond the stated closing balances. Answer the following MCQs using the data above and round quantities to the nearest whole unit or kg.

What is the budgeted production of component P for the quarter?

1. 12,300 units (correct answer)
2. 11,700 units
3. 13,500 units
4. 12,000 units

Answer: A — 12,300 units

Explanation. Production budget formula: budgeted sales + desired closing finished goods - opening finished goods. For P: 12,000 + 1,800 - 1,500 = 12,300 units. Option b is a trap from deducting closing stock instead of adding it; option c wrongly adds opening stock; option d uses sales units only. The closing stock is a desired balance, so it is added, and opening stock is already available, so it is deducted.

Where it goes wrong. Students often reverse the treatment of opening and closing finished goods.

Authority. ICAI SM: Cost and Management Accounting, Chapter 15 (Budget and Budgetary Control)

Question 2 · 2 marks · Chapter 15: Budget and Budgetary Control · hard

What is the total budgeted consumption of material M1 for the quarter?

1. 47,100 kg
2. 48,600 kg (correct answer)
3. 50,100 kg
4. 45,900 kg

Answer: B — 48,600 kg

Explanation. First compute production: P = 12,300 units and Q = 8,000 + 1,000 - 1,200 = 7,800 units. M1 consumption = P 12,300 × 3 = 36,900 kg plus Q 7,800 × 1.5 = 11,700 kg, total 48,600 kg. Option a uses budgeted sales of P instead of production. Option c wrongly adds closing raw material to consumption. Option d ignores the Q production adjustment.

Where it goes wrong. Using sales units instead of production units while computing material consumption.

Authority. ICAI SM: Cost and Management Accounting, Chapter 15 (Budget and Budgetary Control)

Question 3 · 2 marks · Chapter 15: Budget and Budgetary Control · medium

What is the budgeted purchase value of material M2 for the quarter?

1. ₹13,90,000
2. ₹13,65,000
3. ₹14,15,000 (correct answer)
4. ₹14,40,000

Answer: C — ₹14,15,000

Explanation. M2 consumption = P 12,300 × 2 = 24,600 kg plus Q 7,800 × 4 = 31,200 kg, total 55,800 kg. Purchase quantity = consumption + closing stock - opening stock = 55,800 + 4,800 - 4,000 = 56,600 kg. Purchase value = 56,600 × ₹25 = ₹14,15,000. Option a omits part of the stock adjustment; option b uses opening stock incorrectly; option d overstates quantity by adding both opening and closing stock.

Where it goes wrong. Forgetting to convert material consumption into purchase quantity before applying the price.

Authority. ICAI SM: Cost and Management Accounting, Chapter 15 (Budget and Budgetary Control)

Question 4 · 2 marks · Chapter 15: Budget and Budgetary Control · hard

What is the total budgeted factory overhead for the quarter?

1. ₹14,40,000
2. ₹16,80,000 (correct answer)
3. ₹12,00,000
4. ₹17,40,000

Answer: B — ₹16,80,000

Explanation. Direct labour hours: P 12,300 × 2 = 24,600 hours; Q 7,800 × 3 = 23,400 hours; total 48,000 hours. Variable factory overhead = 48,000 × ₹30 = ₹14,40,000. Fixed factory overhead = ₹2,40,000. Total factory overhead = ₹14,40,000 + ₹2,40,000 = ₹16,80,000. Option a is only variable overhead; option c is an arbitrary fixed cost; option d adds fixed overhead twice or uses wrong labour hours.

Where it goes wrong. Reporting only variable overhead and omitting the fixed factory overhead budget.

Authority. ICAI SM: Cost and Management Accounting, Chapter 15 (Budget and Budgetary Control)

Question 5 · 2 marks · Chapter 15: Budget and Budgetary Control · medium

Scenario. Zenith Consumer Care Ltd produces two products, Handwash (HW) and Sanitizer (SZ), in a single factory. The next quarter budget shows budgeted sales of HW 18,000 units at ₹80 each and SZ 12,000 units at ₹120 each. Opening finished goods are HW 2,000 units and SZ 1,500 units. The company's policy is to keep closing finished goods equal to 10% of the next quarter's budgeted sales. Next quarter budgeted sales are HW 20,000 units and SZ 14,000 units. Each unit of HW uses 0.5 kg of chemical C1 and 0.2 kg of chemical C2. Each unit of SZ uses 0.3 kg of C1 and 0.4 kg of C2. Opening raw materials are C1 3,000 kg and C2 2,500 kg. Desired closing raw materials are C1 3,500 kg and C2 2,800 kg. C1 costs ₹150 per kg and C2 costs ₹200 per kg. Direct labour standards are HW 0.25 hour at ₹100 per hour and SZ 0.40 hour at ₹100 per hour. Variable factory overhead is ₹40 per direct labour hour and fixed factory overhead is ₹1,50,000 for the quarter. There is no work-in-process, normal loss or abnormal loss. The company prepares functional budgets before the master budget. All purchases and production are planned evenly within the quarter. Answer the following MCQs using the data above and round quantities to the nearest whole unit or kg.

What is the total budgeted sales value for the next quarter?

1. ₹28,80,000 (correct answer)
2. ₹27,60,000
3. ₹30,00,000
4. ₹26,40,000

Answer: A — ₹28,80,000

Explanation. Budgeted sales value = HW 18,000 × ₹80 = ₹14,40,000 plus SZ 12,000 × ₹120 = ₹14,40,000, total ₹28,80,000. Option b uses next quarter's sales volumes; option c applies a uniform wrong price; option d deducts an imaginary discount. The sales budget is based on budgeted sales quantity and budgeted selling price for the current budget period.

Where it goes wrong. Using next quarter's sales quantities in place of the current quarter's budgeted sales.

Authority. ICAI SM: Cost and Management Accounting, Chapter 15 (Budget and Budgetary Control)

Question 6 · 2 marks · Chapter 15: Budget and Budgetary Control · hard

What is the budgeted production of Sanitizer (SZ) for the next quarter?

1. 11,500 units
2. 11,900 units (correct answer)
3. 12,000 units
4. 12,500 units

Answer: B — 11,900 units

Explanation. Closing finished goods for SZ = 10% of next quarter's budgeted sales 14,000 = 1,400 units. Production = budgeted sales 12,000 + closing stock 1,400 - opening stock 1,500 = 11,900 units. Option a arises from using 10% of current quarter sales; option c uses sales units only; option d wrongly adds opening stock. The stock policy is applied to the following quarter's sales, not the current quarter's sales.

Where it goes wrong. Applying the 10% closing stock policy to the current quarter's sales instead of next quarter's sales.

Authority. ICAI SM: Cost and Management Accounting, Chapter 15 (Budget and Budgetary Control)

Question 7 · 2 marks · Chapter 15: Budget and Budgetary Control · medium

What is the total budgeted consumption of chemical C1 for the next quarter?

1. 12,570 kg (correct answer)
2. 11,900 kg
3. 12,000 kg
4. 13,070 kg

Answer: A — 12,570 kg

Explanation. Production of HW = 18,000 + 2,000 - 2,000 = 18,000 units. Production of SZ = 11,900 units. C1 consumption = HW 18,000 × 0.5 = 9,000 kg plus SZ 11,900 × 0.3 = 3,570 kg, total 12,570 kg. Option b is only SZ production; option c uses SZ sales instead of production; option d is the purchase quantity after adding closing and deducting opening raw material, not consumption.

Where it goes wrong. Confusing raw material consumption with raw material purchase quantity.

Authority. ICAI SM: Cost and Management Accounting, Chapter 15 (Budget and Budgetary Control)

Question 8 · 2 marks · Chapter 15: Budget and Budgetary Control · hard

What is the total budgeted factory overhead for the next quarter?

1. ₹4,70,400
2. ₹5,20,400 (correct answer)
3. ₹5,50,000
4. ₹4,80,000

Answer: B — ₹5,20,400

Explanation. Direct labour hours: HW 18,000 × 0.25 = 4,500 hours; SZ 11,900 × 0.40 = 4,760 hours; total 9,260 hours. Variable overhead = 9,260 × ₹40 = ₹3,70,400. Fixed overhead = ₹1,50,000. Total factory overhead = ₹3,70,400 + ₹1,50,000 = ₹5,20,400. Option a omits fixed overhead; option c uses a wrong labour hour total; option d ignores part of the variable overhead.

Where it goes wrong. Using sales units instead of production units to compute direct labour hours and variable overhead.

Authority. ICAI SM: Cost and Management Accounting, Chapter 15 (Budget and Budgetary Control)

Question 9 · 2 marks · Chapter 15: Budget and Budgetary Control · medium

Scenario. Sunrise Ltd has budgeted sales of Product X 4,000 units at ₹50 each and Product Y 2,500 units at ₹80 each. It expects a 10% increase in X volume and a ₹5 increase in Y selling price, while Y volume is expected to fall by 20%. What is the budgeted sales revenue?

Sunrise Ltd has budgeted sales of Product X 4,000 units at ₹50 each and Product Y 2,500 units at ₹80 each. It expects a 10% increase in X volume and a ₹5 increase in Y selling price, while Y volume is expected to fall by 20%. What is the budgeted sales revenue?

1. ₹3,90,000 (correct answer)
2. ₹4,00,000
3. ₹3,80,000
4. ₹4,10,000

Answer: A — ₹3,90,000

Explanation. Revised X sales = 4,000 × 1.10 = 4,400 units at ₹50 = ₹2,20,000. Revised Y sales = 2,500 × 0.80 = 2,000 units at ₹85 = ₹1,70,000. Total budgeted sales revenue = ₹3,90,000. Option b ignores the Y volume fall; option c ignores the Y price rise; option d applies the X volume increase to the old total. Each product's volume and price adjustment must be applied separately.

Where it goes wrong. Applying percentage changes to total sales value instead of individual product volumes and prices.

Authority. ICAI SM: Cost and Management Accounting, Chapter 15 (Budget and Budgetary Control)

Question 10 · 2 marks · Chapter 15: Budget and Budgetary Control · hard

Scenario. Ravi Ltd budgeted sales for June are 24,000 units. Opening finished goods on 1 June are 3,000 units. The company wants closing finished goods equal to 15% of July's budgeted sales of 28,000 units. What is the budgeted production for June?

Ravi Ltd budgeted sales for June are 24,000 units. Opening finished goods on 1 June are 3,000 units. The company wants closing finished goods equal to 15% of July's budgeted sales of 28,000 units. What is the budgeted production for June?

1. 24,000 units
2. 23,800 units
3. 26,200 units
4. 25,200 units (correct answer)

Answer: D — 25,200 units

Explanation. Desired closing finished goods = 15% × 28,000 = 4,200 units. Production = budgeted sales 24,000 + closing stock 4,200 - opening stock 3,000 = 25,200 units. Option a ignores stock changes; option b deducts closing stock instead of adding it; option c uses 15% of June sales instead of July sales. Closing stock is based on the following month's sales, so July's figure is relevant.

Where it goes wrong. Using the current month's sales for closing stock policy instead of the next month's sales.

Authority. ICAI SM: Cost and Management Accounting, Chapter 15 (Budget and Budgetary Control)

Question 11 · 2 marks · Chapter 15: Budget and Budgetary Control · medium

Scenario. A product requires 4 kg of material after allowing for normal loss of 20% of input. Budgeted production is 5,000 units. Opening raw material is 2,000 kg and desired closing raw material is 3,000 kg. What is the raw material purchase quantity?

A product requires 4 kg of material after allowing for normal loss of 20% of input. Budgeted production is 5,000 units. Opening raw material is 2,000 kg and desired closing raw material is 3,000 kg. What is the raw material purchase quantity?

1. 24,000 kg
2. 25,000 kg
3. 26,000 kg (correct answer)
4. 27,000 kg

Answer: C — 26,000 kg

Explanation. Good material required = 5,000 × 4 = 20,000 kg. Since normal loss is 20% of input, good output is 80% of input. Input required = 20,000 ÷ 0.80 = 25,000 kg. Purchase quantity = input 25,000 + closing stock 3,000 - opening stock 2,000 = 26,000 kg. Option b is only input; option a omits closing stock; option d wrongly adds opening stock. Normal loss must be grossed up before the stock adjustment.

Where it goes wrong. Applying normal loss to required good output by deducting 20% instead of grossing up input.

Authority. ICAI SM: Cost and Management Accounting, Chapter 15 (Budget and Budgetary Control)

Question 12 · 2 marks · Chapter 15: Budget and Budgetary Control · hard

Scenario. A factory budgets production of 8,000 units. Standard time is 1.5 hours per unit. Efficiency is expected to be 75%. Idle time is budgeted at 20% of hours paid. The wage rate is ₹100 per hour. What is the budgeted direct labour cost?

A factory budgets production of 8,000 units. Standard time is 1.5 hours per unit. Efficiency is expected to be 75%. Idle time is budgeted at 20% of hours paid. The wage rate is ₹100 per hour. What is the budgeted direct labour cost?

1. ₹16,00,000
2. ₹18,00,000
3. ₹22,00,000
4. ₹20,00,000 (correct answer)

Answer: D — ₹20,00,000

Explanation. Standard hours for output = 8,000 × 1.5 = 12,000 hours. At 75% efficiency, productive hours required = 12,000 ÷ 0.75 = 16,000 hours. If idle time is 20% of hours paid, productive hours are 80% of paid hours. Hours paid = 16,000 ÷ 0.80 = 20,000 hours. Labour cost = 20,000 × ₹100 = ₹20,00,000. Option a uses standard hours without efficiency and idle time; option c treats idle time as an addition to productive hours, not a percentage of paid hours.

Where it goes wrong. Adding idle time directly to productive hours instead of dividing by the productive proportion.

Authority. ICAI SM: Cost and Management Accounting, Chapter 15 (Budget and Budgetary Control)

Question 13 · 2 marks · Chapter 15: Budget and Budgetary Control · medium

Scenario. At 70% activity, a factory has variable expenses ₹1,26,000, semi-variable expenses ₹1,20,000 and fixed expenses ₹1,80,000. Semi-variable expenses increase by 10% between 85% and 95% activity. What is the total budgeted expense at 90% activity?

At 70% activity, a factory has variable expenses ₹1,26,000, semi-variable expenses ₹1,20,000 and fixed expenses ₹1,80,000. Semi-variable expenses increase by 10% between 85% and 95% activity. What is the total budgeted expense at 90% activity?

1. ₹4,62,000
2. ₹4,50,000
3. ₹4,74,000 (correct answer)
4. ₹4,68,000

Answer: C — ₹4,74,000

Explanation. Variable expenses at 90% = ₹1,26,000 × 90/70 = ₹1,62,000. At 90% activity, semi-variable expenses fall in the 85% to 95% range and increase by 10%: ₹1,20,000 × 1.10 = ₹1,32,000. Fixed expenses remain ₹1,80,000. Total = ₹1,62,000 + ₹1,32,000 + ₹1,80,000 = ₹4,74,000. Option a misses the semi-variable step-up; option b uses 70% variable cost; option d applies the step incorrectly.

Where it goes wrong. Forgetting to apply the semi-variable step increase at the specified activity range.

Authority. ICAI SM: Cost and Management Accounting, Chapter 15 (Budget and Budgetary Control)

Question 14 · 2 marks · Chapter 15: Budget and Budgetary Control · hard

Scenario. Maximum possible hours in a budget period are 10,000. Budgeted hours are 8,000, actual hours worked are 7,000 and standard hours for actual output are 7,500. What is the actual capacity usage ratio?

Maximum possible hours in a budget period are 10,000. Budgeted hours are 8,000, actual hours worked are 7,000 and standard hours for actual output are 7,500. What is the actual capacity usage ratio?

1. 87.5%
2. 93.75%
3. 70% (correct answer)
4. 75%

Answer: C — 70%

Explanation. Actual capacity usage ratio = actual hours worked ÷ maximum possible hours × 100 = 7,000 ÷ 10,000 × 100 = 70%. Option a is standard hours divided by budgeted hours; option b is actual hours divided by budgeted hours; option d is standard hours divided by maximum hours. The denominator for capacity usage is maximum possible hours, not budgeted hours.

Where it goes wrong. Using budgeted hours instead of maximum possible hours in the capacity usage ratio.

Authority. ICAI SM: Cost and Management Accounting, Chapter 15 (Budget and Budgetary Control)

Question 15 · 2 marks · Chapter 15: Budget and Budgetary Control · medium

Scenario. A company budgets sales of Product A 5,000 units and Product B 7,000 units. Opening finished goods are A 800 units and B 1,000 units. Desired closing finished goods are A 1,200 units and B 900 units. What is total budgeted production?

A company budgets sales of Product A 5,000 units and Product B 7,000 units. Opening finished goods are A 800 units and B 1,000 units. Desired closing finished goods are A 1,200 units and B 900 units. What is total budgeted production?

1. 12,000 units
2. 12,500 units
3. 11,800 units
4. 12,300 units (correct answer)

Answer: D — 12,300 units

Explanation. Production A = 5,000 + 1,200 - 800 = 5,400 units. Production B = 7,000 + 900 - 1,000 = 6,900 units. Total production = 5,400 + 6,900 = 12,300 units. Option a ignores stock adjustments; option b adds closing stock without deducting opening stock; option c deducts closing stock and adds opening stock. Each product's production must be computed separately before totalling.

Where it goes wrong. Netting opening and closing stock across products instead of computing each product separately.

Authority. ICAI SM: Cost and Management Accounting, Chapter 15 (Budget and Budgetary Control)

Question 16 · 2 marks · Chapter 15: Budget and Budgetary Control · hard

Scenario. Material P consumption is budgeted at 12,000 kg. Opening stock is 1,500 kg and desired closing stock is 2,000 kg. The purchase price is ₹25 per kg. What is the budgeted purchase value of Material P?

Material P consumption is budgeted at 12,000 kg. Opening stock is 1,500 kg and desired closing stock is 2,000 kg. The purchase price is ₹25 per kg. What is the budgeted purchase value of Material P?

1. ₹3,00,000
2. ₹3,12,500 (correct answer)
3. ₹3,25,000
4. ₹3,37,500

Answer: B — ₹3,12,500

Explanation. Purchase quantity = consumption 12,000 + closing stock 2,000 - opening stock 1,500 = 12,500 kg. Purchase value = 12,500 × ₹25 = ₹3,12,500. Option a uses consumption only; option c adds closing stock without deducting opening stock; option d deducts opening stock twice or adds closing stock twice. The purchase budget adjusts consumption for the change in raw material inventory.

Where it goes wrong. Multiplying consumption quantity by price without adjusting for opening and closing raw material stock.

Authority. ICAI SM: Cost and Management Accounting, Chapter 15 (Budget and Budgetary Control)

Question 17 · 2 marks · Chapter 15: Budget and Budgetary Control · medium

Scenario. A worker is paid ₹100 per hour for normal hours. Budgeted standard hours are 4,000, of which 400 hours are overtime paid at a 50% premium over the normal rate. What is the budgeted wages cost?

A worker is paid ₹100 per hour for normal hours. Budgeted standard hours are 4,000, of which 400 hours are overtime paid at a 50% premium over the normal rate. What is the budgeted wages cost?

1. ₹4,20,000 (correct answer)
2. ₹4,00,000
3. ₹4,40,000
4. ₹4,60,000

Answer: A — ₹4,20,000

Explanation. Normal hours = 4,000 - 400 = 3,600 hours. Normal wages = 3,600 × ₹100 = ₹3,60,000. Overtime rate = ₹100 × 1.50 = ₹150 per hour. Overtime wages = 400 × ₹150 = ₹60,000. Total wages = ₹3,60,000 + ₹60,000 = ₹4,20,000. Option b ignores the overtime premium; option c applies the premium to all hours; option d wrongly pays overtime at double rate.

Where it goes wrong. Applying the overtime premium to total hours instead of only overtime hours.

Authority. ICAI SM: Cost and Management Accounting, Chapter 15 (Budget and Budgetary Control)

Question 18 · 2 marks · Chapter 15: Budget and Budgetary Control · hard

Scenario. A company budgets variable factory overhead at ₹5 per direct labour hour and fixed factory overhead at ₹2,00,000. Budgeted direct labour hours are 20,000 and actual direct labour hours are 18,000. What is the factory overhead absorbed using a predetermined rate based on direct labour hours?

A company budgets variable factory overhead at ₹5 per direct labour hour and fixed factory overhead at ₹2,00,000. Budgeted direct labour hours are 20,000 and actual direct labour hours are 18,000. What is the factory overhead absorbed using a predetermined rate based on direct labour hours?

1. ₹3,00,000
2. ₹2,50,000
3. ₹2,90,000
4. ₹2,70,000 (correct answer)

Answer: D — ₹2,70,000

Explanation. Budgeted total overhead = variable 20,000 × ₹5 = ₹1,00,000 plus fixed ₹2,00,000 = ₹3,00,000. Predetermined rate = ₹3,00,000 ÷ 20,000 hours = ₹15 per direct labour hour. Absorbed overhead for actual hours = 18,000 × ₹15 = ₹2,70,000. Option a is budgeted overhead; option b uses only variable overhead; option c uses an incorrect rate. Absorption is based on actual hours at the predetermined rate.

Where it goes wrong. Using actual hours to compute the predetermined rate instead of budgeted hours.

Authority. ICAI SM: Cost and Management Accounting, Chapter 15 (Budget and Budgetary Control)

Question 19 · 2 marks · Chapter 15: Budget and Budgetary Control · medium

Scenario. A product has a list price of ₹200 per unit. Budgeted sales are 5,000 units and a trade discount of 10% is allowed. What is the budgeted net sales revenue?

A product has a list price of ₹200 per unit. Budgeted sales are 5,000 units and a trade discount of 10% is allowed. What is the budgeted net sales revenue?

1. ₹10,00,000
2. ₹9,50,000
3. ₹9,00,000 (correct answer)
4. ₹8,50,000

Answer: C — ₹9,00,000

Explanation. Net selling price = ₹200 × (full - 10%) = ₹180 per unit. Budgeted net sales revenue = 5,000 × ₹180 = ₹9,00,000. Option a ignores the trade discount; option b applies a 5% discount; option d applies a 15% discount. The sales budget should use the net realisable selling price after allowed discounts.

Where it goes wrong. Using list price instead of net price after trade discount in the sales budget.

Authority. ICAI SM: Cost and Management Accounting, Chapter 15 (Budget and Budgetary Control)

Question 20 · 2 marks · Chapter 15: Budget and Budgetary Control · hard

Scenario. Budgeted production is 6,000 units. Each unit requires 2.5 kg of good material. Normal waste is 20% of material input. What is the budgeted material input quantity?

Budgeted production is 6,000 units. Each unit requires 2.5 kg of good material. Normal waste is 20% of material input. What is the budgeted material input quantity?

1. 15,000 kg
2. 16,000 kg
3. 18,000 kg
4. 18,750 kg (correct answer)

Answer: D — 18,750 kg

Explanation. Good material required = 6,000 × 2.5 = 15,000 kg. Since normal waste is 20% of input, good material is 80% of input. Input = 15,000 ÷ 0.80 = 18,750 kg. Option a ignores normal waste; option b deducts 6.25% waste; option c applies a 16.67% waste. Normal loss or waste must be grossed up by dividing by the good-output percentage.

Where it goes wrong. Deducting 20% from good material required instead of grossing up input by dividing by 80%.

Authority. ICAI SM: Cost and Management Accounting, Chapter 15 (Budget and Budgetary Control)