Test 2: Budget and Budgetary Control: answer key

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

Scenario. Apex Polychem Ltd operates a resin plant with normal capacity of 10,000 machine hours, taken as full activity. The budget committee has collected cost data at two activity levels. At 60% capacity, equal to 6,000 machine hours, the costs are: indirect labour ₹1,20,000; power ₹90,000; maintenance ₹80,000; depreciation ₹1,50,000; and supervision ₹60,000. At 80% capacity, equal to 8,000 machine hours, the costs are: indirect labour ₹1,60,000; power ₹1,10,000; maintenance ₹96,000; depreciation ₹1,50,000; and supervision ₹60,000. Indirect labour is treated as a variable cost at a constant rate per machine hour. Power and maintenance are semi-variable costs and must be segregated using the high-low method. Depreciation and supervision are fixed costs within the relevant range. The company prepares a flexible budget for 70% and full capacity levels. There is no change in technology, wage rates or price levels within the relevant range. The plant works evenly through the year and there is no abnormal idle time. All amounts are in Indian rupees. Answer the following MCQs using the data above and apply the high-low method wherever required. Round all amounts to the nearest rupee and select the most appropriate option.

What is the variable component per machine hour of the power cost using the high-low method?

1. ₹10 per machine hour (correct answer)
2. ₹12 per machine hour
3. ₹8 per machine hour
4. ₹15 per machine hour

Answer: A — ₹10 per machine hour

Explanation. High-low variable cost per machine hour = change in power cost ÷ change in machine hours. Change in cost = ₹1,10,000 - ₹90,000 = ₹20,000. Change in hours = 8,000 - 6,000 = 2,000 hours. Variable rate = ₹20,000 ÷ 2,000 = ₹10 per machine hour. Option b wrongly divides by 1,667 hours; option c uses maintenance data; option d is an arbitrary rate. The high-low method uses only the highest and lowest activity levels.

Where it goes wrong. Using total costs at both levels without taking the difference in activity levels.

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 fixed component of the maintenance cost?

1. ₹30,000
2. ₹32,000 (correct answer)
3. ₹40,000
4. ₹36,000

Answer: B — ₹32,000

Explanation. Variable maintenance rate = (₹96,000 - ₹80,000) ÷ (8,000 - 6,000) = ₹16,000 ÷ 2,000 = ₹8 per machine hour. Fixed maintenance = total cost at 6,000 hours - variable portion = ₹80,000 - (6,000 × ₹8) = ₹80,000 - ₹48,000 = ₹32,000. Option a uses the power fixed cost; option c ignores the variable portion; option d is a common arithmetic slip. Fixed cost is the intercept after removing the variable element.

Where it goes wrong. Subtracting only part of the variable maintenance cost from total maintenance cost.

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 total budgeted cost at 70% capacity?

1. ₹5,20,000
2. ₹5,30,000
3. ₹5,38,000 (correct answer)
4. ₹5,50,000

Answer: C — ₹5,38,000

Explanation. At 70%, machine hours = 7,000. Indirect labour = 7,000 × ₹20 = ₹1,40,000. Power = fixed ₹30,000 + 7,000 × ₹10 = ₹1,00,000. Maintenance = fixed ₹32,000 + 7,000 × ₹8 = ₹88,000. Depreciation = ₹1,50,000 and supervision = ₹60,000. Total = ₹1,40,000 + ₹1,00,000 + ₹88,000 + ₹1,50,000 + ₹60,000 = ₹5,38,000. Option a omits part of the semi-variable fixed cost; option b uses 6,500 hours; option d overstates the variable element.

Where it goes wrong. Forgetting to add the fixed components of both semi-variable costs at the 70% level.

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 cost at full capacity?

1. ₹6,52,000 (correct answer)
2. ₹6,40,000
3. ₹6,60,000
4. ₹6,72,000

Answer: A — ₹6,52,000

Explanation. At full, machine hours = 10,000. Indirect labour = 10,000 × ₹20 = ₹2,00,000. Power = ₹30,000 + 10,000 × ₹10 = ₹1,30,000. Maintenance = ₹32,000 + 10,000 × ₹8 = ₹1,12,000. Depreciation = ₹1,50,000 and supervision = ₹60,000. Total = ₹2,00,000 + ₹1,30,000 + ₹1,12,000 + ₹1,50,000 + ₹60,000 = ₹6,52,000. Option b omits part of the fixed costs; option c overstates variable cost; option d adds an extra step not given in the data.

Where it goes wrong. Using 80% capacity costs and scaling only variable costs, ignoring fixed components at full.

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 sanitizer bottles in a single factory. Normal capacity is 20,000 units, taken as full activity. At 70% capacity, equal to 14,000 units, the budgeted costs are: variable costs ₹2,80,000; semi-variable costs ₹1,50,000; and fixed costs ₹3,00,000. The variable cost per unit remains constant within the relevant range. Fixed costs remain unchanged from 60% to full capacity. Semi-variable costs remain at ₹1,50,000 up to 80% capacity. At 90% capacity, a supervisory step-up increases semi-variable costs by 12% over the 70% level. At full capacity, semi-variable costs increase by a further 10% over the 90% level because of an additional shift allowance. The company is preparing a flexible budget at 60%, 70%, 80%, 90% and full capacity levels. There is no work-in-process, abnormal loss or scrap. All production is sold in the same period. Amounts are in Indian rupees. Answer the following MCQs using the data above. Round all amounts to the nearest rupee and select the most appropriate option. The budget committee wants to verify the behaviour of costs before approving the master budget.

What is the variable cost per unit at Zenith Consumer Care Ltd?

1. ₹18 per unit
2. ₹20 per unit (correct answer)
3. ₹22 per unit
4. ₹25 per unit

Answer: B — ₹20 per unit

Explanation. At 70% capacity, output is 14,000 units and variable cost is ₹2,80,000. Variable cost per unit = ₹2,80,000 ÷ 14,000 = ₹20 per unit. Option a divides by 15,556 units; option c adds a part of semi-variable cost to variable cost; option d uses total cost per unit. Variable cost per unit remains constant within the relevant range, so the 70% rate can be used at other capacity levels.

Where it goes wrong. Dividing total cost by output instead of isolating the variable cost line.

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 total budgeted cost at 80% capacity?

1. ₹7,50,000
2. ₹7,60,000
3. ₹7,70,000 (correct answer)
4. ₹7,80,000

Answer: C — ₹7,70,000

Explanation. At 80%, output = 16,000 units. Variable cost = 16,000 × ₹20 = ₹3,20,000. Semi-variable cost remains ₹1,50,000 up to 80% capacity. Fixed cost = ₹3,00,000. Total = ₹3,20,000 + ₹1,50,000 + ₹3,00,000 = ₹7,70,000. Option a uses 70% output; option b applies a step-up too early; option d adds an unnecessary 10% semi-variable increase. The step-up applies only at 90% and above.

Where it goes wrong. Applying the supervisory step-up at 80% even though the data says it applies at 90%.

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 semi-variable cost at full capacity?

1. ₹1,68,000
2. ₹1,81,440
3. ₹1,84,800 (correct answer)
4. ₹1,90,000

Answer: C — ₹1,84,800

Explanation. Semi-variable cost at 90% = ₹1,50,000 × 1.12 = ₹1,68,000. At full, it increases by a further 10% over the 90% level: ₹1,68,000 × 1.10 = ₹1,84,800. Option a is the 90% level; option b applies an 8% increase instead of 10%; option d applies a flat ₹40,000 increase. The two step-ups are sequential, not simultaneous on the 70% base.

Where it goes wrong. Applying both percentage increases to the original ₹1,50,000 base instead of sequentially.

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 cost at full capacity?

1. ₹8,80,000
2. ₹8,84,800 (correct answer)
3. ₹8,90,000
4. ₹9,00,000

Answer: B — ₹8,84,800

Explanation. At full, output = 20,000 units. Variable cost = 20,000 × ₹20 = ₹4,00,000. Semi-variable cost at full = ₹1,84,800. Fixed cost = ₹3,00,000. Total = ₹4,00,000 + ₹1,84,800 + ₹3,00,000 = ₹8,84,800. Option a omits part of the semi-variable step-up; option c rounds semi-variable cost to ₹1,90,000; option d uses an incorrect variable rate. Each cost element must be built separately at full activity.

Where it goes wrong. Adding fixed and variable costs but using the 90% semi-variable cost at full capacity.

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. At 5,000 machine hours, maintenance cost is ₹85,000. At 8,000 machine hours, maintenance cost is ₹1,15,000. Using the high-low method, what is the fixed maintenance cost?

At 5,000 machine hours, maintenance cost is ₹85,000. At 8,000 machine hours, maintenance cost is ₹1,15,000. Using the high-low method, what is the fixed maintenance cost?

1. ₹30,000
2. ₹32,000
3. ₹40,000
4. ₹35,000 (correct answer)

Answer: D — ₹35,000

Explanation. Variable maintenance rate = (₹1,15,000 - ₹85,000) ÷ (8,000 - 5,000) = ₹30,000 ÷ 3,000 = ₹10 per machine hour. Fixed cost = ₹85,000 - (5,000 × ₹10) = ₹85,000 - ₹50,000 = ₹35,000. Option a uses the wrong activity base; option b is an arithmetic slip; option c ignores the variable portion. The high-low method uses the change between the highest and lowest activity levels.

Where it goes wrong. Dividing the change in cost by total hours instead of the change in hours.

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. At 60% capacity, a factory has variable cost ₹4,80,000 and fixed cost ₹3,60,000. What is the total budgeted cost at 80% capacity?

At 60% capacity, a factory has variable cost ₹4,80,000 and fixed cost ₹3,60,000. What is the total budgeted cost at 80% capacity?

1. ₹10,00,000 (correct answer)
2. ₹9,60,000
3. ₹10,40,000
4. ₹9,80,000

Answer: A — ₹10,00,000

Explanation. Variable cost at 80% = ₹4,80,000 × 80/60 = ₹6,40,000. Fixed cost remains ₹3,60,000. Total budgeted cost = ₹6,40,000 + ₹3,60,000 = ₹10,00,000. Option b scales fixed cost as well; option c adds an extra ₹40,000; option d uses 75% scaling. In a flexible budget, variable costs change with activity but fixed costs remain constant within the relevant range.

Where it goes wrong. Scaling fixed costs in proportion to activity along with variable costs.

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 semi-variable cost is ₹1,20,000 at 4,000 units and ₹1,50,000 at 6,000 units. What is the total semi-variable cost at 5,000 units?

A semi-variable cost is ₹1,20,000 at 4,000 units and ₹1,50,000 at 6,000 units. What is the total semi-variable cost at 5,000 units?

1. ₹1,25,000
2. ₹1,30,000
3. ₹1,40,000
4. ₹1,35,000 (correct answer)

Answer: D — ₹1,35,000

Explanation. Variable cost per unit = (₹1,50,000 - ₹1,20,000) ÷ (6,000 - 4,000) = ₹30,000 ÷ 2,000 = ₹15 per unit. Fixed cost = ₹1,20,000 - (4,000 × ₹15) = ₹1,20,000 - ₹60,000 = ₹60,000. At 5,000 units, total = ₹60,000 + (5,000 × ₹15) = ₹1,35,000. Option a ignores fixed cost growth; option b uses a ₹10 variable rate; option c uses the midpoint of total costs incorrectly.

Where it goes wrong. Taking the simple average of total costs at two activity levels instead of segregating fixed and variable components.

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 fixed budget is prepared at 10,000 units with variable cost ₹20 per unit and fixed cost ₹2,00,000. Actual output is 12,000 units. What total cost allowance should a flexible budget show at the actual output?

A fixed budget is prepared at 10,000 units with variable cost ₹20 per unit and fixed cost ₹2,00,000. Actual output is 12,000 units. What total cost allowance should a flexible budget show at the actual output?

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

Answer: D — ₹4,40,000

Explanation. Flexible budget variable cost at 12,000 units = 12,000 × ₹20 = ₹2,40,000. Fixed cost remains ₹2,00,000. Total cost allowance = ₹2,40,000 + ₹2,00,000 = ₹4,40,000. Option a is the fixed budget total at 10,000 units; option b scales fixed cost; option c adds an extra ₹20,000. A flexible budget recasts variable costs at actual activity while retaining fixed costs.

Where it goes wrong. Comparing actual cost with the original fixed budget instead of a flexed allowance at actual output.

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% capacity, total cost is ₹7,00,000, of which 60% is variable. What is the total budgeted cost at 90% capacity?

At 70% capacity, total cost is ₹7,00,000, of which 60% is variable. What is the total budgeted cost at 90% capacity?

1. ₹8,20,000 (correct answer)
2. ₹8,00,000
3. ₹8,40,000
4. ₹7,80,000

Answer: A — ₹8,20,000

Explanation. Variable cost at 70% = 60% × ₹7,00,000 = ₹4,20,000. Fixed cost = ₹2,80,000. Variable cost at 90% = ₹4,20,000 × 90/70 = ₹5,40,000. Total at 90% = ₹5,40,000 + ₹2,80,000 = ₹8,20,000. Option b scales the whole cost by 90/70; option c treats fixed cost as variable; option d uses 80% scaling. Only the variable portion should be flexed.

Where it goes wrong. Scaling the entire total cost by the capacity ratio instead of flexing only variable costs.

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. At 6,000 units, a semi-variable cost is ₹1,32,000. At 9,000 units, the same cost is ₹1,68,000. What is the fixed component?

At 6,000 units, a semi-variable cost is ₹1,32,000. At 9,000 units, the same cost is ₹1,68,000. What is the fixed component?

1. ₹48,000
2. ₹72,000
3. ₹36,000
4. ₹60,000 (correct answer)

Answer: D — ₹60,000

Explanation. Variable cost per unit = (₹1,68,000 - ₹1,32,000) ÷ (9,000 - 6,000) = ₹36,000 ÷ 3,000 = ₹12 per unit. Fixed component = ₹1,32,000 - (6,000 × ₹12) = ₹1,32,000 - ₹72,000 = ₹60,000. Option a uses the variable cost at 4,000 units; option b is the total variable cost at 6,000 units; option c uses the wrong difference. The fixed component is the total cost less variable cost at either activity level.

Where it goes wrong. Reporting total variable cost as the fixed component after applying the high-low method.

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 flexible budget at 80% capacity shows variable cost ₹6,40,000 and fixed cost ₹4,00,000. What is the total budgeted cost at full capacity?

A flexible budget at 80% capacity shows variable cost ₹6,40,000 and fixed cost ₹4,00,000. What is the total budgeted cost at full capacity?

1. ₹11,20,000
2. ₹12,00,000 (correct answer)
3. ₹12,80,000
4. ₹10,40,000

Answer: B — ₹12,00,000

Explanation. Variable cost at full = ₹6,40,000 × 100/80 = ₹8,00,000. Fixed cost remains ₹4,00,000. Total budgeted cost = ₹8,00,000 + ₹4,00,000 = ₹12,00,000. Option a scales fixed cost as well; option c adds an extra ₹80,000; option d uses the 80% total cost. In flexible budgeting, only variable costs are recast in proportion to activity.

Where it goes wrong. Increasing fixed cost in proportion to capacity while flexing the budget to full.

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. At 70% activity, a semi-variable expense is ₹2,30,000 and its fixed component is ₹90,000. What is the semi-variable expense at 90% activity, assuming a linear variable component?

At 70% activity, a semi-variable expense is ₹2,30,000 and its fixed component is ₹90,000. What is the semi-variable expense at 90% activity, assuming a linear variable component?

1. ₹2,50,000
2. ₹2,70,000 (correct answer)
3. ₹2,80,000
4. ₹2,60,000

Answer: B — ₹2,70,000

Explanation. Variable component at 70% = ₹2,30,000 - ₹90,000 = ₹1,40,000. Variable cost per 1% activity = ₹1,40,000 ÷ 70 = ₹2,000. At 90%, variable component = 90 × ₹2,000 = ₹1,80,000. Total semi-variable expense = ₹90,000 + ₹1,80,000 = ₹2,70,000. Option a uses 80% activity; option c adds the whole variable cost again; option d uses 85% activity.

Where it goes wrong. Applying the total 70% semi-variable cost as a variable amount and scaling it to 90%.

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 fixed budget is prepared at 8,000 units with total cost ₹6,40,000. Actual output is 10,000 units and actual total cost is ₹7,20,000. Which statement is valid?

A fixed budget is prepared at 8,000 units with total cost ₹6,40,000. Actual output is 10,000 units and actual total cost is ₹7,20,000. Which statement is valid?

1. Actual cost is over budget by ₹80,000 because the fixed budget is the correct benchmark
2. Actual cost is under budget by ₹80,000 because output is higher
3. Comparison with the fixed budget is misleading because actual activity differs from the budgeted activity (correct answer)
4. The fixed budget should be automatically revised to 10,000 units before comparison

Answer: C — Comparison with the fixed budget is misleading because actual activity differs from the budgeted activity

Explanation. A fixed budget is designed for one activity level. Actual output of 10,000 units is different from the budgeted 8,000 units, so comparing actual cost with the fixed budget mixes activity and cost effects. A flexible budget at 10,000 units is needed for a meaningful comparison. Option a ignores the activity difference; option b assumes higher output always means under-budget; option d confuses fixed and flexible budgeting. Fixed budgets remain unchanged irrespective of actual activity.

Where it goes wrong. Treating the original fixed budget as a valid cost allowance even when actual output is different.

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. At 8,000 units, power cost is ₹1,04,000. At 12,000 units, power cost is ₹1,36,000. What is the variable power cost per unit?

At 8,000 units, power cost is ₹1,04,000. At 12,000 units, power cost is ₹1,36,000. What is the variable power cost per unit?

1. ₹6 per unit
2. ₹10 per unit
3. ₹12 per unit
4. ₹8 per unit (correct answer)

Answer: D — ₹8 per unit

Explanation. Variable power cost per unit = change in power cost ÷ change in units = (₹1,36,000 - ₹1,04,000) ÷ (12,000 - 8,000) = ₹32,000 ÷ 4,000 = ₹8 per unit. Option a divides by total units; option b uses the fixed component; option c uses an incorrect difference. The high-low method compares the highest and lowest activity levels to isolate the variable rate.

Where it goes wrong. Dividing the change in cost by the higher activity level instead of the change in activity.

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. At 70% activity, a flexible budget shows variable cost ₹3,50,000, semi-variable cost ₹1,40,000 and fixed cost ₹2,10,000. At 90% activity, variable cost increases proportionately, semi-variable cost increases by ₹20,000 due to a step-up, and fixed cost remains unchanged. What is the total budgeted cost at 90%?

At 70% activity, a flexible budget shows variable cost ₹3,50,000, semi-variable cost ₹1,40,000 and fixed cost ₹2,10,000. At 90% activity, variable cost increases proportionately, semi-variable cost increases by ₹20,000 due to a step-up, and fixed cost remains unchanged. What is the total budgeted cost at 90%?

1. ₹8,20,000 (correct answer)
2. ₹8,00,000
3. ₹8,40,000
4. ₹7,90,000

Answer: A — ₹8,20,000

Explanation. Variable cost at 90% = ₹3,50,000 × 90/70 = ₹4,50,000. Semi-variable cost = ₹1,40,000 + ₹20,000 = ₹1,60,000. Fixed cost = ₹2,10,000. Total = ₹4,50,000 + ₹1,60,000 + ₹2,10,000 = ₹8,20,000. Option b omits the semi-variable step-up; option c overstates the step; option d uses 80% activity. Each cost behaviour must be applied separately.

Where it goes wrong. Flexing variable cost correctly but forgetting to add the semi-variable step-up at 90%.

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. A semi-variable cost is ₹2,50,000 at 10,000 units and ₹3,25,000 at 15,000 units. What is the total semi-variable cost at 12,000 units?

A semi-variable cost is ₹2,50,000 at 10,000 units and ₹3,25,000 at 15,000 units. What is the total semi-variable cost at 12,000 units?

1. ₹2,70,000
2. ₹2,90,000
3. ₹2,80,000 (correct answer)
4. ₹3,00,000

Answer: C — ₹2,80,000

Explanation. Variable cost per unit = (₹3,25,000 - ₹2,50,000) ÷ (15,000 - 10,000) = ₹75,000 ÷ 5,000 = ₹15 per unit. Fixed cost = ₹2,50,000 - (10,000 × ₹15) = ₹1,00,000. At 12,000 units, total = ₹1,00,000 + (12,000 × ₹15) = ₹1,00,000 + ₹1,80,000 = ₹2,80,000. Option a uses 11,333 units; option b uses a ₹16 variable rate; option d adds the fixed cost twice.

Where it goes wrong. Interpolating total cost directly between two activity levels without segregating fixed and variable components.

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