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ACCA Applied Knowledge · Management Accounting · Flexible budgets

A company budgeted to produce and sell 10,000 units with total budgeted costs of $150,000. Actual output was 12,000 units. Which statement best describes why a flexible budget is prepared for 12,000 units?

A flexible budget is prepared so actual costs can be compared with budgeted costs adjusted to the actual activity level. This gives a like-for-like comparison, whereas comparing actual results at 12,000 units with a 10,000-unit fixed budget would produce misleading variances.

  1. ATo compare actual costs with budgeted costs adjusted to the actual activity levelCorrect
  2. BTo replace the original fixed budget as the target for the next period
  3. CTo increase budgeted fixed costs in line with higher output
  4. DTo eliminate the need for variance analysis

Explanation

A flexible budget restates the budget to the actual activity level so that like is compared with like. Comparing actual costs at 12,000 units with a fixed budget for 10,000 units would give misleading variances. It does not change fixed costs and it supports, not removes, variance analysis.

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