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ACCA Applied Knowledge · Management Accounting · Budgetary control and reporting

A company's fixed budget for a period was based on 10,000 units, with total budgeted costs of $150,000. Actual output was 11,000 units. Which statement best describes why a flexed budget is prepared before comparing budget and actual costs?

A flexed budget is prepared to restate budgeted costs at the actual activity level, so actual results are compared with a budget for the same volume. This isolates genuine cost control variances from differences caused simply by activity being higher or lower than planned.

  1. ATo adjust budgeted costs to the actual activity level so that like is compared with likeCorrect
  2. BTo remove all fixed costs from the budget
  3. CTo make the original budget more ambitious
  4. DTo ensure that actual costs always equal budgeted costs

Explanation

A fixed budget is set for one activity level. When actual activity differs, comparing actual costs with it is misleading. Flexing restates variable costs to the actual activity level so that variances reflect cost control rather than volume differences. Fixed costs are not removed; they are kept in the flexed budget.

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