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ACCA Applied Knowledge · Management Accounting · Budgetary control and reporting

A company's monthly budgetary control report compares actual results with the original fixed budget. Actual output was 12,000 units against a budget of 10,000 units. Which statement best describes the main weakness of this comparison for controlling variable costs?

Comparing actual results with a fixed budget at a different activity level makes variable costs look adverse just because more units were made. The variance reflects volume, not control, so the budget should be flexed to actual activity before judging cost performance.

  1. AVariable cost variances will be adverse simply because activity was higher, so they do not show true cost controlCorrect
  2. BFixed cost variances will be distorted because fixed costs change with output
  3. CThe report will fail to show total sales revenue
  4. DThe comparison cannot be prepared unless standard costs exist

Explanation

A fixed budget is set for one activity level. When actual activity is higher, variable costs naturally exceed budget, giving adverse variances unrelated to efficiency. A flexed budget is needed for a like-for-like comparison. Fixed costs do not change with output in the relevant range, so option B is wrong.

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