ACCA Applied Knowledge · Management Accounting · Flexible budgets
A department's actual overhead cost was $84,000 against a flexed budget of $80,000. Which action is most appropriate in a performance report?
The variance of $4,000 adverse should be investigated to find its cause and whether it is controllable. The flexed budget already allows for activity, so the increase is a genuine overspend, and management by exception says significant variances need follow-up.
- AInvestigate the $4,000 adverse variance to establish its cause and whether it is controllableCorrect
- BIgnore it because it is under 5% of budget in all cases
- CReduce next year's budget by $4,000 automatically
- DTreat it as favourable because costs rose with activity
Explanation
Actual cost exceeds the flexed budget by $4,000, so the variance is adverse. Management by exception means variances are investigated for cause and controllability, not ignored or adjusted mechanically.
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