CA Intermediate · Cost and Management Accounting · Budgets and Budgetary Control
A flexible budget concept check: which statement about a flexible budget is correct?
A flexible budget recognises the difference between fixed and variable costs and is recast to the actual activity level, allowing a fair comparison with actual performance. It is not limited to one fixed activity level or to capital items.
- AIt is prepared for one fixed level of activity only
- BIt recognises the difference between fixed and variable costs and is adjusted to the actual level of activityCorrect
- CIt treats all costs as variable
- DIt is prepared only for the capital expenditure of the firm
Explanation
A flexible budget separates fixed and variable costs and is recast for the level of activity actually achieved, so actual results can be compared on a like-for-like basis. A fixed budget is prepared for one level only.
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