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ACCA Applied Knowledge · Management Accounting · Behavioural aspects of budgeting

A manager's budget for a cost centre was 90,000, of which 12,000 was slack. Actual cost was 84,000. Management, unaware of the slack, judges performance against the budget. Compared with the true required budget, what is the favourable variance reported and what would the true variance be?

Reported variance is 6,000 favourable (90,000 less 84,000), but removing the 12,000 slack gives a true budget of 78,000, so the real result is 6,000 adverse. Slack hides inefficiency by making a poor performance look favourable.

  1. AReported 6,000 favourable; true 6,000 adverseCorrect
  2. BReported 6,000 favourable; true 6,000 favourable
  3. CReported 12,000 favourable; true 6,000 adverse
  4. DReported 6,000 adverse; true 6,000 favourable

Explanation

Reported variance = 90,000 - 84,000 = 6,000 favourable. The true budget without slack is 90,000 - 12,000 = 78,000, so actual 84,000 exceeds it by 6,000 adverse. The slack masks inefficiency.

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