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ACCA Strategic Professional · Strategic Business Leader · Cost and management accounting

Delta Retail's cost-centre manager for distribution is told that actual costs were 12% over a fixed budget set for 80,000 deliveries, although 92,000 deliveries were actually made. The finance director wants a fairer basis for assessing the manager's cost control. Which action is most appropriate?

The distribution budget should be flexed to the actual 92,000 deliveries and actual costs compared with that. Because activity was higher than planned, variable costs would naturally exceed a fixed budget, so flexing compares like with like and isolates the manager's true cost control performance.

  1. APrepare a flexed budget for 92,000 deliveries and compare actual costs with itCorrect
  2. BReduce the fixed budget to reflect the 12% overspend
  3. CCompare actual costs with last year's actual costs
  4. DAssess only the fixed costs, since variable costs are uncontrollable

Explanation

Activity was 15% above budget, so variable costs would naturally rise. Flexing the budget to actual activity compares like with like and isolates the manager's cost efficiency from the volume effect. The other options do not adjust for activity or are conceptually wrong.

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