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ACCA Strategic Professional · Advanced Performance Management · Budgetary planning and control

Kestrel Components budgeted to produce and sell 10,000 units at a variable cost of $12 per unit and fixed costs of $50,000. Actual output was 11,500 units. The manager compares total actual cost with the original budget total cost of $170,000 and reports an adverse variance. What is the main flaw in this comparison?

The comparison is flawed because the original budget was set for 10,000 units while actual output was 11,500. A flexed budget, adjusting variable costs to actual activity while holding fixed costs constant, is needed so that variances reflect cost control rather than volume differences.

  1. AThe budget was not flexed to the actual activity level, so the comparison is not like-for-likeCorrect
  2. BFixed costs should have been flexed in proportion to output
  3. CThe comparison should use the prior year's actual costs instead
  4. DVariances should only be calculated for revenue, not costs

Explanation

Original budget cost of $170,000 (10,000 x $12 + $50,000) relates to 10,000 units. At 11,500 units the flexed budget is 11,500 x $12 + $50,000 = $188,000. Comparing actual cost with the unflexed budget confuses volume effects with efficiency. Fixed costs do not flex, so option B is wrong.

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