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

Lindqvist 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 and sales were 11,500 units, and total actual costs were $192,000. Management wants to judge cost control fairly. Which statement is correct?

The flexed budget cost is $188,000 (11,500 units × $12 plus $50,000 fixed). Actual cost of $192,000 is $4,000 higher, so the variance is adverse. Comparing with the original $170,000 budget would wrongly blame managers for costs that rose because volume was higher.

  1. AAgainst the flexed budget of $188,000, there is an adverse cost variance of $4,000Correct
  2. BAgainst the original budget of $170,000, there is an adverse cost variance of $22,000 attributable wholly to poor cost control
  3. CAgainst the flexed budget of $138,000, there is an adverse variance of $54,000
  4. DAgainst the flexed budget of $188,000, there is a favourable cost variance of $4,000

Explanation

Flexed cost = 11,500 × $12 = $138,000 variable plus $50,000 fixed = $188,000. Actual $192,000 exceeds this by $4,000, so adverse. The original budget total of $170,000 gives $22,000 but ignores the higher activity, and the $138,000 figure omits fixed costs.

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