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ACCA Strategic Professional · Advanced Performance Management · Management reports

Tessan Pharma's monthly report compares actual results with a fixed budget set 12 months earlier. Sales volume was 15% above budget and total variable costs were 14% above budget. The finance director says the cost overspend shows poor cost control. What is the most valid criticism of this report?

The report should flex the budget to actual activity. With volume 15% above budget, variable costs would be expected to rise 15%, so a 14% increase is slightly favourable. Comparing with a fixed budget wrongly suggests poor cost control.

  1. AFixed budgets cannot be compared with actual results at all
  2. BThe comparison should be flexed to actual activity; costs rising 14% on volume up 15% suggests cost control may actually be goodCorrect
  3. CThe report should show only favourable variances
  4. DVariable costs should be excluded from the report

Explanation

A fixed budget comparison is misleading when activity differs. Flexing variable costs to the 15% higher volume would give an expected increase of 15%, so the actual 14% is slightly favourable. The report's basis, not cost control, is the problem.

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