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CA Intermediate · Cost and Management Accounting · Budgets and Budgetary Control

Which statement about a flexible budget is correct?

A flexible budget recasts cost allowances to the actual activity level, with variable costs moving in proportion to activity and fixed costs staying constant in total. This allows fair comparison of actual and budgeted costs, unlike a static budget fixed at one level.

  1. AIt is designed to remain unchanged regardless of the actual level of activity
  2. BIt is prepared only for fixed costs of a period
  3. CIt recasts budgeted cost allowances for the actual level of activity achieved, treating fixed costs as constant in total and variable costs as changing with activityCorrect
  4. DIt is the same as a master budget prepared at one level of output

Explanation

A flexible budget is designed to change with the level of activity. Variable costs vary in proportion to activity while fixed costs stay constant in total within the relevant range. A static budget is the one fixed at a single level.

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