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ACCA Applied Knowledge · Management Accounting · Flexible budgets

Which statement about reporting variances using a flexed budget is correct?

A flexed budget adjusts budgeted variable costs to the actual activity level while keeping fixed costs constant, so actual costs are compared with the costs allowed for actual output. This isolates genuine performance variances from those caused merely by different volume.

  1. AIt removes the effect of activity differences so that actual costs are compared with costs allowed for actual outputCorrect
  2. BIt compares actual results with the original budget without any adjustment
  3. CIt treats all costs as variable when activity changes
  4. DIt is used only to forecast next year's budget

Explanation

A flexed budget restates budgeted costs to the actual activity level, with fixed costs unchanged and variable costs adjusted. This gives a like-for-like comparison. Comparing with the original budget mixes volume effects with efficiency effects.

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