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ACCA Applied Knowledge · Management Accounting · Flexible budgets

Which statement best describes why a flexible budget is preferred to a fixed budget for budgetary control when actual activity differs from budgeted activity?

A flexible budget is preferred because it adjusts budgeted revenue and costs to the actual activity level, so actual results are compared with a budget for the same volume. This makes variances meaningful rather than being distorted by volume differences.

  1. AIt removes the need to separate costs into fixed and variable elements
  2. BIt compares actual results with budgeted costs adjusted to the actual activity level, so like is compared with likeCorrect
  3. CIt always produces lower budgeted costs than the fixed budget
  4. DIt fixes revenue at the original budget level so that sales variances are eliminated

Explanation

A flexible budget restates the budgeted figures to actual activity, allowing a valid comparison. It requires cost behaviour to be known, so the first option is wrong. Flexed costs may be higher or lower than the original budget.

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