ACCA Applied Knowledge · Management Accounting · Standard costing system
Why is a flexed budget used in variance analysis, rather than comparing actual results directly with the original fixed budget?
A flexed budget is used because it restates budgeted revenue and costs to the actual activity level, giving a like-for-like comparison. Variances then show genuine efficiency and price differences rather than differences caused by producing more or fewer units than originally planned.
- AIt compares costs and revenues at the same activity level as actual outputCorrect
- BIt removes the need to set standard costs
- CIt makes fixed costs vary in proportion to output
- DIt ensures all variances are favourable
Explanation
A flexed budget restates the budget for the actual activity level, so differences reflect cost control and price rather than volume changes. It still relies on standard costs, and fixed costs remain unchanged within the relevant range. It does not guarantee favourable variances.
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