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Questions and Answers
What remains unchanged in a fixed budget?
What remains unchanged in a fixed budget?
- The budget is evaluated based on the production plan.
- The budget level remains constant regardless of activity. (correct)
- The cost level changes with activity.
- The budget is adjusted based on actual performance.
What is the primary advantage of a flexible budget?
What is the primary advantage of a flexible budget?
- It requires no adjustments based on activity levels.
- It is easier to prepare than fixed budgets.
- It reflects the actual production level. (correct)
- It keeps costs fixed regardless of activity.
For what purposes is a fixed budget primarily prepared?
For what purposes is a fixed budget primarily prepared?
- Performance evaluation.
- Variance reporting.
- Cost behaviour analysis.
- Planning purposes. (correct)
How does a flexible budget assist in variance reporting?
How does a flexible budget assist in variance reporting?
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What is a common limitation of a fixed budget?
What is a common limitation of a fixed budget?
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What is meant by a 'flexed budget'?
What is meant by a 'flexed budget'?
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Why is a flexible budget useful for determining cost behaviour patterns?
Why is a flexible budget useful for determining cost behaviour patterns?
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In which industry is a fixed budget most commonly used?
In which industry is a fixed budget most commonly used?
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Study Notes
Fixed Budget
- Remains constant regardless of changes in the level of activity.
- Created based on a projected production plan at the beginning of a period.
- Lacks comparability since it does not adjust for actual performance levels.
- Primarily utilized in service industries where a majority of costs are fixed.
- May lead to misleading performance assessments due to its inflexibility.
- Mainly designed for planning purposes rather than actual performance tracking.
Flexible Budget
- Adjusts cost and revenue estimates based on the actual activity achieved.
- Initially developed for an expected level of activity but can be modified.
- Considers discrepancies between planned and actual production levels.
- Once adjusted to reflect actual outcomes, this budget is referred to as a flexed budget.
- Allows for multiple activity levels, enabling more dynamic financial planning.
- Variance analysis involves comparing actual costs to the flexed budget at equivalent output.
- Variances can be classified as favorable (costs under budget) or adverse (costs over budget), prompting management control measures.
- Provides a direct comparison of budget to actual performance metrics.
- Highlights cost behavior trends, essential for cost management.
- Encourages accurate evaluations of performance, promoting better financial oversight.
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