Fixed and Flexible Budgets Quiz
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Questions and Answers

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?

  • 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?

  • Performance evaluation.
  • Variance reporting.
  • Cost behaviour analysis.
  • Planning purposes. (correct)

    • How does a flexible budget assist in variance reporting?

    <p>By comparing actual costs with the flexed budget for the same volume of production.</p> Signup and view all the answers

    What is a common limitation of a fixed budget?

    <p>It does not provide a like with like comparison.</p> Signup and view all the answers

    What is meant by a 'flexed budget'?

    <p>A budget adjusted to reflect actual production levels.</p> Signup and view all the answers

    Why is a flexible budget useful for determining cost behaviour patterns?

    <p>It adapts to actual levels of activity, reflecting real cost behavior.</p> Signup and view all the answers

    In which industry is a fixed budget most commonly used?

    <p>Service industries where most costs are fixed.</p> Signup and view all the answers

    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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    Description

    Test your knowledge on fixed and flexible budgets with this quiz. Understand the definitions, applications, and differences between these two budgeting methods. Perfect for students in finance or accounting courses.

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