Questions and Answers
What remains unchanged in a fixed budget?
What is the primary advantage of a flexible budget?
For what purposes is a fixed budget primarily prepared?
How does a flexible budget assist in variance reporting?
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What is a common limitation of a fixed budget?
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What is meant by a 'flexed budget'?
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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?
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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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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.
