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Questions and Answers
What is the primary purpose of a flexible budget?
What does a flexible budget variance indicate?
When actual revenues are included in a flexible budget model, what type of variances can occur?
In a flexible budget, how is the budgeted expense level determined?
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What is a potential implication of a large flexible budget variance?
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If 800 units are sold at a price of $102 per unit when the expected price is $100, what is the favorable revenue variance?
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What results from using a fixed budget model instead of a flexible budget model?
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If actual cost per unit is $50 instead of a budgeted $45, how is this reflected in the flexible budget variance?
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What does an aggregate unfavorable variance of $2,400 indicate?
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How is a flexible budget different from a fixed budget in terms of revenue?
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Study Notes
Flexible Budget Overview
- A flexible budget adjusts revenue and expenses based on actual sales activity, providing a dynamic financial planning tool.
- Actual revenues or units sold are entered into the flexible budget model, generating budgeted expenses through predetermined formulas linked to sales percentages.
- The flexible budget facilitates comparison against actual results for performance control and management.
Flexible Budget Variance
- A flexible budget variance indicates the difference between the budgeted amounts generated by the model and the actual financial results achieved.
- Variances primarily arise from budgeted versus actual expenses when actual revenues are input; variations in revenue occur when actual units sold are used.
- Larger flexible budget variances may signal the need to revise the underlying formulas for more accurate budgeting in future periods.
Comparative Analysis
- The total flexible budget variance is typically less than the total variance from a fixed budget model, as it adapts to align with actual economic performance.
- This adaptability can enhance management’s ability to analyze performance and control operations more effectively.
Example Scenario
- If a flexible budget anticipates a selling price of $100 per unit and 800 units are sold at an actual price of $102, a favorable revenue variance of $1,600 arises (800 units x $2 favorable price difference).
- Conversely, if the expected cost of goods sold is $45 per unit but the actual cost rises to $50, an unfavorable cost variance of $4,000 occurs (800 units x $5 unfavorable cost difference).
- The cumulative effect results in an unfavorable total variance of $2,400 (- $4,000 + $1,600).
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Description
This quiz explores the principles of flexible budgeting, focusing on how it adjusts based on actual sales activity. It delves into the generation of budgeted expense levels and the comparison with actual results for effective financial control.
