When the activity level of the master/planning/static budget differs from the activity level (cost driver, allocation base; e.g., machine hours), then a flexible budget is needed to match the same activity level that the actuals are based on to truly analyze revenue and spending variances.

Question

When the activity level of the master/planning/static budget differs from the activity level (cost driver, allocation base; e.g., machine hours),  then a flexible budget is needed to match the same activity level that the actuals are based on to truly analyze revenue and spending variances.

BlackTom AI · Accepted Answer

Flexible budgets adjust budgeted revenues and variable costs to the actual level of the cost driver (e.g., machine hours or units produced), so they are required when the master/static budget’s activity differs from actual activity.

1) Relevant knowledge points and concepts
- Master/static budget: prepared for one planned activity level; does not change with actual output.
- Flexible budget: recalculates budgeted revenue and variable costs at the actual activity level; fixed costs remain unchanged.
- Cost behavior: variable costs and revenues are driven by activity (cost driver); fixed costs are not.
- Variance analysis: total variance = activity (volume) variance + spending/price variance. Comparing actuals to the flexible budget isolates spending/price variances; comparing flexible to static isolates activity variances.

2) Step-by-step reasoning
- If actual activity ≠ master budget activity, variable items in the master budget are inappropriate for comparison with actuals.
- Construct a flexible budget by applying per-unit (or per-hour) budgeted amounts to the actual activity level.
- Compare actual results to the flexible budget to measure controllable/spending variances; compare flexible to static to measure volume/activity variance.

3) Example calculations (intermediate steps)
- Suppose master budget: 1,000 machine hours, budgeted variable cost $50/hour → variable cost = 1,000 × $50 = $50,000.
- Actual: 1,200 machine hours, actual variable cost = $61,200.
- Flexible budget variable cost: 1,200 × $50 = $60,000.
- Spending variance = Actual − Flexible = $61,200 − $60,000 = $1,200 unfavorable.
- Activity variance = Flexible − Master = $60,000 − $50,000 = $10,000 (due to higher activity).

4) Why the correct answer is correct
- Without converting to a flexible budget, the $11,200 difference between actual variable cost ($61,200) and master budget ($50,000) would mix activity and spending effects, giving misleading conclusions. The flexible budget isolates the spending variance, enabling accurate analysis.

5) Why the other option is incorrect
- “False” would imply the static master budget suffices even when activity differs; that is incorrect because it conflates activity-driven differences with performance (controllable) differences.

6) Conclusion
- Therefore, the statement is True. This matches the provided answer: True.

When the activity level of the master/planning/static budget differs from the activity level (cost driver, allocation base; e.g., machine hours), then a flexible budget is needed to match the same activity level that the actuals are based on to truly analyze revenue and spending variances. 判断题

类似问题

Which budget evaluates the results of operations at the actual level of activity?

Flexing the budget means

Variable cost per unit and total fixed costs remain constant in the relevant range. Therefore, total fixed costs should not change with the change in activity level and you would take the variable cost per unit times the new activity level to generate the flexible budget line item.

Which of the following is TRUE of flexible budget?

The flexible budget for direct materials is computed in which of the following ways?

Laurie Inc.’s static budget for 10,000 units of production includes $60,000 for direct materials, $44,000 for direct labor, fixed utilities costs of $5,000, and supervisor salaries of $25,000. A flexible budget for 12,000 units of production would show

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