Answer (D) is correct. A flexible budget is essentially a series of budgets prepared for various levels of operating activity. A flexible budget facilitates comparison of actual results with budget figures. The purpose is to have a usable budget even though activity may differ from the level originally planned at the time the budget was prepared.
A company is focused on continuous improvement and wants to ensure that its budgeting process supports this goal. The company has already eliminated much of the waste from activities during previous budget periods and now wants to concentrate on value-added activities and improving relationships with suppliers and customers. Which of the following is the least beneficial budget solution for this company?
Answer (A) is correct. A flexible budget is adaptable to various levels of production. Flexible budgeting enables an organization to compute the levels of cost that “should” have been incurred given the level of output actually achieved. The flexible budget is usually prepared at the end of the period, making it the least beneficial budget solution for this company.
The difference between the actual amounts and the flexible budget amounts for the actual output achieved is the
Answer (B) is correct. A flexible budget is prepared at the end of the budget period when the actual results are available. A flexible budget reflects the revenues that should have been earned and costs that should have been incurred given the achieved levels of production and sales. The difference between the flexible budget and actual figures is known as the flexible budget variance.
An advantage of using a flexible budget compared to a static budget is that, in a flexible
Answer (D) is correct.
The actual level of production for a period is rarely identical to the level
that was projected when the period was being planned. Flexible budgets
use standard costs to report what costs “should” have been incurred given the actual level of production achieved.
A major disadvantage of a static budget is that
Answer (B) is correct. Static budgets are prepared based on the best estimates for output to be produced and costs to be incurred before the period begins. If there are any variations in conditions actually experienced, the static budget is unhelpful for diagnosing specific problem areas since it only reflects one level of activity.
Arkin Co.’s controller has prepared a flexible budget for the year just ended, adjusting the original static budget for the unexpected large increase in the volume of sales. Arkin’s costs are mostly variable. The controller is pleased to note that both actual revenues and actual costs approximated amounts shown on the flexible budget. If actual revenues and actual costs are compared with amounts shown on the original (static) budget, what variances would arise?
Answer (B) is correct. Since Arkin’s actual sales volume exceeded expectations, revenue variances will be favorable. By the same token, the higher level of output resulted in the company incurring more production costs than expected.
A method of budgeting in which the cost of each program must be justified, starting with the one most vital to the company, is
Answer (B) is correct. Zero-based budgeting is an effective means of bringing objective thinking to the budgeting process. The principal advantage of this approach is that managers are forced to review each program in its entirety at the beginning of every budget period, rather than merely extrapolate historical figures.
Comparing actual results with a budget based on achieved volume is possible with the use of a
Answer (D) is correct. A flexible budget is essentially a series of several budgets prepared for various levels of sales and production. At the end of the period, management can compare actual costs or performance with the appropriate budgeted level in the flexible budget. A flexible budget is designed to allow adjustment of the budget to the actual level of activity before comparing the budgeted activity with actual results.
The use of standard costs in the budgeting process signifies that an organization has most likely implemented a
Answer (A) is correct. A flexible budget is a series of budgets prepared for various levels of sales and production. Another view is that it is based on cost formulas, or standard costs. Thus, the cost formulas are fed into the computerized budget program along with the actual level of sales or production. The result is a budget created for the actual level of activity.
All of the following are advantages of the use of budgets in a management control system except that budgets:
Even the most advanced and accurate budget cannot prevent unauthorized expenditures. This is controlled
through management oversight, rather than the budgeting process.