Fundamentals of Cost Accounting 3rd Edition by William N. Lanen, Shannon W. Anderson, Michael Maher

Exercise 3

A flexible budget is:

a. Appropriate for control of factory overhead but not for control of direct materials and direct labor.

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b. Appropriate for control of direct materials and direct labor but not for control of factory overhead.

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c. Not appropriate when costs and expenses are affected by fluctuations in volume.

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d. Appropriate for any level of activity.

Step 1 of 2

Fundamentals of Variance Analysis;

Before attempting the question, students must comprehend thoroughly the concepts of flexible budgeting. In a nutshell, Flexible budgeting is basically a budget of standard costs that are going to be incurred at various levels of activity. Say for example if we are having standard costs of $ 100 for 100 units , then projecting standard costs for producing 150 units, 175 units or 200 units is part of flexible budgeting. Hence its purpose is to forecasting amount of standard costs for a given level of activity. Hence it is useful and appropriate for any level of activity, because of the fact that it gives us ready information to be compared with actual results and the management can then investigate the reasons of variations, if any occurred. Hence the answer is (D)