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

Exercise 4

What is the basic difference between a master budget and a flexible budget?

a. A flexible budget considers only variable costs; a master budget considers all costs.

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b. A master budget is based on a predicted level of activity; a flexible budget is based on the actual level of activity.

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c. A master budget is for an entire production facility; a flexible budget is applicable only to individual departments.

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d. A flexible budget allows management latitude in meeting goals; a master budget is based on a fixed standard.

Step 1 of 2

Fundamentals of Variance Analysis

Here the emphasis is on making distinction between Master budget and flexible budget. As we all know that master budget is prepared keeping in view an estimated level of activity. For example a master budget will be a comprehensive statement of costs and incomes of predetermined quantity, say 100 units but a flexible budget on the other hand will be a statement of standard costs of actual quantity produced. Assume that though we had predetermined that 100 units will be produced but in reality we produce 120 units. Now the concepts of Flexible budget is used to determine the standard costs of those 120 units. When we say standard costs that means we will be calculating total costs of 120 units keeping standards costs of each component in mind. In other words we will be projecting costs of 120 units with the question “what would have been the costs of 120 units had it been projected through master budget.” Hence the answer of the question is (D).