Rensings groomers is in the dog grooming business A flexible budget is more informative than a static budget because it provides the relevant information for the actual level of activity as standard, which will be useful for analysing the variances. However, a state budget will be at the planned activity level, and our actual activity level can be different from the planned level, meaning the analysis of variances will not be accurate by using a static budget with actual results.
The Correct Answer and Explanation is:
A flexible budget is more useful than a static budget because it adapts to the actual level of activity, providing more relevant and accurate financial information. A static budget, on the other hand, is set at the planned activity level and remains fixed regardless of actual performance. This can lead to inaccuracies when comparing actual results to budgeted figures, especially if the actual level of activity differs significantly from what was originally planned.
For example, Rensings Groomers might plan for 500 dog grooming sessions in a month, but if they end up performing only 400, a static budget will still reflect the financials based on 500 sessions. This discrepancy would make it difficult to accurately assess performance because the budget does not reflect the reality of the actual activity level. Variances in revenue and costs, such as labor and supplies, may seem unfavorable or favorable, but the cause could be simply the difference in the number of services provided.
A flexible budget adjusts for changes in the level of activity, allowing for a more meaningful analysis of variances. If Rensings Groomers actually performs 400 sessions, the flexible budget will adjust its revenue and cost expectations to match this number, providing a clearer view of whether costs were controlled and whether the business was able to maintain profitability at the reduced activity level.
In summary, a flexible budget offers a more accurate analysis of performance by aligning with actual results, while a static budget can lead to misleading conclusions if the actual activity level diverges from the planned one. By using a flexible budget, businesses can make more informed decisions and pinpoint the causes of variances, whether they are due to volume changes, cost inefficiencies, or other factors.
