A flexible budget performance report compares:
Actual performance over several years.
Budget and actual performance based on actual sales volume.
Budget and actual performance based on budgeted sales volume.
Rolling budgets for different periods of time.
Actual performance over several months.
The Correct Answer and Explanation is:
Correct Answer:
Budget and actual performance based on actual sales volume.
Explanation
A flexible budget performance report is a managerial accounting tool used to compare a company’s actual financial results with what the results should have been, given the actual level of activity or sales volume. This type of report adjusts the original budget (also called the static budget) to reflect actual operating conditions, providing a more meaningful performance evaluation.
The static budget, prepared at the start of a period, is based on projected sales or production levels. However, because actual sales volume can differ significantly from projections, comparing actual results to a static budget can lead to misleading conclusions. For example, if actual sales are much higher than expected, costs will naturally be higher too. A static budget might make it appear that management overspent, when in reality, the increased spending was appropriate for the higher activity level.
In contrast, a flexible budget adjusts budgeted revenues and expenses to the actual activity level. This allows companies to analyze variances (differences between actual and budgeted performance) more accurately by isolating the effects of activity level from other factors like price changes or inefficiencies.
For example, suppose a company originally budgeted to produce 10,000 units, but it actually produced 12,000. The flexible budget recalculates what revenues and costs should have been for 12,000 units, providing a fair basis for comparison with actual results. Managers can then identify favorable or unfavorable variances that are due to price changes, efficiency, or cost control, rather than simply changes in volume.
Thus, the flexible budget performance report compares budget and actual performance based on actual sales volume, offering a clearer, more accurate picture of operational efficiency and financial management. It is a key tool in performance evaluation, variance analysis, and informed decision-making.
