Question

Variances for variable costs will be misleading when the planned output differs from budgeted output. A solution to this problem would be

A) to use a stricter budgeting process.
B) to use flexible budgeting.
C) to better predict the final output.
D) to allow more judgement involve in the budgeting process.

Answer 1

The best solution to manage misleading variances for variable costs when planned output differs from budgeted output is to apply flexible budgeting, which adjusts the budget according to actual output.

Step-by-step explanation:

When planned output differs from budgeted output, variances for variable costs can be misleading. The best solution to this issue is to use flexible budgeting, which adjusts budget expectations based on the actual level of output, allowing for more accurate cost control and performance evaluation. Flexible budgets account for changes in variable costs that are directly tied to actual production levels, such as costs for labor and raw materials.

With flexible budgets, a company can more effectively manage the economic decisions regarding current and future production or pricing, despite the presence of diminishing marginal returns and the increasing marginal cost of producing higher levels of output. This approach provides a framework that aligns better with real-world scenarios where actual output can differ from initial forecasts, hence avoiding the misguidance that static budgets might cause when dealing with variable costs.