Question

The volume of output at Bubba's Bait and Beer last month was 40,000 units, while the budgeted output was 30,000 units. Earl reminded Bubba that:

A. Comparison of budgeted results and actual results will be misleading unless the company uses a flexible budget.
B. Actual fixed costs per unit may be expected to exceed budgeted levels.
C. Actual cost per unit will be higher than standard cost per unit.
D. Both total production costs and unit production costs should be approximately 25% above budgeted levels.

Answer 1

Earl is right in suggesting the use of a flexible budget for an accurate comparison of budgeted versus actual results, taking into account the changes in output volume.

Step-by-step explanation:

Earl's reminder to Bubba regarding the volume of output at Bubba's Bait and Beer suggests that a comparison of budgeted results and actual results will be misleading unless the company uses a flexible budget. This is because a flexible budget adjusts to changes in the volume of activity, and without it, any variance analysis would not take into account the actual level of activity. In this case, as actual production exceeded the budgeted amount, the fixed costs per unit would decrease, not increase, as they are spread over more units. Therefore, the correct statement by Earl would be:

A. Comparison of budgeted results and actual results will be misleading unless the company uses a flexible budget.