Final answer:
The correct answer is option a. Production performance should be evaluated based on the flexible budget.
Step-by-step explanation:
The student's question revolves around cost behavior and the integration of budgeting and cost analysis in management accounting. To answer the question, let's evaluate each statement individually:
- Production performance should ideally be evaluated based on the flexible budget because it adjusts for different levels of activity and provides a more accurate measure of performance by comparing what should have been spent at the actual level of output.
- A sales activity variance does not impact fixed production costs since fixed costs do not change with sales volume. They are incurred regardless of the level of output or sales.
- A sales activity variance also does not impact both variable and fixed production costs in general. If it's simply a variance in sales, the primary impact is on variable costs related to the production of goods sold.
- A sales activity variance primarily impacts variable production costs. This occurs because changes in sales affect the number of units sold and produced, thereby altering costs that vary with production such as materials and labor.
- Production performance should not typically be evaluated based on the master budget because the master budget is prepared for a set level of production. It does not adjust for the actual level of output.
Therefore, the correct statement among the options provided is a. Production performance should be evaluated based on the flexible budget.