Final answer:
In the context of preparing a flexible budget, neither variable nor fixed costs remain constant. Both variable costs and fixed costs can vary in a flexible budget. The correct answer is D.
Step-by-step explanation:
In the context of preparing a flexible budget, neither variable nor fixed costs remain constant. A flexible budget allows for adjustments in costs based on changes in production levels. Both variable costs, which change in proportion to the level of production, and fixed costs, which remain constant regardless of the level of production, can vary in a flexible budget.
In a flexible budget, only fixed costs remain constant. Variable costs vary with the level of production and do not remain constant.
When preparing a flexible budget, the correct answer is B: Only fixed costs remain constant. Fixed costs are expenditures that do not change regardless of the level of production, such as the rent on a factory or a retail space, machinery costs, or branding expenses. On the contrary, variable costs change with the level of output and typically show diminishing marginal returns, hence they are not constant in a flexible budget.
When preparing a flexible budget, option D is accurate: Neither variable nor fixed costs remain constant. A flexible budget is a dynamic financial plan that adjusts itself based on changes in activity levels. Unlike a static budget, which remains unchanged regardless of actual performance, a flexible budget takes into account the variability of both fixed and variable costs.
Fixed costs, such as rent and salaries, do not change with fluctuations in production or sales levels in the short term. However, a flexible budget recognizes that fixed costs may vary over a more extended period or under certain circumstances. Variable costs, on the other hand, fluctuate directly with changes in activity levels. In a flexible budget, both fixed and variable costs are adjusted proportionally to reflect the actual level of activity achieved.
This dynamic nature allows managers to make more accurate performance evaluations by comparing actual results with the budgeted figures that would have been expected at the actual level of activity. It provides a more realistic basis for cost control, decision-making, and performance analysis, fostering adaptability in response to the dynamic business environment. In essence, a flexible budget ensures a more reflective and practical approach to financial planning and management, considering the inherent variability in costs across different levels of business activity.