Why should the budget allowance for variable costs be flexed?

• A. To account for changes in the selling price of products.
• B. Because variable costs change in direct proportion to the level of activity, and flexing ensures the budget reflects actual activity levels.
• C. To adjust for errors in the original fixed cost estimates.
• D. Because variable costs remain constant regardless of activity level.

Answer: (B)

Verified step by step guidance

1. Understand the nature of variable costs: Variable costs are expenses that change directly in proportion to the level of activity or production. Examples include raw materials and direct labor costs.
2. Recognize the purpose of flexing a budget: Flexing a budget means adjusting the budgeted figures to reflect the actual level of activity. This ensures that the budget remains relevant and accurate as activity levels change.
3. Identify why flexing is necessary for variable costs: Since variable costs are tied to activity levels, flexing the budget allows for a more accurate comparison between actual costs and budgeted costs at the same activity level.
4. Distinguish variable costs from fixed costs: Fixed costs remain constant regardless of activity level, while variable costs fluctuate. Flexing is specifically relevant for variable costs due to their proportional nature.
5. Conclude the importance of flexing: Flexing the budget for variable costs ensures that the financial analysis and performance evaluation are based on realistic and comparable figures, reflecting the actual activity levels.