ACCA Performance Management (F5) Certification Practice Exam

What is the relationship between the flexible budget and activity levels?

1. The flexible budget does not change with activity

2. The flexible budget is fixed regardless of activity

3. The flexible budget changes with the volume of activity

4. The flexible budget only accounts for fixed costs

The correct answer is: The flexible budget changes with the volume of activity

The flexible budget is designed to adjust according to the actual level of activity or output. This means that as the volume of production or services changes, the flexible budget recalibrates to reflect those changes in activity levels. For example, if a company produces more units than originally planned, the flexible budget will show increased revenues and variable costs corresponding to that higher level of activity. This adaptability makes the flexible budget particularly useful for performance evaluation, as it allows for a more accurate comparison between budgeted and actual results. By understanding the relationship between costs and activities, managers can better assess operational efficiency and identify areas needing improvement. In contrast, other options suggest that the flexible budget remains static regardless of activity, which does not accurately represent its purpose. A flexible budget shouldn't only account for fixed costs either, as it primarily considers variable costs that fluctuate with the volume of activity. Therefore, recognizing that the flexible budget changes with the volume of activity is fundamental to utilizing this tool effectively in performance management.