Assume that the simple profit variance is -$200,000, while the flexible profit v
ID: 2651371 • Letter: A
Question
Assume that the simple profit variance is -$200,000, while the flexible profit variance is +$200,000. Which of the following statements about this situation is most correct? (Points : 10) When the volume forecast error is accounted for, the business lost money.
When the volume forecast error is accounted for, the business broke even.
The business actually made a profit of $200,000.
The business actually made a profit of $400,000.
When the volume forecast error is accounted for, the business made money.
Explanation / Answer
Answer:
A static budget is a budget prepared for only one level of activity and it is based on the level of output planned at the start of the budget period. A master budget is an example of a static budget.
However, a flexible budget is developed using budgeted revenues or cost amounts based on the level of output actually achieved in the budget period. The key difference between a flexible budget and a static budget is the use of the actual output level in the flexible budget.
A static / simple budget is prepared for only one expected level of activity. However, a budget that adjusts to different levels of activity is a flexible budget (sometimes called a variable budget). It may be noted that the static budget is just the flexible budget for a single assumed level of activity.
Differences between actual results and the static budget for the original planned level of output are static-budget variances; whereas the differences between actual results and the flexible budget for the actual level of output achieved are flexible-budget variances. It may be noted here that Flexible budget variances reflect how actual results deviate from what was expected, given the achieved activity level.
Therefore, based on the above explanations it is clear that the most correct statement in the given situation shall be;
When the volume forecast error is accounted for, the business broke even.
Because once, the volume forecast error will be accounted for the whole of unfavorable simple profit variance of - $ 200,000 shall be set off / adjusted against the favorable flexible profit variance of + $ 200,000.