Business – 5.5 Budgets – Meaning and purpose of budgets | e-Consult
5.5 Budgets – Meaning and purpose of budgets (1 questions)
Login to see all questions.
Click on a question to view the answer
Preparation steps:
- Identify the relevant activity measure (e.g., units produced, labour hours).
- Determine cost behaviour for each budget line (fixed, variable, mixed).
- Create a set of budgeted amounts for a range of activity levels (e.g., 80%, 100%, 120% of the plan).
- Apply the variable cost formulas to each activity level to generate the flexible budget figures.
Performance evaluation example:
| Activity level | Budgeted cost (£) | Actual cost (£) | Variance (£) |
| 100,000 units (planned) | 150,000 | - | - |
| 120,000 units (actual) | 180,000 | 190,000 | +10,000 (unfavourable) |
By comparing the actual cost with the flexible budget cost for the actual activity level, managers can isolate the effect of efficiency (variance) from the effect of volume changes.