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    Question

    A manufacturing company experiences frequent

    fluctuations in production volume due to seasonal demand. Management wants a budgeting system that revises expected costs and revenues automatically whenever the level of activity changes, so that meaningful performance comparison can be made. Which type of budget would best serve this purpose?
    A Fixed budget prepared for one capacity level Correct Answer Incorrect Answer
    B Flexible budget prepared for multiple levels of activity Correct Answer Incorrect Answer
    C Master budget consolidating all functional budgets Correct Answer Incorrect Answer
    D Cash budget showing expected inflows and outflows Correct Answer Incorrect Answer
    E Zero-based budget requiring fresh justification of expenses Correct Answer Incorrect Answer

    Solution

    A flexible budget is a budget that is adjusted to reflect the actual level of activity, allowing for a more accurate comparison of budgeted and actual costs at different output levels. It is useful when output fluctuates as it e nables fair performance comparison and s eparates fixed and variable costs.   Note:

    • Fixed budget is used for only one level and is not adjustable
    • Master budget is used for overall planning and not activity-based adjustment
    • Cash budget helps in liquidity planning only
    • Zero-based helps in expense justification, not flexibility

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