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Under a fixed budget, comparing actual cost at a different activity level is misleading because
Afixed cost moves with the activity level
Ball costs stay constant at every level
Cvariable cost moves with the activity level
Dthe budget is prepared after the period
Answer & Solution
Correct answer: C. variable cost moves with the activity level
1. A fixed budget is set at one assumed level of activity.
2. Variable cost changes as activity changes, while fixed cost does not.
3. If actual activity differs, actual variable cost will differ for that reason alone.
4. The resulting variance mixes a volume effect with any real efficiency effect.
5. Flexing the budget to the actual level is what separates the two.
_Source: ICAI Cost and Management Accounting Ch15 'Budgets and Budgetary Control', section 15.7_
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