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Hi,
What is the purpose of calculating ‘budget cost allowance’ in flexible budget?
I thought we calculate flexible budget to find out what we should actually spend for a level of activity and compared it to what we have spent and thus we can find out the variance of each cost? In budget cost allowance, there is no variance involved so what is the purpose of it?
‘Budget cost allowance’ is not a standard term, so it depends in what context the phrase is used.
If you are referring to a past exam question or a question in the BPP Revision Kit then say which question and then I will explain.
It’s in BPP text page 268.
5.3 Preparing a flexible budget.
Step 1:
The first step in the preparation of a flexible budget is the determination of cost behaviour patterns, which means deciding whether costs are fixed, variable or semi variable.Step 2:
The second step in the preparation of a flexible budget is to calculate the BUDGET COST ALLOWANCE for each cost item.Budget cost allowance = budgeted fixed* cost + (number of units x variable cost per unit)**
* nil for variable cost
** nil for fixed costSemi variable costs therefore need splitting into their fixed and variable components so that the budget cost allowance can be calculated. One method for splitting semi variable costs is the high/low method, which we covered in Chapter 9.
All it means is flexing the budget to calculate what the cost should be for the actual level of production (so that, as you stated in your first post, we can then compare the actual cost with the standard cost).
When flexing the budget, fixed costs will stay as per the original budget and variable costs will vary with the actual number of units produced.
All this is explained in my free lectures. The lectures are a complete free course for Paper PM and cover everything needed to be able to pass the exam well. If you are watching the lectures then you do not really need the Study Text. The book that is essential, regardless of how you choose to study, is the Revision Kit because question practice is vital to passing the exam.
I got it now! Thanks for your nice explanation 🙂 I will try to do question practice as much as I can!
Take care and stay safe sir!
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