Question from the Institute of Chartered Accountants in Ireland, Professional Examination 3, Management Accounting & Business Finance II, Autumn 1996. (45 minutes)

Some managements flex a budget linearly when wishing to make the budgeted volume and actual volume production more comparable. The basis for flexing can be either labour hours or machine hours.

REQUIRED 1. Discuss why flexing a budget linearly on the basis of either labour hours or machine hours may not be an appropriate basis. (9 marks)

2. Discuss how flexing a budget on a labour or machine hours basis may reduce effective cost control. (5 marks)

3. Discuss an alternative method of budgeting which might increase the relevance of the budget and improve effective cost control. (6 marks). nki6