CHAPTER 7: FLEXIBLE BUDGETS, VARIANCES, AND MANAGEMENT CONTROL: I
TRUE/FALSE
1.The master budget is one type of flexible budget.
Answer:FalseDifficulty:1Objective:1
The master budget is a static budget.
2.A flexible budget is calculated at the start of the budget period.
Answer:FalseDifficulty:1Objective:1
A flexible budget is calculated at the end of the budget period when actual output is known.
3.Information regarding the causes of variances is provided when the master budget is compared with actual results.
Answer:FalseDifficulty:2Objective:1
Little information regarding the causes of variances is provided when the master budget is compared with actual results because you are comparing a budget for one level of activity with actual costs for a different level of activity.
4.A favorable variance results when budgeted revenues exceed actual revenues.
Answer:FalseDifficulty:2Objective:1
An unfavorable variance results when budgeted revenues exceed actual revenues.
5.Management by exception is the practice of concentrating on areas not operating as anticipated (such as a cost overrun) and placing less attention on areas operating as anticipated.
Answer:TrueDifficulty:1Objective:1
6.The essence of variance analysis is to capture a departure from what was expected.
Answer:TrueDifficulty:1Objective:1
7.A favorable variance should be ignored by management.
Answer:FalseDifficulty:1Objective:1
Favorable variance investigation may lead to improved production methods, other discoveries for future opportunities, or not be good news at all and adversely affect other variances.
8.An unfavorable variance may be due to poor planning rather than due to inefficiency.
Answer:TrueDifficulty:2Objective:1
9.If budgets contain slack, cost variances will tend to be favorable.
Answer:TrueDifficulty:2Objective:1
10.The only difference between the static budget and flexible budget is that the static budget is prepared using planned output.
Answer:TrueDifficulty:2Objective:2
11.The static-budget variance can be subdivided into the flexible-budget variance and the sales-volume variance.
Answer:TrueDifficulty:2Objective:2
12.The flexible-budget variance may be the result of inaccurate forecasting of units sold.
Answer:FalseDifficulty:3Objective:2
The sales-volume variance is the result of inaccurate forecasting of units sold.
13.Decreasing demand for a product may create a favorable sales-volume variance.
Answer:FalseDifficulty:2Objective:2
Decreasing demand for a product may create an unfavorable sales-volume variance.
14.An unfavorable variance is conclusive evidence of poor performance.
Answer:FalseDifficulty:2Objective:2
An unfavorable variance suggests further investigation, not conclusive evidence of poor performance.
15.A company would not need to use a flexible budget if it had perfect foresight about actual output units.
Answer:TrueDifficulty:2Objective:2
16.The flexible-budget variance pertaining to revenues is often called a selling-price variance.
Answer:TrueDifficulty:1Objective:2
17.Cost control is the focus of the sales-volume variance.
Answer:FalseDifficulty:2Objective:2
The sales-volume variance is not a measure of cost, but rather a measure of actual output units differing from budgeted output units.
18.Managers generally have more control over efficiency variances than price variances.
Answer:TrueDifficulty:3Objective:3
Efficiency variances are primarily affected by internal factors, whereas price changes may be influenced by market factors.
19.To prepare budgets based on actual data from past periods is preferred since past inefficiencies are excluded.
Answer:FalseDifficulty:2Objective:3
A deficiency of using budgeted input quantity information based on actual quantity data from past periods is that past inefficiencies are included.
20.All budgets are based on standard costs.
Answer:FalseDifficulty:2Objective:3
Budgets may be based on standard costs, actual amounts from last year, or data from other companies.
21.A standard is attainable through efficient operations but allows for normal disruptions such as machine breakdowns and defective production.
Answer:TrueDifficulty:3Objective:3
22.The presumed cause of a material price variance will determine how a company responds.
Answer:TrueDifficulty:1Objective:4
23.The use of high-quality raw materials is likely to result in a favorable efficiency variance and an unfavorable price variance.
Answer:TrueDifficulty:2Objective:4
24.The direct manufacturing labor price variance is likely to be favorable if higher-skilled workers are put on a job.
Answer:FalseDifficulty:2Objective:4
The direct manufacturing labor variance is likely to be unfavorable if higher-skilled workers are put on a job since they are usually also higher paid.
25.Although computed separately, price variances and efficiency variances should not be analyzed separately from each other.
Answer:TrueDifficulty:2Objective:4
26.A favorable variance can be automatically interpreted as “good news.”
Answer:FalseDifficulty:1Objective:5
A favorable variance may not be good news at all because it adversely affects other variances that increase total costs.
27.Variances often affect each other.
Answer:TrueDifficulty:1Objective:5
28.If variance analysis is used for performance evaluation, managers are encouraged to meet targets using creativity and resourcefulness.
Answer:FalseDifficulty:2Objective:5
The most common outcome when variance analysis is used for performance evaluation is that managers seek targets that are easily attainable and avoid targets that require creativity and resourcefulness.
29.For critical items such as product defects, a small variance may prompt investigation.
Answer:TrueDifficulty:2Objective:5
30.A particular variance generally signals one particular problem.
Answer:FalseDifficulty:1Objective:5
There are many potential causes of a single variance.
31.Continuous improvement budgeted costs target price reductions and efficiency improvements.
Answer:TrueDifficulty:1Objective:6
32.Improvement opportunities are easier to identify when products have been on the market for a considerable period of time.
Answer:FalseDifficulty:2Objective:6
Improvement opportunities are easier to identify when products are first produced.
33.It is best to rely totally on financial performance measures rather than using a combination of financial and nonfinancial performance measures.
Answer:FalseDifficulty:2Objective:6
It is best to rely on a combination of financial and nonfinancial performance measures.
34.From the perspective of control, the direct materials price variance should be isolated at the time the direct materials are requisitioned for use.
Answer:FalseDifficulty:2Objective:6
From the perspective of control, the direct materials price variance should be isolated at the earliest possible time, which is at the time of purchase not of use.
35.Employees logging in to production floor terminals and other modern technologies greatly facilitate the use of a standard costing system.
Answer:TrueDifficulty:1Objective:6
36.Performance variance analysis can be used in activity-based costing systems.
Answer:TrueDifficulty:1Objective:7
37.Price variances can be calculated for batch-level costs as well as for output unit-level costs.
Answer:TrueDifficulty:1Objective:7
38.Benchmarking is the continuous process of measuring products, services, and activities against the best possible levels of performance, either inside or outside the organization.
Answer:TrueDifficulty:1Objective:8
39.When benchmarking, the best levels of performance are typically found in companies that are totally different.
Answer:FalseDifficulty:1Objective:8
When benchmarking, the best levels of performance are typically found in competing companies or in companies having similar processes
40.One problem with benchmarking is ensuring that numbers are comparable.
Answer:TrueDifficulty:1Objective:8
41.When benchmarking it is best when management accountants simply analyze the costs and allow management to provide the insight as to why the revenues and costs differ between companies.
Answer:FalseDifficulty:1Objective:8
When benchmarking, management accountants are more valuable when they analyze the costs and also provide management with insight as to why the revenues and costs differ between companies.
MULTIPLE CHOICE
42.The master budget is
a.a flexible budget.
b.a static budget.
c.developed at the end of the period.
d.based on the actual level of output.
Answer:bDifficulty:1Objective:1
43.A flexible budget
a.is another name for management by exception.
b.is developed at the end of the period.
c.is based on the budgeted level of output.
d.provides favorable operating results.
Answer:bDifficulty:1Objective:1
44.Management by exception is the practice of concentrating on
a.the master budget.
b.areas not operating as anticipated.
c.favorable variances.
d.unfavorable variances.
Answer:bDifficulty:1Objective:1
45.A variance is
a.the gap between an actual result and a benchmark amount.
b.the required number of inputs for one standard output.
c.the difference between an actual result and a budgeted amount.
d.the difference between a budgeted amount and a standard amount.
Answer:cDifficulty:1Objective:1
46.An unfavorable variance indicates that
a.actual costs are less than budgeted costs.
b.actual revenues exceed budgeted revenues.
c.the actual amount decreased operating income relative to the budgeted amount.
d.all of the above are true.
Answer:cDifficulty:2Objective:1
47.A favorable variance indicates that
a.budgeted costs are less than actual costs.
b.actual revenues exceed budgeted revenues.
c.the actual amount decreased operating income relative to the budgeted amount.
d.all of the above are true.
Answer:bDifficulty:2Objective:1
THE FOLLOWING INFORMATION APPLIES TO QUESTIONS 48 THROUGH 50.
Abernathy Corporation used the following data to evaluate their current operating system. The company sells items for $10 each and used a budgeted selling price of $10 per unit.
ActualBudgeted
Units sold92,000 units90,000 units
Variable costs$450,800$432,000
Fixed costs$ 95,000$100,000
48.What is the static-budget variance of revenues?
a.$20,000 favorable
b.$20,000 unfavorable
c.$2,000 favorable
d.$2,000 unfavorable
Answer:aDifficulty:2Objective:1
(92,000 units x $10) - (90,000 units x $10) = $20,000 F
49.What is the static-budget variance of variable costs?
a.$1,200 favorable
b.$18,800 unfavorable
c.$20,000 favorable
d.$1,200 unfavorable
Answer:bDifficulty:2Objective:1
$450,800 - $432,000 = $18,800 U
50.What is the static-budget variance of operating income?
a.$3,800 favorable
b.$3,800 unfavorable
c.$6,200 favorable
d.$6,200 unfavorable
Answer:cDifficulty:2Objective:1
ActualStatic Static-budget
ResultsBudgetVariance
Units sold92,00090,000
Revenues$920,000$900,000 $20,000 F
Variable costs450,800432,000 18,800 U
Contribution margin$469,200$468,000 $1,200 F
Fixed costs 95,000 100,000 (5,000) F
Operating income$374,200$368,000 $6,200 F
THE FOLLOWING INFORMATION APPLIES TO QUESTIONS 51 THROUGH 53.
Bates Corporation used the following data to evaluate their current operating system. The company sells items for $10 each and used a budgeted selling price of $10 per unit.
ActualBudgeted
Units sold495,000 units500,000 units
Variable costs$1,250,000$1,500,000
Fixed costs$ 925,000$ 900,000
51.What is the static-budget variance of revenues?
a.$50,000 favorable
b.$50,000 unfavorable
c.$5,000 favorable
d.$5,000 unfavorable
Answer:bDifficulty:2Objective:1
(495,000 units x $10) - (500,000 units x $10) = $50,000 U
52.What is the static-budget variance of variable costs?
a.$200,000 favorable
b.$50,000 unfavorable
c.$250,000 favorable
d.$250,000 unfavorable
Answer:cDifficulty:2Objective:1
$1,250,000 - $1,500,000= $250,000 F
53.What is the static-budget variance of operating income?
a.$175,000 favorable
b.$195,000 unfavorable
c.$225,000 favorable
d.$325,000 unfavorable
Answer:aDifficulty:2Objective:1
ActualStaticStatic-budget
ResultsBudget Variance
Units sold495,000500,000
Revenues$4,950,000$5,000,000 $(50,000) U
Variable costs1,250,0001,500,000 (250,000) F
Contribution margin$3,700,000$3,500,000 $200,000 F
Fixed costs 925,000 900,000 25,000 U
Operating income$2,775,000$2,600,000 $175,000 F
54.Regier Company had planned for operating income of $10 million in the master budget but actually achieved operating income of only $7 million.
a.The static-budget variance for operating income is $3 million favorable.
b.The static-budget variance for operating income is $3 million unfavorable.
c.The flexible-budget variance for operating income is $3 million favorable.
d.The flexible-budget variance for operating income is $3 million unfavorable.
Answer:bDifficulty:2Objective:1
55.The flexible budget contains
a.budgeted amounts for actual output.
b.budgeted amounts for planned output.
c.actual costs for actual output.
d.actual costs for planned output.
Answer:aDifficulty:1Objective:2
56.The following items are the same for the flexible budget and the master budget EXCEPT
a.the same variable cost per unit.
b.the same total fixed costs.
c.the same units sold.
d.the same sales price per unit.
Answer:cDifficulty:2Objective:2
57.The sales-volume variance is due to
a.using a different selling price from that budgeted.
b.inaccurate forecasting of units sold.
c.poor production performance.
d.both (a) and (b).
Answer:bDifficulty:2Objective:2
58.An unfavorable sales-volume variance could result from
a.decreased demand for the product.
b.competitors taking market share.
c.customer dissatisfaction with the product.
d.all of the above.
Answer:dDifficulty:2Objective:2
59.If a sales-volume variance was caused by poor-quality products, then the ______would be in the best position to explain the variance.
a.production manager
b.sales manager
c.purchasing manager
d.management accountant
Answer:aDifficulty:2Objective:2
60.The variance that is BEST for measuring operating performance is the
a.static-budget variance.
b.flexible-budget variance.
c.sales-volume variance.
d.selling-price variance.
Answer:bDifficulty:2Objective:2
61.An unfavorable flexible-budget variance for variable costs may be the result of
a.using more input quantities than were budgeted.
b.paying higher prices for inputs than were budgeted.
c.selling output at a higher selling price than budgeted.
d.both (a) and (b).
Answer:dDifficulty:3Objective:2
62.An unfavorable variance
a.may suggest investigation is needed.
b.is conclusive evidence of poor performance.
c.demands that standards be recomputed.
d.indicates continuous improvement is needed.
Answer:aDifficulty:2Objective:2
63.All of the following are needed to prepare a flexible budget EXCEPT
a.determining the budgeted variable cost per output unit.
b.determining the budgeted fixed costs.
c.determining the actual selling price per unit.
d.determining the actual quantity of output units.
Answer:cDifficulty:3Objective:2
64.The variance that LEAST affects cost control is the
a.flexible-budget variance.
b.direct-material-price variance.
c.sales-volume variance.
d.direct manufacturing labor efficiency variance.
Answer:cDifficulty:2Objective:2
65.A flexible-budget variance is $800 favorable for unit-related costs. This indicates that
a.costs were $800 more than the master budget.
b.costs were $800 less than for the planned level of activity.
c.costs were $800 more than standard for the achieved level of activity.
d.costs were $800 less than standard for the achieved level of activity.
Answer:dDifficulty:2Objective:2
THE FOLLOWING INFORMATION APPLIES TO QUESTIONS 66 THROUGH 68.
JJ White planned to use $82 of material per unit but actually used $80 of material per unit, and planned to make 1,200 units but actually made 1,000 units.
66.The flexible-budget amount is
a.$80,000.
b.$82,000.
c.$96,000.
d.$98,400.
Answer:bDifficulty:2Objective:2
1,000 units x $82 = $82,000
67.The flexible-budget variance is
a.$2,000 favorable.
b.$14,000 unfavorable.
c.$16,400 unfavorable.
d.$2,400 favorable.
Answer:aDifficulty:2Objective:2
($80 - $82) x 1,000 = $2,000 F
68.The sales-volume variance is
a.$2,000 favorable.
b.$14,000 unfavorable.
c.$16,400 unfavorable.
d.$2,400 favorable.
Answer:cDifficulty:2Objective:2
(1,000 – 1,200) x $82 = $16,400 U
69.Aebi Corporation currently produces cardboard boxes in an automated process. Expected production per month is 20,000 units, direct-material costs are $0.60 per unit, and manufacturing overhead costs are $9,000 per month. Manufacturing overhead is allocated based on units of production. What is the flexible budget for 10,000 and 20,000 units, respectively?
a.$10,500; $16,500
b.$10,500; $21,000
c.$15,000; $21,000
d.none of the above
Answer:cDifficulty:2Objective:2
10,000 units20,000 units
Materials ($0.60)$ 6,000$12,000
Machinery 9,000 9,000
$15,000$21,000
THE FOLLOWING INFORMATION APPLIES TO QUESTIONS 70 THROUGH 72.
McKenna Incorporated planned to use $24 of material per unit but actually used $25 of material per unit, and planned to make 1,000 units but actually made 1,200 units.
70.The flexible-budget amount is
a.$24,000.
b.$25,000.
c.$28,800.
d.$30,000.
Answer:cDifficulty:2Objective:2
1,200 units x $24 = $28,800
71.The flexible-budget variance is
a.$4,800 favorable.
b.$1,200 unfavorable.
c.$5,000 unfavorable.
d.$6,000 favorable.
Answer:bDifficulty:2Objective:2
($25 - $24) x 1,200 = $1,200 U
72.The sales-volume variance is
a.$4,800 favorable.
b.$1,200 unfavorable.
c.$5,000 unfavorable.
d.$6,000 favorable.
Answer:aDifficulty:2Objective:2
(1,200 – 1,000) x $24 = $4,800 F
73.Hemberger Corporation currently produces baseball caps in an automated process. Expected production per month is 20,000 units, direct material costs are $1.50 per unit, and manufacturing overhead costs are $23,000 per month. Manufacturing overhead is allocated based on units of production. What is the flexible budget for 10,000 and 20,000 units, respectively?
a.$26,500; $41,500
b.$26,500; $53,000
c.$38,000; $53,000
d.none of the above
Answer:cDifficulty:2Objective:2
10,000 units20,000 units
Materials ($1.50)$15,000$30,000
Machinery 23,00023,000
$38,000$53,000
THE FOLLOWING INFORMATION APPLIES TO QUESTIONS 74 THROUGH 77.
The actual information pertains to the month of August. As part of the budgeting process Alloway’s Fencing Company developed the following static budget for August. Alloway is in the process of preparing the flexible budget and understanding the results.
ActualFlexibleStatic
ResultsBudgetBudget
Sales volume (in units)# 20,000# 25,000
======
Sales revenues$1,000,000$$1,250,000
Variable costs 512,000$ ______600,000
Contribution margin488,000$650,000
Fixed costs 458,000$ ______450,000
Operating profit$ 30,000$$ 200,000
74.The flexible budget will report ______for variable costs.
a.$512,000
b.$600,000
c.$480,000
d.$640,000
Answer:cDifficulty:2Objective:2
20,000 units ($600,000/25,000) = $480,000
75.The flexible budget will report ______for the fixed costs.
a.$458,000
b.$450,000
c.$360,000
d.$572,500
Answer:bDifficulty:2Objective:2
$450,000, given in the static budget
76.The flexible-budget variance for variable costs is
a.$32,000 unfavorable.
b.$120,000 unfavorable.
c.$32,000 favorable.
d.$120,000 favorable.
Answer:aDifficulty:2Objective:2
$512,000 - (20,000 x $600,000/25,000) = $32,000 U
77.The PRIMARY reason for low operating profits was
a.the variable-cost variance.
b.increased fixed costs.
c.a poor management accounting system.
d.lower sales volume than planned.
Answer:dDifficulty:3Objective:2
THE FOLLOWING INFORMATION APPLIES TO QUESTIONS 78 THROUGH 82.
Peters’ Company manufacturers tires. Some of the company's data was misplaced. Use the following information to replace the lost data:
ActualResults / Flexible-Budget
Variances / Flexible
Budget / Sales-Volume
Variances / Static
Budget
Units
sold / #225,000 / #225,000 / #206,250
Revenues / $84,160 / $2,000 F / (A) / $2,800 U / (B)
Variable
costs / (C) / $400 U / $31,720 / $4,680 F / $36,400
Fixed
costs / $16,560 / $1,720 F / $18,280 / 0 / $18,280
Operating
income / $35,480 / (D) / $32,160 / (E) / $30,280
78.What amounts are reported for revenues in the flexible-budget (A) and the static-budget (B), respectively?
a.$82,160; $79,360
b.$82,160; $84,960
c.$84,960; $88,960
d.$84,960; $83,360
Answer:bDifficulty:2Objective:2
79.What are the actual variable costs (C)?
a.$36,400
b.$32,120
c.$31,320
d.$27,040
Answer:bDifficulty:2Objective:2
80.What is the total flexible-budget variance (D)?
a.$120 unfavorable
b.$0
c.$680 favorable
d.$3,320 favorable
Answer:dDifficulty:2Objective:2
81.What is the total sales-volume variance (E)?
a.$7,480 unfavorable
b.$2,800 unfavorable
c.$1,880 favorable
d.$7,480 favorable
Answer:cDifficulty:2Objective:2
82.What is the total static-budget variance?
a.$5,200 favorable
b.$3,320 favorable
c.$1,880 unfavorable
d.$1,880 favorable
Answer:aDifficulty:2Objective:2
83.The flexible-budget variance for direct cost inputs can be further subdivided into
a.a static-budget variance and a sales-volume variance.
b.a sales-volume variance and an efficiency variance.
c.a price variance and an efficiency variance.
d.a static-budget variance and a price variance.
Answer:cDifficulty:1Objective:3
84.Budgeted input quantity information may be obtained from
a.actual input quantities used last period.
b.standards developed by your company.
c.data from other companies that have similar processes.
d.all of the above.
Answer:dDifficulty:1Objective:3
85.When actual input data from past periods is used to develop a budget
a.past inefficiencies are excluded.
b.expected future changes are incorporated.
c.information is available at a low cost.
d.audited financial information must be used.
Answer:cDifficulty:2Objective:3
86.When standards are used to develop a budget
a.past inefficiencies are excluded.
b.benchmarking must also be used.
c.information is available at a low cost.
d.flexible-budget amounts are difficult to determine.
Answer:aDifficulty:2Objective:3
87.The term budget indicates
a.that standards have been used to develop the budget.
b.that actual input data from past periods have been used to develop the budget.
c.that engineering studies have been used to develop the budget.
d.planned amounts for a future accounting period.
Answer:dDifficulty:1Objective:3
88.A standard input
a.is a carefully determined price, cost, or quantity.