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1Which of the following statements is correct?

A)Unfavorable cost variances always indicate bad performance.

B)Favorable cost variances always indicate good performance.

C)Both of the above statements are correct.

D)Neither of the above statements are correct.

2Lizzie's Riverside Grill compares monthly operating results with a static budget prepared at the beginning of the year. When actual sales are less than budget, the restaurant would usually report favorable variances on:

A)fixed supervisory salaries and variable food costs.

B)variable food costs but not fixed supervisory salaries.

C)fixed supervisory salaries but not variable food costs

D)neither fixed supervisory salaries or variable food costs

3A company's static budget estimate of total overhead costs was $400,000 based on the assumption that 20,000 units would be produced and sold. The company estimates that 30% of its overhead is variable and the remainder is fixed. What would be the total overhead cost according to the flexible budget if 24,000 units were produced and sold?

A)$384,000

B)$400,000

C)$424,000

D)$464,000

4A major weakness of static budgets is that:

A)they are geared only to a single level of activity.

B)they cannot be used to assess whether variable costs are under control.

C)they force the manager to compare actual costs at one level of activity to budgeted costs at a different level of activity.

D)all of the above.

5An activity variance is the difference between:

A)a revenue or cost item in the static planning budget and the same item in the flexible budget.

B)how much the revenue should have been, given the actual level of activity, and the actual revenue for the period.

C)how much a cost should have been, given the actual level of activity, and the actual amount of the cost.

D)none of the above.

6If the average selling price is greater than expected, the revenue variance is:

A)labeled as favorable.

B)labeled as unfavorable.

C)cannot be labeled as favorable or unfavorable without obtaining an explanation.

D)an activity variance.

7If the actual cost incurred is greater than what the cost should have been as set forth in the flexible budget, the variance is:

A)labeled as favorable.

B)labeled as unfavorable.

C)cannot be labeled as favorable or unfavorable without obtaining an explanation.

D)an activity variance.

8Which of the following statements is not correct?

A)To generate a favorable variance for net operating income in a business that serves customers managers must take actions to increase client-visits.

B)To generate a favorable overall revenue and spending variance, managers must take actions to protest selling prices.

C)Flexible budget performance reports provide useful more useful information to managers than a simple comparison of budgeted to actual results.

D)A flexible budget performance report separates the effects of how well prices were controlled and operations were managed.

9Let q1represents client visits and q2represents hours of operations. The electricity cost for Blissful Spa depends on both client-visits and the hours of operations and its cost formula is $400 + $0.10q1+ 2.00 q2. If the actual number of client visits is 800 and the salon was open for 200 hours during the month, the flexible budget amount for electricity is:

A)$840

B)$880

C)$2,080

D)$2,020

10Which of the following statements is not correct?

A)A flexible budget allows managers to isolate activity variances and revenue and spending variances.

B)One of the common errors in preparing performance reports is to implicitly assume that all costs are fixed.

C)One of the common errors in preparing performance reports is to implicitly assume that all costs are variable.

D)Comparing static planning budget costs to actual costs only makes sense if the cost is variable.

he correct answer for each question is indicated by a.

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1 CORRECTWhich of the following statements is correct?

A)Unfavorable cost variances always indicate bad performance.

B)Favorable cost variances always indicate good performance.

C)Both of the above statements are correct.

D)Neither of the above statements are correct.

Feedback:The correct answer is D (Learning Objective 1):Managers should not assume that unfavorable cost variances always indicate bad performance and that favorable cost variances always indicate good performance. Unfavorable cost variances may result from an increase in revenues (e.g., ingredient costs may be higher than expected because more meals were served in a restaurant than anticipated). And, favorable cost variances may result from a decrease in revenues (e.g., ingredient costs may be lower than expected because less meals were served in a restaurant than anticipated).

2 INCORRECTLizzie's Riverside Grill compares monthly operating results with a static budget prepared at the beginning of the year. When actual sales are less than budget, the restaurant would usually report favorable variances on:

A)fixed supervisory salaries and variable food costs.

B)variable food costs but not fixed supervisory salaries.

C)fixed supervisory salaries but not variable food costs

D)neither fixed supervisory salaries or variable food costs

Feedback:The correct answer is B (Learning Objective 1):Since supervisory salaries are fixed, they would not be expected to change when then activity level (i.e., sales) changes. As such, actual supervisory salaries would be expected to equal budgeted supervisory salaries, and no variance would be expected. However, since food costs are variable, they would be expected to decrease as the activity level (i.e., sales) decreased. As such, because a static budget is being used (and actual sales are less than budgeted sales), actual food costs would be expected to be less than budgeted food costs, and a favorable variance would be reported.

3 INCORRECTA company's static budget estimate of total overhead costs was $400,000 based on the assumption that 20,000 units would be produced and sold. The company estimates that 30% of its overhead is variable and the remainder is fixed. What would be the total overhead cost according to the flexible budget if 24,000 units were produced and sold?

A)$384,000

B)$400,000

C)$424,000

D)$464,000

Feedback:The correct answer is C (Learning Objective 1):First, determine the budgeted variable overhead as follows.Budgeted variable overhead = Budgeted overhead cost of $400,000 x 30% (variable portion) = $120,000Next, determine the budgeted variable overhead per unit as follows.Budgeted variable overhead of $120,000 20,000 units produced and sold = $6.00 per unit Then, determine the budgeted fixed overhead as follows.Budgeted fixed overhead = Budgeted overhead cost of $400,000 x 70% (fixed portion) = $280,000.Finally, the flexible budget at 24,000 units is determined as follows.Budgeted variable overhead of (24,000 units x $6.00 per unit variable overhead) + budgeted fixed overhead of $280,000 = $424,000

4 INCORRECTA major weakness of static budgets is that:

A)they are geared only to a single level of activity.

B)they cannot be used to assess whether variable costs are under control.

C)they force the manager to compare actual costs at one level of activity to budgeted costs at a different level of activity.

D)all of the above.

Feedback:The correct answer is D (Learning Objective 1):A static budget is prepared at the beginning of the budgeting period and is valid for only the planned level of activity. It may be suitable for planning purposes, but it is inadequate for evaluating how well costs are controlled. If actual activity during a period differs from what was planned, it would be misleading to simply compare actual costs to the static budget. If activity is higher than expected, variable costs should be higher than expected. On the other hand, if activity is lower than expected, variable costs should be lower than expected.

5 INCORRECTAn activity variance is the difference between:

A)a revenue or cost item in the static planning budget and the same item in the flexible budget.

B)how much the revenue should have been, given the actual level of activity, and the actual revenue for the period.

C)how much a cost should have been, given the actual level of activity, and the actual amount of the cost.

D)none of the above.

Feedback:The correct answer is A (Learning Objective 2):An activity variance is the difference between a revenue or cost item in the static planning budget and the same item in the flexible budget (choice A).A revenue (rather than activity) variance is the difference between how much the revenue should have been, given the actual level of activity, and the actual revenue for the period. A spending (rather than activity) variance is the difference between how much a cost should have been, given the actual level of activity, and the actual amount of the cost.

6 INCORRECTIf the average selling price is greater than expected, the revenue variance is:

A)labeled as favorable.

B)labeled as unfavorable.

C)cannot be labeled as favorable or unfavorable without obtaining an explanation.

D)an activity variance.

Feedback:The correct answer is A (Learning Objective 3):If the average selling price is greater than expected, the revenue variance is favorable.

7 CORRECTIf the actual cost incurred is greater than what the cost should have been as set forth in the flexible budget, the variance is:

A)labeled as favorable.

B)labeled as unfavorable.

C)cannot be labeled as favorable or unfavorable without obtaining an explanation.

D)an activity variance.

Feedback:The correct answer is B (Learning Objective 3):If the actual cost incurred is greater than what the cost should have been as set forth in the flexible budget, the variance is labeled as unfavorable.

8 INCORRECTWhich of the following statements is not correct?

A)To generate a favorable variance for net operating income in a business that serves customers managers must take actions to increase client-visits.

B)To generate a favorable overall revenue and spending variance, managers must take actions to protest selling prices.

C)Flexible budget performance reports provide useful more useful information to managers than a simple comparison of budgeted to actual results.

D)A flexible budget performance report separates the effects of how well prices were controlled and operations were managed.

Feedback:The correct answer is B (Learning Objective 4):To generate a favorable overall revenue and spending variance, managers must take actions to protect selling prices, increase operating efficiency, and reduce the prices of inputs.

9 INCORRECTLet q1represents client visits and q2represents hours of operations. The electricity cost for Blissful Spa depends on both client-visits and the hours of operations and its cost formula is $400 + $0.10q1+ 2.00 q2. If the actual number of client visits is 800 and the salon was open for 200 hours during the month, the flexible budget amount for electricity is:

A)$840

B)$880

C)$2,080

D)$2,020

Feedback:The correct answer is B (Learning Objective 5):Electricity cost = $400 + $0.10q1+ $1.00 q2Electricity cost = $400 + ($0.10 x 800) + ($2.00 x 200) = $880

10 INCORRECTWhich of the following statements is not correct?

A)A flexible budget allows managers to isolate activity variances and revenue and spending variances.

B)One of the common errors in preparing performance reports is to implicitly assume that all costs are fixed.

C)One of the common errors in preparing performance reports is to implicitly assume that all costs are variable.

D)Comparing static planning budget costs to actual costs only makes sense if the cost is variable.

Feedback:The correct answer is D (Learning Objective 6):Comparing static planning budget costs to actual costs only makes sense if the cost is fixed. If the cost isn't fixed, it needs to be adjusted for any change in activity that occurs during the period.

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