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1
Which 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.

2


Lizzie'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

3


A 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

4
A 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.

5
An 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.

6
If 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.

7


If 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.

8
Which 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.
9


Let q
1
represents client visits and q
2
represents 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 + $0.10q
1
+ 2.00 q
2
. 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:


$840
A)


B)
$880


C)
$2,080


D)
$2,020

10
Which 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 .
1 CORRECT
Which 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
INCORRECT


Lizzie'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
INCORRECT


A 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) = $120,000
Next, 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
INCORRECT


A 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
INCORRECT


An 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
INCORRECT


If 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.


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

7 CORRECT


If 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
INCORRECT


Which 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
INCORRECT


Let q
1
represents client visits and q
2
represents 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 + $0.10q
1
+ 2.00 q
2
. 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 + $0.10q
1
+ $1.00 q
2

Electricity cost = $400 + ($0.10 x 800) + ($2.00 x 200) = $880

10
INCORRECT


Which 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.