Accounting 208 Ch. 9 Questions

What is a revenue variance and what does it mean?

A revenue variance is the difference between the actual revenue for the period and how much the revenue should have been, given the actual level of activity. A revenue variance is easy to interpret. A favorable revenue variance occurs because the revenue is greater than expected for the actual level of activity. An unfavorable revenue variance occurs because the revenue is less than expected for the actual level of activity.

What is a spending variance and what does it mean?

A spending variance is the difference between the actual amount of the cost and how much a cost should have been, given the actual level of activity. Like the revenue variance, the interpretation of a spending variance is straight-forward. A favorable spending variance occurs because the cost is lower than expected for the actual level of activity. An unfavorable spending variance occurs because the cost is higher than expected for the actual level of activity.

Flexible Budget vs. Static Planning Budget

A flexible budget can be adjusted to reflect any level of activity—including the actual level of activity. By contrast, a static planning budget is prepared for a single level of activity and is not subsequently adjusted.

Why is it difficult to interpret a difference between how much expense was budgeted and how much was actually spent?

the level of activity can have a very big impact on costs. From a manager's perspective, a variance that is due to a change in activity is very different from a variance that is due to changes in prices and changes in how effectively resources are managed. A variance of the first kind requires very different actions from a variance of the second kind. Consequently, these two kinds of variances should be clearly separated from each other. When the budget is directly compared to the actual results, these two kinds of variances are lumped together.

How does a flexible budget based on two cost drivers differ from a flexible budget based on one cast driver?

The only difference between a flexible budget based on a single cost driver and one based on two cost drivers is the cost formulas. When there are two cost drivers, some costs may be a function of the first cost driver, some costs may be a function of the second cost driver, and some costs may be a function of both cost drivers.

What is an activity variance and what does it mean?

An activity variance is the difference between a revenue or cost item in the flexible budget and the same item in the static planning budget. An activity variance is due solely to the difference in the actual level of activity used in the flexible budget and the level of activity assumed in the planning budget. Caution should be exercised in interpreting an activity variance. The "favorable" and "unfavorable" labels are perhaps misleading for activity variances that involve costs. A "favorable" activity variance for a cost occurs because the cost has some variable component and the actual level of activity is less than the planned level of activity. An "unfavorable" activity variance for a cost occurs because the cost has some variable component and the actual level of activity is greater than the planned level of activity.