Midterm 3

Fixed costs should not be included in a performance report because fixed costs are not controllable.

False

Flexible budgets cannot be used when there is more than one cost driver (i.e., measure of activity).

False

The revenue and spending variances are the differences between the static planning budget and the actual results for the period.

False

If activity is higher than expected, total variable costs should be higher than expected. If activity is lower than expected, total variable costs should be lower than expected.

True

If the actual level of activity is 4% more than planned, then the variable costs in the static budget should be increased by 4% before comparing them to actual costs.

True

The activity variance for revenue is favorable if the actual level of activity for the period exceeds the planned level of activity.

True

The activity variance for revenue is unfavorable if the revenue in the flexible budget is less than the revenue in the static planning budget.

True

When a flexible budget is used in performance evaluation, actual costs are compared to what the costs should have been for the actual level of activity during the period rather than to the static planning budget.

True

While fixed costs should not be affected by a change in the level of activity within the relevant range, they may change for other reasons.

True

Which of the following comparisons best isolates the impact of a change in activity on performance?

A. static planning budget and flexible budget A planning budget is prepared before the period begins and is valid for only the planned level of activity. Flexible budgets take into account how changes in activity affect costs. A flexible budget is an estimate of what revenues and costs should have been, given the actual level of activity for the period.

A static budget:

C. is valid for only one level of activity. A planning budget is prepared before the period begins and is valid for only the planned level of activity.

The purpose of a flexible budget is to:

C. update the static planning budget to reflect the actual level of activity of the period. When a flexible budget is used in performance evaluation, actual costs are compared to what the costs should have been for the actual level of activity during the period rather than to the static planning budget.

Which of the following would not appear on a flexible budget performance report as shown in the text?

D. The previous year's actual costs. Flexible budget performance reports show only current year information.

A favorable spending variance occurs when the actual cost exceeds the amount of that cost in the flexible budget.

False

A revenue variance is favorable if the revenue in the static planning budget exceeds the revenue in the flexible budget.

False

. A flexible budget performance report contains both activity variances and revenue and spending variances.

True

A flexible budget can be used to determine what costs should have been at a given level of activity.

True

A spending 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 for the period.

True

An activity variance is due solely to the difference between the level of activity assumed in the planning budget and the actual level of activity used in the flexible budget.

True

Directly comparing static budget costs to actual costs only makes sense if the costs are fixed.

True