ACCT 311 CHAPTER 9 FLEXIBLE BUDGETS & PERFORMANCE ANALYSIS

The flexible budget performance report consists of:

-activity variances -revenue and spending variances -the planning budget, flexible budget and actual results

Comparing a static planning budget to actual results only makes sense when:

-all costs are fixed -the actual activity level is the same as the budgeted activity level

Common errors in preparing performance reports include:

-assuming all costs are variable -assuming all costs are fixed

Options to generate a favorable revenue and spending variance include:

-increase operating efficiency -protecting the selling price -reduce the prices of inputs

Nonprofit organizations:

-may have revenue sources that are fixed -usually have significant funding sources other than sales

A cost center's performance report does NOT include:

-revenue -net operating income

A performance report shows that the planned revenue was $200,000, the flexible budget revenue was $225,000, and actual revenue was $223,000. Which of the following statements are true?

-the activity variance is $25,000 favorable (flexible budget - planning budget) -the revenue variance is 2,000 unfavorable (actual results - flexible budget)

A flexible budget shows:

-what fixed costs should have been at the actual level of activity -what revenue should have been at the actual level of activity -what variable costs should have been at the actual level of activity

Commission expense is budgeted to be $16,000 at a planned sales level of 4,000 units. If only 2,900 units are sold, how much commission expense will appear on the flexible budget, and is the activity variance favorable or unfavorable:

11,600 and favorable 16,000/4,000 = 4 X 2,900 = 11,600 favorable= flexible budget expense <planned budget expense

If the planned budget revenue for 5,000 units is $120,000, what is the flexible budget revenue if the actual activity is 4,500 units?

120,000/5,000 = 24 per unit X 4,500 = 108,000

The planning budget calls for total variable costs for supplies to be $6,250 based on 1,000 units with planned revenue at $24,000. A total of 1,200 were actually produced and sold. What amounts should appear on the flexible budget?

28,800 revenue 7,500 for supplies $24,000/1,000 = 24 per unit X1,200= $28,800 6,250/1,000 = 6.25 per unit X 1,200 = 7,500

If the activity level for the month is 4,000 units, actual revenue is $6,000, actual variable costs are .20 unit and actural fixed costs total $500, which of the following are TRUE?

4,700 net income 1,300 in total costs 6,000 - (4,000 X .20) - 500 = 4,700 4,000 units X .20 + 500 = 1,300

Fancy Nails cost formula for electricity is $40 per operating day plus $.15 per client served. Calculate Fancy Nails' electricity budget in a month when the business is going to be open for 24 days and they expect to serve a total of 2,100 clients.

40X24 = 960 .15X2,100 = 315 + 960 = 1,275

A company's cost of supplies for when 5,000 units are sold is $7,500 of fixed costs plus $1.25 variable cost per unit. What is the increase in the total cost of supplies if 350 more units are sold than expected?

437.50 5,000 X 1.25 = 6,250 + 7,500 = 13,750 5,350 X 1.25 = 6,687.50 + 7,500 = 14,187.50 14,187.50 - 13,750 = 437.50

True or False: A spending variance is the difference between how much a cost should have been and the actual cost given the actual level of activity.

True

True or false: A discrepancy between the budgeted profit and the actual profit can be caused by a decrease in the actual level of activity?

True

The difference between a revenue or cost item in the planning budget and the same item in the flexible budget at the actual level of activity is a(n) ___________ variance

activity

The difference between a revenue or cost item in the planning budget and the same item in the flexible budget at the actual level of activity is a(n) _________________ variance.

activity

A favorable activity variance may NOT indicate good performance because a favorable activity variance:

for a variable cost will occur simply because the actual level of activity is less than the budgeted level of activity.

If management plans the budget based on 40 hours of operation and weather causes the business to be open for only 32, what needs to be adjusted on the flexible budget?

hourly wages

Unfavorable activity variances may not indicate bad performance because:

increased activity should result in higher variable costs

Unfavorable variance

Actual revenue is less than budgeted revenue

Favorable variance

Actual revenue is more than budgeted revenue

Which of the following statements is true?

Fixed costs are often more controllable than variable costs

The variance analysis cycle:

begins with the preparation of performance reports

A spending variance is the:

difference between what a cost should have been at the actual level of activity and the actual amount of the cost

A revenue variance is the:

difference between what revenue should have been at the actual level of activity and the actual revenue

Performance reports for cost centers:

do not include revenues or net income

Given planning budget revenue of $284,000, actual revenue of $275,000, and flexible budget revenue of $290,000, there is a(n) _________activity variance

favorable

Revenues and costs are adjusted as the level of activity changes on a ________ budget

flexible

What costs and revenues should be for the actual level of activity us shown on a(n) ________.

flexible

Because of fixed costs, net operating income does not change in proportion to changes in the level of activity which is the ___________ effect.

leverage

The concept that focuses on important variances and ignores trivial ones is

management by exception

When the activity level increases by 15%, net operating income in the flexible budget will ordinarily increase by:

more than 15%

Variances are more accurate when using:

multiple cost drivers

Fancy Nail's monthly rent is $2,500. The company's static budget for March was based on the activity level of 2,000 manicures. Total sales was budgeted at $40,000 and nail technician wages (a variable cost based on the number of manicures) was budgeted at $20,000. Actual manicures in March totaled 2,200. Assuming no other expenses, Fancy Nail's flexible budget will show

net operating income of $19,500 sales of $44,000 44,000-22,000-2,500= 19,500 40,000/2,000 = 20 per manicure X 2,200 = 44,000

A budget that is prepared at the beginning of the period for a specific level of activity is a __________ budget

planning

A budget this is prepareed at the beginning of the period for a specific level of activity is a __________ budget.

planning

The difference between what the total sales should have been, given the actual level of activity for the period, and the actual total sales is a(n) _________________variance.

revenue

To understand why actual net operating income differs from what it should have been at the actual level of activity, the ___________ variances should be analyzed.

revenue and spending

an unchanged planning budget is known as a(n) __ planning budget.

static

Revenue and spending Variances

subtract flexible budget from actual results

activity variance

subtract planning budget from flexible budget

If the actual cost is greater than what the cost should have been, the variance is labeled as ________________.

unfavorable

If activity increases by 20%:

variable costs should increase by 20%

Companies use the _______________ _______________ cycle to evaluate and improve performance

variance analysis