Chapter 9
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.
planning budget
is prepared before the period begins and is valid for only the planned level of activity
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)
revenue variance
flexible budget
take into account how activity changes in activity affect costs. is an estimate of what revenues and costs should have been, given the actual level of activity for 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. this is a very important distinction. if the adjustments for the level of activity are not made, it is very difficult to interpret discrepancies between budgeted and actual costs.
activity variance
the difference between a revenue or cost item in the flexible budget and the same item ini the static planning budget. an activity variance is due solely to the difference between the actual level of activity used in the flexible budget and the level of activity assumed in the planning budget
spending variance
the difference between the actual amount of the cost and how much the cost should have been, given the actual level of activity. a favorable (unfav) spending variance occurs because the cost is lower(higher) than expected, given the actual level of activity for the period.
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 Reason: Flexible budget expense: $16,000/4,000 = $4 per unit x 2,900 units = $11,600. Since the flexible budget expense < planning budget expense, the variance is favorable.
Fancy Nails has an estimated cost for supplies of $0.75 per manicure. June's budget was based on 2,400 manicures and a total cost for supplies of $1,800. June's actual activity was 2,500 manicures. Total cost of supplies in June was $2,000. Calculate the spending variance for June.
$125 U Reason: Flexible budget amount for supplies: $0.75 x 2,500 manicures = $1,875. Spending variance: $1,875 - $2,000 = $125 U.
Revenue on the planning budget is expected to be $380,000 for 1,900 client visits. The revenue on the flexible budget is $410,000, showing that there were actually ______ client visits.
2,050 Reason: $380,000/1,900 = $200 per client visit. $410,000/200 = 2,050 client visits.
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?
25000 favorable 2000 unfavorable
revenue variance
the difference between the actual revenue for the period and how much the revenue should have been, given the actual level of activity. a favorable (unfavorable) revenue variance occurs because the revenue is higher (lower) than expected, given the actual level of activity for the period.
