Acct 2210 ch. 9 smart book and chapter questions

A budget that is prepared before the beginning of the period for a specific level of activity is called a Blank______ budget.

planning

Planning budgets are sometimes called Blank______ budgets.

static

The percentage change in net income in the flexible budget is greater than the percentage change in activity due to

fixed

A favorable activity variance may not indicate good performance because a favorable activity variance Blank______. Multiple choice question.

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

What is a flexible budget and how does it from a 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.

When comparing the static planning budget to actual activity, a problem that arises when actual activity is higher than budgeted activity is that

net income is higher than expected but all or most expense variances are unfavorable

If the actual level of activity is greater than the planned level of activity, would you expect the activity variances for variable expenses to be favorable, unfavorable, or a combination of the two?

If the actual level of activity is greater than the planned level of activity, the activity variances for variables expenses will be unfavorable.

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

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.

How does a flexible budget based on two cost drivers differ from a flexible budget based on one cost 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.

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) Blank______ variance.

activity

When preparing a flexible budget, the level of activity

affects variable cost only

The variance analysis cycle

begins with the preparation of performance reports

Unfavorable activity variances may not indicate bad performance because

increased activity should result in higher variable costs

A budget that takes into account how costs are affected by changes in level of activity is a(n) _____ budget.

flex

If the planned budget revenue for 5,000 units is $120,000, the flexible budget revenue for 4,500 units is

108,000 120,000/5,000=24x4500

What is a static planning budget?

A planning budget is prepared before the period begins and is valid for only the planned level of activity. It is sometimes referred to as a static planning budget because it is not adjusted even if the level of activity subsequently changes.

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

True or false: A static budget is being compared to actual activity. The variance is F for net income but U for most expenses. This suggests that actual activity was lower than budgeted.

false

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

Comparing actual costs to what the costs should have been for the actual level of activity is done on a(n) ___________ budget.

flexible

An estimate of what revenue and costs should have been, based on the actual level of activity is shown on a ____.

flexible budget

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 Nails' flexible budget will show Blank

sales of $44,000 net operating income of $19,500

What are some of the possible reasons that actual results may differ from what had been budgeted at the beginning of a period?

Actual results can differ from the budget for many reasons. Very broadly speaking, the differences are usually due to a change in the level of activity, changes in prices, and changes in how effectively resources are managed.

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.

Why is it difficult to interpret the difference between how much expenses were budgeted and how much was spent?

As noted above, a difference between the budget and actual results can be due to many factors. Most importantly, 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.

What does a flexible budget performance report do that a simple comparison of a budget to actual results does not do?

In a flexible budget performance report, the actual results are not directly compared to the static planning budget. The flexible budget is interposed between the actual results and the static planning budget. The differences between the flexible budget and the static planning budget are activity variances. The differences between the actual results and the flexible budget are the revenue and spending variances. The flexible budget performance report cleanly separates the differences between the actual results and the static planning budget that are due to changes in activity (the activity variances) from the differences that are due to changes in prices and the effectiveness with which resources are managed (the revenue and spending variances).