Chapter 9

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 unfavourable.

Planning Budget

prepared before the period begins and is valid for only the planned level of activity

flexible budget is prepared by

using a static level of activity. A flexible budget takes into account what costs should have been at the actual level of activity.

Variance Analysis Cycle is used to...

evaluate and improve performance

F and U

favorable / unfavorable

The percentage changes in net operating income are ordinarily larger than the percentage increases in activity t/f

True (Leverage effect)

A revenue variance is

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

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. 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.

Static Planning Budget

Is suitable for planning but is inappropriate for evaluating how well costs are controlled

Revenue and spending variances

Subtract flexible budget from actual results

Activity variance

Subtracting planning budget from flexible budget

Activity Variance

The variances on a flexible report that are solely due to the difference between the actual level of activity and the level of activity in the planning budget from the beginning of the period.

management by exception

a management system that compares actual results to a budget so that significant deviations can be flagged as exceptions and investigated further

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

activity variance

When preparing a flexible budget, the level of activity

affects variable costs only

Activity variances

all of the variances on this report are solely due to the difference between the actual level of activity and the level of activity in the planning budget from the beginning of the period.

flexible budget

an estimate of what revenues and costs should have been, given the actual level of activity for the period

The variance analysis cycle

begins with the preparation of performance reports

Spending variance

the difference between the actual amount of the cost and how much a cost should have been, given the actual level of activity