Accounting 2: Chapter 9 (exam 3)

Key terminology 1) The difference is a revenue variance, which includes... 2) The difference is a spending variance, which includes...

1) -Actual revenue -Flexible budget revenue 2) -Actual cost -Flexible budget cost

Characteristics of Flexible Budgets 1. May be prepared for ___ activity level in the relevant range. 2. Show costs that should have been incurred at the ___ level of activity, enabling "apples to apples" cost comparison. 3. Help managers control costs. 4. Improve performance evaluation.

1) any 2) actual

what is an activity variance and what does it mean? 1) An activity variance is the difference between a revenue or cost item in the _______ budget and the same item in the _______ 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. 2) 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 _____ 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 _____ than the planned level of activity.

1) flexible; static 2) less; greater

1) F = Favorable variance that occurs when actual revenue is ________ than budgeted revenue. 2) U = Unfavorable variance that occurs when actual costs are _____ than budgeted costs. 3) F = Favorable variance that occurs when actual costs are ____ than budgeted costs.

1) greater 2) greater 3) less

1) Planning budgets are prepared for a _____, planned level of activity. 2) Performance evaluation is difficult when actual activity differs from the ____ level of activity.

1) single 2) planned

The most common errors when preparing performance reports are to implicitly assume that: 1.All costs are ____, or that; 2.All costs are ____.

fixed; variable

what are some 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 ______, changes in _____, and changes in how effectively resources are ______.

activity; prices; managed

what is a revenue variance and what does it mean? A revenue variance is the difference between the ______ revenue for the period and how much the revenue should have _____, 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 _______ than expected for the actual level of activity.

actual; been; less

An activity variance arises solely due to the difference in the _____ level of activity and the level of activity included in the _____ budget.

actual; planning

what does a flexible budget performance report do that a simple comparison of budgeted 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 _______ results and the ______ 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).

actual; static

what is a flex budget and how does it differ from a static planning budget? A flexible budget can be ______ 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 ______ subsequently adjusted.

adjusted; not

Khan Corporation has budgeted the unit sales for April to be 5,000 units. The sales price is $25 per unit, and production costs are $10 per unit. Monthly utility expenses are estimated to be $2,000 plus $2 per unit, whereas selling expenses are estimated to be $12,000. The company pays a monthly rent of $2,000. What would be the utility expenses on the company's flexible budget if actual unit sales for April were 6,000 units? a) $12,000 b) $14,000 c) $2,000 d) $26,000

answer: b) $14,000

Khan Corporation has budgeted the unit sales for April to be 5,000 units. The sales price is $25 per unit, and production costs are $10 per unit. Monthly utility expenses are estimated to be $2,000 plus $2 per unit, whereas selling expenses are estimated to be $12,000. The company pays a monthly rent of $2,000. What is the net operating income in the company's planning budget? a) $49,000 b) $62,000 c) $125,000 d) $72,000

answer: a) $49,000

Which of the following scenarios demonstrates the leverage effect on net operating income due to the existence of fixed costs? a) A 25% increase in sales resulting in a 30% decrease in net operating income. b) A 15% increase in sales resulting in a 15% increase in cost of goods sold. c) A 25% increase in sales resulting in a 30% increase in net operating income. d) A 25% increase in sales resulting in a 30% increase in fixed costs.

answer: c) A 25% increase in sales resulting in a 30% increase in net operating income.

Budget Solutions has determined from its flexible budget that selling costs for actual level activity for a period should have been $25,000. Actual selling costs incurred during the period were $28,000. What is the amount and direction of variance in selling costs? a) $3,000 Favorable b) $28,000 Unfavorable c) $0 d) $3,000 Unfavorable

answer: d) $3,000 Unfavorable

Paradise Company's planning budget for 10,000 units showed sales of $500,000. The flexible budget for 12,000 units showed sales of $600,000. What is the variance of $100,000 called if this variance was due only to an increase in unit sales? a) Spending variance b) Activity variance c) Unfavorable variance d) Revenue variance

answer: b) Activity variance

An unfavorable variance of $5,000 in sales is determined by comparing the flexible budget (9,000 units) and the planning budget (10,000 units). What type of variance is described? a) Activity variance b) Spending variance c) Revenue variance

answer: a) Activity variance

An unfavorable variance of $5,000 in cost of goods sold is determined by comparing the actual results (10,000 units) and the flexible budget (10,000 units). What type of variance is described? a) Activity variance b) Spending variance c) Revenue variance

answer: b) Spending variance

The difference between the actual total revenue and budgeted total revenue at the actual level of activity is called a(n) ________. a) spending variance b) activity variance c) unfavorable variance d) revenue variance

answer: d) revenue variance

The difference between the actual cost and budgeted cost at the actual level of activity is called a(n) ________. a) spending variance b) activity variance c) unfavorable variance d) revenue variance

answer: a) spending variance

what is static planning budget? A planning budget is prepared _____ the period begins and is valid for only the _____ 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 ______.

before; planned; changes

To flex a budget, we need to know that: •Total variable costs ______ in direct proportion to changes in activity. •Total fixed costs remain ____ within the relevant range.

change unchanged

what is a spending variance and what does it mean? A spending variance is the difference between the actual amount of the _______ and how much a cost should have ______, 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 _______ 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.

cost; been; lower