ACCT 3306 Exam 2: Chapter 9

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:

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

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 unfavorable Flexible budget amount for supplies = $0.75 x 2,500 manicures = $1,875 Spending Variance = $1,875 - $2,000 = $125 U

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 revenue variance is $2,000 Unfavorable - The activity variance is $25,000 favorable The revenue variance is the difference between the flexible budget and actual results. The activity variance is the difference between the planning budget and the flexible budget.

Common errors in preparing performance reports include:

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

Options to generate a favorable revenue and spending variance include:

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

A cost center's performance report does not include:

- revenue - net operating income

The flexible budget performance report consists of:

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

Nonprofit organizations:

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

The spending variance is labeled as favorable when the:

actual cost is less than what the cost should have been at the actual level of activity

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

If activity increases by 20%:

variable costs should increase by 20%

Companies use the ________ __________ cycle to evaluate and improve performance.

variance analysis

Variance analysis cycle

used to evaluate and improve performance

Comparing the static budget to actual results only makes sense when:

- the actual activity level is different than the budgeted activity level - all costs are fixed

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. A favorable (unfavorable) spending variance occurs because the cost is lower (higher) than expected, given the actual level of activity for the period

Flexible budget

A report showing estimates of what revenues and costs should have been, given the actual level of activity for the period.

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:

Sales of $44,000 Net Operating Income of $19,500 Sales = $20 per manicure ($40,000/2,000) X 2,200 Net operating Income = $44,000 - $22,000 - $2,500

Activity Variance

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 between the actual level of activity used in the flexible budget and the level of activity assumed in the planning budget.

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.

T or F: A discrepancy between the budgeted profit and the actual profit can be caused by a decrease in the actual level of activity.

True

T or F: 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

Planning budget

a budget created at the beginning of the budgeting period that is valid only for the planned level of activity

When actual revenue _______ what the revenue should have been, the variance is labeled favorable.

exceeds

Given planning budget revenue of $284,000, actual revenue of $275,000, and flexible budget revenue of $290,000, there is a ______ variance:

favorable

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

fixed b/c of the existence of fixed costs, net operating income does not change in proportion to changes in the level of activity. There is a leverage effect. The percentage changes in net operating income are ordinarily larger than the percentage increases in activity.

Which of the following statements is true?

fixed costs are often more controllable than variable costs

Revenue and costs are adjusted as the level of activity changes on a __________ flexible budget.

flexible

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

Unfavorable activity variances may not indicate bad performance because:

increased activity should result in higher variable costs

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

management by exception

Variances are more accurate when using:

multiple cost drivers

The flexible budget ___________ report combines activity and revenue and spending variance.

performance

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

Fancy nails cost formula for electricity is $40 per operating day plus $0.15 per client served. Calculate Fancy Nail's 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.

$1275 Electrical cost = $40 per day x 24 days + $0.15 per client x 2,100 clients

One option to generate a favorable _________ variance for net operating income is to increase the number of clients.

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

The variance analysis cycle:

begins with the preparation of performance reports

What costs and revenues should be for the actual level of activity is shown on a(n) ___ budget.

flexible