Chapter 9: Flexible Budgets and Performance Analysis

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

Activity

Unfavorable variance

Actual revenue is less than budgeted revenue

Characteristics of Flexible Budgets:

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

Because of fixed costs, net operating income does not change in proportion to changes in the level of activity which is called the

Leverage effect

When the activity level increases by 15%, net operating income in the flexible budget will ordinarily increase by ______ 15%.

More than

A cost center's performance report does not include ______.

Net operating income and revenue

Options to generate a favorable revenue and spending variance include ______.

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

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

The prominent difference between performance reports in nonprofit and for-profit organizations is that nonprofit organizations ______.

usually receive significant funding from sources other than sales

A spending variance is the ______.

difference between what a cost should have been at the actual level of activity and the actual amount of the cost

Estimates of what revenues and costs should have been based on the actual level of activity are shown on the

Flexible budget

Planning budgets are sometimes called ______ budgets.

Static

The variance analysis cycle ______.

begins with the preparation of performance reports

The flexible budget performance report consists of ______.

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

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

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

Planning

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

A flexible budget shows what budgeted amounts should have been at the actual level of activity. As a result of this change in activity, the flexible budget will show a change in total ______.

Variable cost and revenue

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

Favorable variance

actual revenue is more than budgeted revenue

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

Variances are more accurate when using ______.

multiple cost drivers

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

Revenue and spending variances

subtract flexible budget from actual results Actual results - flexible budget

Activity variance

subtract planning budget from flexible budget Flexible budget - planning budget

To flex a budget, we need to know that:

• Total variable costs change in direct proportion to changes in activity. • Total fixed costs remain unchanged within the relevant range.

Activity variance

arises solely due to the difference in the actual level of activity and the level of activity included in the planning budget

Flexible budget performance report

combines activity and revenue and spending variances

A revenue variance is the ______.

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