AC 204 CH 9

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

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

Labor rate variance

AH(AR/hour-SR/hour) if actual hourly rate of pay>standard rate specified, unfavorable

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

Standard hours per unit

most difficult standard to determine; should include allowances for breaks, personal needs of employees, cleanup, and machine downtime

When preparing a flexible budget, the level of activity ______.

affects variable costs only

Variable overhead efficiency variance

difference between actual level of activity and standard activity allowed, multiplied by the variable part of the POHR

A cost center's performance report does NOT include: (check all that apply) -net operating income -costs -variances -revenue

Net operating income & revenue

When actual revenue _____ what the revenue should have been the variance is labeled as favorable.

exceeds

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

planning

when comparing the static planning budget to actual activity, a problem 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

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

flexible

the concept that focuses on important variances and ignores trivial ones is ___________.

management by exception

The system that compares actual results to a budget so that significant deviations can be flagged and investigated further is called ________ ______ ______.

management by exception

Variable overhead rate variance

measures the difference between the actual variable overhead cost incurred during a period and the standard cost that should have been incurred based on the actual activity of the period

Fill in the blanks to complete the sentence. What costs and revenues should have been for the actual level of activity is shown on a (n) ________ budget.

flexible

Companies use the _____ _____ cycle to evaluate and improve performance.

Variance analysis

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

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

Nonprofit organizations: (select all that apply) -usually have significant funding sources other than sales -never have variable revenue sources -never have costs -may have revenue sources that are fixed

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

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

True or false: Activity variances help managers understand why actual net income differs from what it should have been at the actual level of activity.

False

Price variance

difference between actual price of an input and its standard price, multiplied by the actual amount of the input purchased; purchasing manager's responsibility

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

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

Unfavorable activity variances may not indicate bad performance because:

increased activity should result in higher variable costs

Standard quantity per unit (DM)

should reflect the amount of material required for each unit of finished product as well as an allowance for waste

Standard price per unit (DM)

should reflect the final, delivered cost of the materials

Variable MO standards

multiply direct labor hours per unit by POHR

activity variance

subtract planning budget from flexible budget

Deficiencies of static planning budget

...

Quantity variance

difference between how much of an input was actually used and how much should have been used and is stated in dollar terms using the standard price of the input; production manager's responsibility

Standard rate per hour (DL)

should include hourly wages, employment taxes, and fringe benefits

Static planning budget

suitable for planning but inappropriate for evaluating how well costs are controlled; if actual level of activity differs from what was planned, it would be misleading to compare actual costs to the static, unchanged planning budget; if activity is higher than expected, variable costs should be higher than expected and if activity is lower than expected, variable costs should be lower than expected

True of False: fixed costs are often more controllable than variable costs

true

Standard

a benchmark for measuring performance

revenue and spending variances

subtract flexible budget from actual results

Standard cost card

shows the standard quantities and costs of the inputs required to produce a unit of specific product

favorable variance

actual revenue is more than budgeted revenue

If the activity level for the month is 4,000 units, actual revenue is $6,000, actual variable costs are $0.20 unit, and actual fixed costs total $500, which of the following are true?

$4700 NOI and $1300 total cost

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

activity

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; enables managers to focus on the most important variances while bypassing trivial discrepancies between the budge and actual results

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 ________ variance.

activity

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

A performance report shows that the planning 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.

Revenue variance

difference between what the total revenue should have been, given the actual level of activity for the period and the actual total revenue; if actual revenue>expected revenue, variance is favorable; if actual revenue<expected revenue, variance is unfavorable; so favorable if the avg selling price is greater than expected; could be due to change in selling price, diff mix of products sold, change in amount of discounts given, or poor accting controls

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

fixed

Planning budget

prepared before the period begins and is valid for only the planned level of activity (ch 7 budgets)

unfavorable variance

Actual revenue is less than budgeted revenue

Quantity standards

specify how much of an input should be used to make a product or provide a service

Price standards

specify how much should be paid for each unit of the input

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

spending variance

An unchanged planning budget is known as a(n) planning budget. (Enter only one word per blank.

static

If the actual cost is greater than what the cost should have been, the variance is labeled as ________.

unfavorable

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

flexible

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.

125U Reason: Flexible budget amount for supplies: $0.75 × 2,500 manicures = $1,875. Spending variance: $1,875 - $2,000 = $125 U.

A performance report shows that the planning revenue was $240,000, the flexible budget revenue was $225,000, and actual revenue was $230,000. The activity variance is $

15,000 U

Materials price variance

AQ(AP/unit-SP/unit) favorable if actual purchase price is less than standard purchase price; purchasing manager typically in control over price paid for goods; factors that influence prices paid include how many units are ordered, how the order is delivered, whether the order is a rush order, and the quality of materials purchased

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?

Reason: Flexible budget expense: $16,000 ÷ 4,000 = $4 per unit × 2,900 units = $11,600. Since the flexible budget expense < planning budget expense, the variance is favorable.

Materials quantity variance

SP/unit(AQ-SQ) unfavorable when quantity of materials used in production is greater than the quantity that should have been used according to the standard; excessive materials can result form faulty machines, inferior materials quality, untrained workers, and poor supervision

Labor efficiency variance

SR/hour(AH-SH) causes of unfavorable labor efficiency: poorly trained or motivated workers, poor quality materials, requiring more labor time, faulty equipment causing breakdowns and work interruptions, poor supervision of workers, and inaccurate standards, insufficient demand for company's products

A flexible budget performance report combines the ________.

activity variances with the revenue and spending variances

Spending variances

difference between how much a cost should have been, given the actual level of activity, and the actual amount of the cost; if actual cost>expected cost, variance is unfavorable; could be due to paying a higher price for inputs than should ahve been paid, using too many inputs for the actual level of activity, a change in technology, etc

a revenue variance is the _______.

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

Which of the following statements is true? -a cost is fixed if it is proportional to activity -it is easier to significantly reduce variable costs than to reduce fixed costs -fixed costs are often more controllable than variable costs

fixed costs are often more controllable than variable costs

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

leverage

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

more than

Variances are more accurate when using:

multiple cost drivers

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

Flexible budget

take into account how changes in activity affect costs; an estimate of what revenues and costs should have been, given the actual level of activity for the period; actual costs are then compared to what the costs should have been for the actual level of activity during the period rather than to the static planning budget; if adjustments for the level of activity are not made, it is hard to interpret discrepancies between budgeted and actual costs; what revenues and costs should have been given actual level of activity; fixed costs don't change

Variance analysis cycle

used to compare budgets to actual results for the purposes of solving problems and evaluating performance; begins with preparation of performance reports in the accounting department and these highlight variances which are the differences between the actual results and what should have occurred according to the budget