ACCT 255 Ch8

Nonprofit organizations ______.

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

Companies use the cycle to evaluate and improve performance.

variance analysis

The flexible budget report combines activity and revenue and spending variances.

performance

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

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

affects variable costs only

The variance analysis cycle ______.

begins with the preparation of performance reports

Favorable variance

actual revenue is more than budgeted revenue

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

management by exception

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

more than

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

True or false: Fixed costs are often more controllable than variable costs.

true

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

unfavorable

A flexible budget shows ______.

what fixed costs should have been at the actual level of activity what variable costs should have been at the actual level of activity what revenue should have been at the actual level of activity

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

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

Variances are more accurate when using ______.

multiple cost drivers

Fancy Nails' budgeted revenue is $20 per manicure. The planning budget for June was based on 2,400 manicures. During June, the actual revenue was $49,750 for 2,500 manicures. The revenue variance for June is ______.

$250 U Flexible budget amount for revenue = $20 per manicure × 2,500 manicures = $50,000. Revenue variance = $50,000 - $49,750 = $250 U.

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

Which of the following statements is true?

Fixed costs are often more controllable than variable costs.

A revenue variance is the ______.

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

Unfavorable variance

Actual revenue is less than budgeted revenue.

The flexible budget performance report consists of ______.

activity variancesTrue or false: Activity variances help managers understand why actual net income differs from what it should have been at the actual level of activity. the planning budget, flexible budget and actual results revenue and spending variances

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

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

$1,275 Electrical cost = $40 per day × 24 days + $0.15 per client × 2,100 clients = $1,275

The planning budget calls for total variable costs for supplies to be $6,250 based on 1,000 units with planned revenue at $24,000. A total of 1,200 units were actually produced and sold. What amounts should appear on the flexible budget?

$28,800 revenue $24,000 ÷ 1,000 = $24 per unit × 1,200 = $28,800 $7,500 for supplies $6,250 ÷ 1,000 = $6.25 per unit × 1,200 = $7,500

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 × 2,900 units = $11,600. Since the flexible budget expense < planning budget expense, the variance is favorable.

Revenue and spending variances

Subtract flexible budget from actual results

Activity variance

Subtract planning budget from flexible budget

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.

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 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 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

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

exceeds

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

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

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

flexible

An estimate of what revenue and costs should have been, based on the actual level of activity is shown on a ______.

flexible budget

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

Using multiple cost drivers on a flexible budget report will generally ______.

increase accuracy

Unfavorable activity variances may not indicate bad performance because ______.

increased activity should result in higher variable costs

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 Nails' flexible budget will show ______.

sales of $44,000 $20 per manicure ($40,000 ÷ 2,000) × 2,200 = $44,000 net operating income of $19,500 $44,000 - $22,000 - $2,500

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) variance.

spending

An unchanged planning budget is known as a(n) planning budget.

static

Fancy Nails cost formula for miscellaneous expenses is $30 per operating day plus $0.25 per client served. Fancy Nails' miscellaneous expense budget in a month when the business is going to be open for 25 days and they expect to serve a total of 2,400 clients is $

1,350

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 $

15,000U

Revenue on the planning budget is expected to be $380,000 for 1,900 client visits. The revenue on the flexible budget is $410,000, showing that there were actually ______ client visits.

2050 $380,000 ÷ 1,900 = $200 per client visit. $410,000 ÷ $200 = 2,050 client visits.

Planning budgets are sometimes called ______ budgets.

static

Performance reports for cost centers ______.

do not include revenues or net income

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

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

management by exception

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