Chapter 9 SmartBook

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

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

net operating income

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

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

exceeds

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

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

Revenues and costs are adjusted as the level of activity changes on a(n) _____ budget.

flex

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

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

variance analysis

Variances are more accurate when using ______.

multiple cost drivers

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

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

management by exception

Nonprofit organizations ______.

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

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

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

revenue net operating income

Unfavorable activity variances may not indicate bad performance because ______.

increased activity should result in higher variable costs

A flexible budget shows ______.

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

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

mixed

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

flex

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

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

flexible budget

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 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

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 × 4,500 = $108,000

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

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

favorable

A flexible budget performance report combines the ______.

activity variances with the revenue and spending variances

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

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

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

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

static

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 activity variance is $25,000 Favorable. The revenue variance is $2,000 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

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

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 $_____ _____.

15,000 U

Unfavorable variance

Actual revenue is less than budgeted revenue

Favorable variance

Actual revenue is morethan budgeted revenue

Which of the following statements is true?

Fixed costs are often more controllable than variable costs.

Revenue and spending variances

Subtract flexible budget from actual results

Activity variance

Subtract planning budget from flexible budget

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

True

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

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

A revenue variance is the ______.

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

Performance reports for cost centers ______.

do not include revenues or net income

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

increase accuracy

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

planning

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.

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

affects variable costs only

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

A company's cost of supplies for when 5,000 units are sold is $7,500 of fixed costs plus $1.25 variable cost per unit. What is the increase in the total cost of supplies if 350 more units are sold than expected?

$437.50 350 × $1.25 = $437.50. Fixed costs remain the same.

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?

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

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