Chapter 9

Revenues and costs are adjusted as the level of activity changes on a_______ budget

flexible

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

more than 15%

Variances are more accurate when using:

multiple cost drivers

A flexible budget performance report combines the:

activity variances with the revenue and spending variances

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__________ variance.

revenue

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 flexible budget performance report consists of:

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

Planning budgets are sometimes called _______ budgets.

static

If activity increases by 20%:

variable costs should increase by 20%

Companies use the_________-_______ cycle to evaluate and improve performance.

variance analysis cycle

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

flexible

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

flexible

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

leverage

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

management by exception

Options to generate a favorable revenue and spending variance include:

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

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 flexible budget shows:

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

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?

$1,300 in total costs $4,700 net income $1,300 in total costs Reason: 4,000 units x $0.20 + $500 = $1,300 $4,700 net income Reason: $6,000 - (4,000 x $0.20) - $500 = $4,700 net income.

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

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 Reason: 350 x $1.25 = $437.50. Fixed costs remain the same.

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 Reason: Electrical cost = $40 per day x 24 days + $0.15 per client x 2,100 clients = $1,275.

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

A static planning budget

-compares actual costs at one level of activity with budgeted costs at a different level of activity -compares actual revenues at one level of activity with budgeted revenues at a different level of activity

Nonprofit organizations:

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

Unfavorable variance Favorable variance

Actual revenue is less than budgeted revenue. Actual revenue is more than budgeted revenue.

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

Comparing actual costs to static planning budget costs only makes sense if the costs are:

Fixed

Which of the following statements is true?

Fixed costs are often more controllable than variable costs.

If management plans the budget based on 40 hours of operation and weather causes the business to be opened for only 32, what needs to be adjusted on the flexible budget?

Hourly wages

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:

Net operating income of $19,500 Reason: $44,000 - $22,000 - $2,500 Sales of $44,000

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

Static

Which of the following is a deficiency of using a static planning budget in performance reports?

The report compares actual revenues and costs at one level of activity with budgeted revenues and costs at a different level of activity

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.

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

True

True or false: 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

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

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

When preparing a flexible budget, the level of activity:

affects variable costs only

Variance Analysis Cycle

begins with the preparation of performance reports

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

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.

Unfavorable activity variances may not indicate bad performance because:

increased activity should result in higher variable costs.

A cost center's performance report does not include:

net operating income

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

performance

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

performance

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

the actual activity level is the same as the budgeted activity level all costs are fixed

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

unfavorable

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

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

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 $28,800 revenue Reason: $24,000/1,000 = $24 per unit x 1,200 = $28,800. $7,500 for supplies 7,500 for supplies Reason: $6,250/1,000 = $6.25 per unit x 1,200 = $7,500.

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

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

flexible budget