Chapter 9 Terms

>>Lower levels of activity reduce some costs. >>Higher levels of activity increase some costs.

How does the level of activity affect costs in a flexible budget?

True

If activity is higher than expected, total variable costs should be higher than expected. If activity is lower than expected, total variable costs should be lower than expected.

Favorable (Spending Variance)

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

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.

The performance reports in nonprofit organizations are:

Basically the same as the performance reports we have considered so far with one prominent difference. Non profit organizations usually receive a significant amount of funding from sources other than sales.

Activity variance

Because all of the variances on this report are solely due to the difference between the actual level of activity and the level of activity in the planning budget from the beginning of the period; Subtract planning budget from flexible budget.

>>assuming all costs are fixed. >>assuming all costs are variable.

Common errors in preparing performance reports include:

True

Directly comparing static budget costs to actual costs only makes sense if the costs are fixed.

Favorable (Revenue Variance)

If actual revenue exceeds what the revenue should have been, the variance is labeled _________.

Unfavorable (Revenue Variance)

If actual revenue is less than what the revenue should have been, the variance is labeled _______.

Unfavorable (Spending Variance)

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

True

If the actual level of activity is 4% more than planned, then the variable costs in the static budget should be increased by 4% before comparing them to actual costs.

If the actual level of activity differs from what was planned:

It would be misleading to compare actual costs to the static, unchanged planning budget.

Determine the activity variance: Planning budget - Flexible budget Determine the revenue or spending variance: Flexible budget - Actual results Determine if the results dictate need for changes

List the steps in order for a performance report to show the difference between the budgeted amount and the actual results

Favorable revenue

More units were sold than expected.

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

Not for profit organizations:

Static planning budget

Only considers the planned level of activity.

Do not include revenues or net income.

Performance reports for cost centers:

Unfavorable utilities

Plant was in operation for an extra shift each week for increased production.

The purpose of a flexible budget is to:

Remove items from performance reports that are not controllable by managers

Performance Reports in Cost Centers

Revenue should be different, and consequently net operating income, will not appear on the report. Because managers in these departments are responsible for costs, but not revenues, they are often called cost centers.

Increased activity should result in higher variable costs.

Unfavorable activity variances may not indicate bad performance because:

Multiple cost drivers

Variances are more accurate when using:

>>Revenue >>Net operating income

What items would be omitted on a cost center's performance report?

True

When a flexible budget is used in performance evaluation, actual costs are compared to what the costs should have been for the actual level of activity during the period rather than to the static planning budget.

>>changes in costs are expected due to changes in activity. >>increases or decreases in net income are not adequately explained

When a static planning budget is compared to actual results at a different activity level:

True

While fixed costs should not be affected by a change in the level of activity within the relevant range, they may change for other reasons.

Variable

You would expect total _____ costs to be higher in the flexible budget if the activity level for a period is higher than expected

Variance

A flexible budget ________ is the difference between the actual amount and the planned amount at the actual level of activity.

True

A flexible budget can be used to determine what costs should have been at a given level of activity.

True

A flexible budget performance report contains both activity variances and revenue and spending variances.

True

A spending variance is the difference between how much a cost should have been and the actual cost given the level of activity.

True

A spending variance is the difference between how much a cost should have been, given the actual level of activity, and the actual amount of the cost for the period.

Activity

A(n) _________ variance is the difference between a revenue or cost item in the static planning budget and the same item in the flexible budget at the actual level of activity.

True

An activity variance is due solely to the difference between the level of activity assumed in the planning budget and the actual level of activity used in the flexible budget.

Static

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

Net operating income and revenue

Should be omitted on a cost center performance report

True

The activity variance for revenue is favorable if the actual level of activity for the period exceeds the planned level of activity.

True

The activity variance for revenue is unfavorable if the revenue in the flexible budget is less than the revenue in the static planning budget.

Flexible budgets take into account:

how changes in activity affect costs.

Spending variance

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

Revenue Variance

is the difference between the actual total revenue and what the total revenue should have been, given the actual level of activity for the period.

Variable Cost

is the type of cost that will fluctuate depending on the level of activity for the budgeted period.

Planning Budgets

prepared before the period begins and is valid for only the planned level of activity. A static planning budget is suitable for planning but is inappropriate for evaluating how well costs are controlled.

Unfavorable wages

Increase in employee hours to manufacture additional units.

Flexible Budget

Is an estimate of what revenues and costs should have been, given the actual level of activity for the period; take into account how changes in activity affect costs; compares actual costs to what the costs should have been for the actual level of activity.