Cost Accounting - Chapter 9

Khan Corporation has budgeted the unit sales for April to be 5,000 units. The sales price is $25 per unit, and production costs are $10 per unit. Monthly utility expenses are estimated to be $2,000 plus $2 per unit, whereas selling expenses are estimated to be $12,000. The company pays a monthly rent of $2,000. What is the net operating income in the company's planning budget? A. $49,000 B. $62,000 C. $125,000 D. $72,000

A. $49,000 (Net operating income on the planning budget for 5,000 units would be $49,000.$49,000 = $13 contribution margin × 5,000 units − fixed expenses of $16,000.)

An unfavorable variance of $5,000 in sales is determined by comparing the flexible budget (9,000 units) and the planning budget (10,000 units). What type of variance is described? A. Activity variance B. Spending variance C. Revenue variance

A. Activity variance (What revenues should have been at the actual level of activity are compared with planned activity revenues. This variance is called the activity variance.)

Performance reports with more than one cost driver typically have more accurate variances than those based on one cost driver. A. True B. False

A. True

The difference between the actual cost and budgeted cost at the actual level of activity is called a(n) ________. A. spending variance B. activity variance C. unfavorable variance D. revenue variance

A. spending variance

Khan Corporation has budgeted the unit sales for April to be 5,000 units. The sales price is $25 per unit, and production costs are $10 per unit. Monthly utility expenses are estimated to be $2,000 plus $2 per unit, whereas selling expenses are estimated to be $12,000. The company pays a monthly rent of $2,000. What would be the utility expenses on the company's flexible budget if actual unit sales for April were 6,000 units? A. $12,000 B. $14,000 C. $2,000 D. $26,000

B. $14,000 (The amount of utility expenses on the flexible budget for 6,000 units would be $14,000. $14,000 = $2,000 + ($2 × 6,000 units).

Pinnacle Corporation is a manufacturing company operating numerous machines, which require regular maintenance to keep them operational. The fixed portion of maintenance expense is $3,000 per month. Maintenance costs are also incurred at the rate of $5 per batch and $0.50 per unit produced. The company produced 23,000 units in 800 batches during a particular month. What budgeted maintenance expense for this month? A. $3,000 B. $18,500 C. $7,000 D. $11,500

B. $18,500 (Budgeted maintenance expense = $3,000 fixed portion + ($5 per batch × 800 batches) + ($0.50 per unit produced × 23,000 units produced) = $18,500)

All of the following are reasons for revenue variances EXCEPT ________. A. A change in discount structure B. A change in input prices C. A change in product mix D. A change in selling price

B. A change in input prices (Possible reasons for revenue variances can be changes in selling price, product mix, discount structure, poor accounting controls, and so on. Possible explanations for such spending variances can be changes in input prices, changes in usage, a change in technology, and so on.)

Which of the following is true when a company determines that its costs should be explained by more than one cost driver? A. The flexible budget performance report should be prepared using only a single cost driver. B. A flexible budget performance report that is based on more than one cost driver will be more accurate than a flexible budget performance report that is based on just one cost driver. C. A flexible budget performance report that is based on just one cost driver will be more accurate than a flexible budget performance report that is based on more than one cost driver. D. A flexible budget performance report cannot be prepared.

B. A flexible budget performance report that is based on more than one cost driver will be more accurate than a flexible budget performance report that is based on just one cost driver.

Paradise Company's planning budget for 10,000 units showed sales of $500,000. The flexible budget for 12,000 units showed sales of $600,000. What is the variance of $100,000 called if this variance was due only to an increase in unit sales? A. Spending variance B. Activity variance C. Unfavorable variance D. Revenue variance

B. Activity variance (Variances caused solely because of the differences in the level of activity are called activity variances.)

If activity is higher than expected, total fixed costs should be higher than expected. If activity is lower than expected, total fixed costs should be lower than expected. A. True B. False

B. False

An unfavorable variance of $5,000 in cost of goods sold is determined by comparing the actual results (10,000 units) and the flexible budget (10,000 units). What type of variance is described? A. Activity variance B. Spending variance C. Revenue variance

B. Spending variance (Since actual costs are being compared with the costs that should have been ideally incurred at the actual level of activity. This is a spending variance.)

When using a flexible budget, a decrease in activity within the relevant range: A. decreases variable cost per unit. B. decreases total costs. C. increases total costs. D. increases variable cost per unit.

B. decreases total costs.

Petrus Framing's cost formula for its supplies cost is $1,740 per month plus $8 per frame. For the month of March, the company planned for activity of 614 frames, but the actual level of activity was 620 frames. The actual supplies cost for the month was $6,850. The activity variance for supplies cost in March would be closest to: A. $48 F B. $198 U C. $48 U D. $198 F

C. $48 U (Flexible budget [$1,740 + ($8 × 620)] = $6,700 Planning budget [$1,740 + ($8 × 614)] = $6,652 Activity variance = $48)

Which of the following scenarios demonstrates the leverage effect on net operating income due to the existence of fixed costs? A. A 25% increase in sales resulting in a 30% decrease in net operating income. B. A 15% increase in sales resulting in a 15% increase in cost of goods sold. C. A 25% increase in sales resulting in a 30% increase in net operating income. D. A 25% increase in sales resulting in a 30% increase in fixed costs.

C. A 25% increase in sales resulting in a 30% increase in net operating income. (Because fixed costs do not change with the level of activity, they cause a leverage effect. In other words, a 25 increase in sales would be expected to increase the net operating income by more than 25%.)

Which of the following is NOT a column on a flexible budget performance report? A. Actual results B. Planning budget C. Net operating income D. Activity variances

C. Net operating income (The flexible budget performance report has the following columns; actual results, revenue and spending variances, flexible budgets, activity variances, and planning budget.)

Ramkissoon Midwifery's cost formula for its wages and salaries is $2,060 per month plus $442 per birth. For the month of July, the company planned for activity of 117 births, but the actual level of activity was 114 births. The actual wages and salaries for the month was $54,500. The spending variance for wages and salaries in July would be closest to: A. $726 F B. $2,052 F C. $726 U D. $2,052 U

D. $2,052 U (Actual results = $54,500 Flexible budget [$2,060 + ($442 × 114)] = $52,448 Spending variance = $2,052)

Kirnon Catering uses two measures of activity, jobs and meals, in the cost formulas in its budgets and performance reports. The cost formula for catering supplies is $300 per month plus $114 per job plus $16 per meal. A typical job involves serving a number of meals to guests at a corporate function or at a host's home. The company expected its activity in October to be 27 jobs and 224 meals, but the actual activity was 29 jobs and 227 meals. The actual cost for catering supplies in October was $7,500. The activity variance for catering supplies in October would be closest to: A. $538 U B. $276 F C. $538 F D. $276 U

D. $276 U (Flexible budget [$300 + ($114×29) + ($16×227)] = $7,238 Planning budget [$300 + ($114×27) + ($16×224)] = $6,962 Activity variance = $276)

Budget Solutions has determined from its flexible budget that selling costs for actual level activity for a period should have been $25,000. Actual selling costs incurred during the period were $28,000. What is the amount and direction of variance in selling costs? multiple choice A. $3,000 Favorable B. $28,000 Unfavorable C. $0 D. $3,000 Unfavorable

D. $3,000 Unfavorable (The amount of variance in selling costs is $3,000 ($28,000 − $25,000). Because the actual costs are higher, the variance is unfavorable.)

All of the following are reasons for preparing a flexible budget with multiple cost drivers EXCEPT ________. A. multiple cost drivers can lead to more accurate variances B. cost formulas are likely to be more accurate C. an expense may be expected to vary for more than one reason D. it eliminates the need for performing variance analysis

D. it eliminates the need for performing variance analysis (The use of multiple cost drivers does not eliminate the need for performing variance analysis. It does lead to more accurate variances, cost formulas are likely to be more accurate, and an expense may be expected to vary for more than one reason.)

The difference between the actual total revenue and budgeted total revenue at the actual level of activity is called a(n) ________. A. spending variance B. activity variance C. unfavorable variance D. revenue variance

D. revenue variance