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Ch9 Quiz1

The document discusses key concepts related to flexible budgets, static budgets, and variances. It defines activity, revenue, and spending variances and explains how a flexible budget performance report separates differences due to activity from those due to prices and resource management effectiveness.

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Jessa Basadre
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30 views2 pages

Ch9 Quiz1

The document discusses key concepts related to flexible budgets, static budgets, and variances. It defines activity, revenue, and spending variances and explains how a flexible budget performance report separates differences due to activity from those due to prices and resource management effectiveness.

Uploaded by

Jessa Basadre
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd
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Basadre, Jessa G.

BSA 3rd yr.

Managerial Accounting
Chapter 9 Quiz 1

9-1 The planning budget is prepared for the planned level of activity. It is static because it is
not adjusted even if the level of activity subsequently changes.

9-2 A flexible budget can be adjusted to reflect any level of activity—including the actual level
of activity. By contrast, a static planning budget is prepared for a single level of activity and is
not subsequently adjusted.

9-3 Actual results can differ from the budget for many reasons. Very broadly speaking, the
differences are usually due to a change in the level of activity, changes in prices, and
changes in how effectively resources are managed.

9-4 As noted in 9-3 above, a difference between the budget and actual results can be due to
many factors. Most importantly, the level of activity can have a very big impact on costs. From
a manager’s perspective, a variance that is due to a change in activity is very different from a
variance that is due to changes in prices and changes in how effectively resources are
managed. A variance of the first kind requires very different actions from a variance of the
second kind. Consequently, these two kinds of variances should be clearly separated from
each other. When the budget is directly compared to the actual results, these two kinds of
variances are lumped together.

9-5 An activity variance is the difference between a revenue or cost item in the static
planning budget and the same item in the flexible budget. An activity variance is due solely to
the difference in the level of activity assumed in the planning budget and the actual level of
activity used in the flexible budget. Caution should be exercised in interpreting an activity
variance. The “favorable” and “unfavorable” labels are perhaps misleading for activity
variances that involve costs. A “favorable” activity variance for a cost occurs because the cost
has some variable component and the actual level of activity is less than the planned level of
activity. An “unfavorable” activity variance for a cost occurs because the cost has some
variable component and the actual level of activity is greater than the planned level of activity.

9-6 A revenue variance is the difference between how much the revenue should have been,
given the actual level of activity, and the actual revenue for the period. A revenue variance is
easy to interpret. A favorable revenue variance occurs because the revenue is greater than
expected for the actual level of activity. An unfavorable revenue variance occurs because the
revenue is less than expected for the actual level of activity.

9-7 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. Like the revenue variance, the
interpretation of a spending variance is straight-forward. A favorable spending variance
occurs because the cost is lower than expected for the actual level of activity. An unfavorable
spending variance occurs because the cost is higher than expected for the actual level of
activity.

9-8 In a flexible budget performance report, the static planning budget is not directly
compared to actual results. The flexible budget is interposed between the static planning
budget and actual results. The differences between the static planning budget and the flexible
budget are activity variances. The differences between the flexible budget and the actual
results are the revenue and spending variances. The flexible budget performance report
cleanly separates the differences between the static planning budget and the actual results
that are due to changes in activity (the activity variances) from the differences that are due to
changes in prices and the effectiveness with which resources are managed (the revenue and
spending variances).
9-9 The only difference between a flexible budget based on a single cost driver and one
based on two cost drivers is the cost formulas. When two cost drivers exist, some costs may
be a function of the first cost driver, some costs may be a function of the second cost driver,
and some costs may be a function of both cost drivers.

9-10When the static planning budget is directly compared to actual results, it is implicitly
assumed that costs (and revenues) should not change with a change in the level of activity.
This assumption is valid only for fixed costs. However, it is unlikely that all costs are fixed.
Some are likely to be variable or mixed.

9-11When the static planning budget is adjusted proportionately for a change in activity and
then directly compared to actual results, it is implicitly assumed that costs should change in
proportion to a change in the level of activity. This assumption is valid only for strictly variable
costs. However, it is unlikely that all costs are strictly variable. Some are likely to be fixed or
mixed.

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