Question 1

What is the best use of a static budget?

Accepted Answer

A static budget is primarily used to measure whether a manager accomplishes his or her predetermined goals, as it does not change with the level of activity and thus serves as a fixed point of reference.

Question 2

Which of the following is characteristic of an after-the-fact flexible budget?

Accepted Answer

An after-the-fact flexible budget is prepared after the actual level of activity has taken place. Therefore, it is a budget for the actual level of activity. Choice B refers to a flexible budget in general, and choice C refers to a flexible budget used for scenario analysis, which may or may not be after-the-fact. Choice D refers to a regular (pre-determined) flexible budget.

Question 3

How does one create a meaningful performance report?

Accepted Answer

Creating a meaningful performance report involves comparing actual costs with the expected costs at the same level of activity. This helps to identify any variances in costs and determine the reasons behind them. By comparing actual costs with the expected costs at the same level of activity, one can calculate and analyze the variances and take corrective actions, if needed. Comparing actual costs with the expected costs found in the static budget (option A) may not be appropriate if the level of activity has changed. Calculating actual costs as a percentage of sales (option B) may not provide the complete picture of the overall performance. Comparing actual costs with the prior year's actual costs (option C) may not be relevant if the business environment has changed significantly.

Question 4

Suppose a company's variable manufacturing overhead is applied on the basis of direct labour hours,and the company has an unfavourable direct labour efficiency variance.Which of the following is most likely to result?

Accepted Answer

If the direct labour efficiency variance is unfavourable, it means that more direct labour hours were used than expected to produce the actual output. As variable manufacturing overhead is applied on the basis of direct labour hours, more variable manufacturing overhead costs will be incurred due to the higher labour hours. This will result in an unfavourable variable manufacturing overhead efficiency variance. The direct materials usage variance and the direct labour rate variance are not related to the variable manufacturing overhead efficiency variance. The variable manufacturing overhead spending variance is related to the actual variable manufacturing overhead costs incurred and not to the direct labour efficiency variance.

Question 5

For what level of activity is a static budget prepared?

Accepted Answer

A static budget is prepared for a particular level of activity. It is a budget that remains constant, regardless of the actual level of activity. Therefore, it is best suited for a specific level of activity.

Question 6

Why are flexible budgets powerful control tools?

Accepted Answer

Flexible budgets are powerful control tools because they allow managers to calculate what costs should be for the actual level of activity, enabling them to make adjustments and take corrective action as necessary. This flexibility provides managers with greater insight into the causes of variances between actual and budgeted results, helping them to better manage costs and resources.

Question 7

What are the two variances for variable overhead?

Accepted Answer

The two variances for variable overhead are spending variance (which measures the difference between actual variable overhead cost and the budgeted variable overhead cost based on actual hours worked) and efficiency variance (which measures the difference between the standard variable overhead rate and the actual variable overhead rate based on actual hours worked). Therefore, option A (spending and efficiency variances) is the correct answer.

Question 8

The difference between which two amounts equals the total variable overhead variance?

Accepted Answer

The total variable overhead variance is calculated by comparing the total actual variable overhead with the total applied variable overhead. This variance measures the difference between what was actually spent on variable overhead and what was expected to be spent, based on the standard cost for the actual level of production.

Question 9

Which budget is prepared for a particular level of activity?

Accepted Answer

A static budget is prepared for a particular level of activity, and does not change regardless of actual activity levels. It is typically used for a specific time period, such as a fiscal year, and is often used to plan and control expenses for that time period. An operational budget includes estimates of revenue and expenses for day-to-day operations, while a capital budget is used to plan for long-term investments in assets such as property, equipment, or infrastructure. A flexible budget, on the other hand, adjusts for actual activity levels and is often used in variable cost environments to better align revenues and expenses.

Question 10

What is the formula for the variable overhead spending variance?

Accepted Answer

The variable overhead spending variance is calculated as the difference between actual variable overhead rate (AVOR) and standard variable overhead rate (SVOR) multiplied by actual hours (AH). The formula for variable overhead spending variance is (AVOR − SVOR)AH.

Question 11

Which budget should be used to determine managerial effectiveness?

Accepted Answer

A static budget is used to evaluate managerial effectiveness because it is fixed and does not change with the actual level of output or activity. This allows for direct comparison between the budgeted figures and the actual results, making it easier to assess how well managers have controlled costs and managed resources.

Question 12

Which of the following is characteristic of a before-the-fact flexible budget?

Accepted Answer

A before-the-fact flexible budget calculates expected costs for various levels of activity before actual activity occurs. It is used to help management plan and control costs by allowing them to see how costs will be affected by changes in activity levels. This type of budget is different from an after-the-fact flexible budget, which calculates what costs should have been for the actual level of activity that occurred. Performance reports would typically use an after-the-fact flexible budget to compare expected costs with actual costs.

Question 13

How is variable overhead applied in a standard cost system?

Accepted Answer

Variable overhead is applied in a standard cost system by using standard direct labour hours. The predetermined overhead rate is usually calculated by dividing the total budgeted variable overhead costs by the total budgeted standard direct labour hours. Therefore, D is the best choice as it reflects the use of standards in the application of variable overhead.

Question 14

Which of the following is characteristic of a performance report?

Accepted Answer

Performance reports compare actual costs with budgeted costs to analyze the organization's performance. These reports typically use flexible budgets, which adjust to changes in activity levels. Static budgets, which do not change with activity levels, are not suitable for performance reports. Additionally, performance reports include variances to explain the differences between actual and budgeted costs.

Question 15

The difference between which two amounts is measured by the variable overhead spending variance?

Accepted Answer

The answer of The difference between which two amounts is...

Question 16

Showcase Inc's standard variable overhead rate is $7 per direct labour hour,and each unit requires three standard direct labour hours.During April,Showcase recorded 7,000 actual direct labour hours,$65,000 actual variable overhead costs,and 2,950 units of product manufactured. What is Showcase's total variable overhead variance for April?

Accepted Answer

The answer of Showcase Inc's standard variable overhead rate is...

Question 17

Assume that the expectations on the static budget were met.What can be concluded?

Accepted Answer

If the expectations on the static budget were met, it means that the manager was able to achieve the target set on the budget. Therefore, the effectiveness of the manager is not in question. However, it does not necessarily mean that the static budget was ill conceived, that the manager is very efficient, or that there is no need for a flexible budget.

Question 18

Which budget allows the determination of expected costs for various levels of activity?

Accepted Answer

A flexible budget allows the determination of expected costs for various levels of activity. It is designed to adjust and adapt to changes in activity levels and allows for better forecasting of costs. The operational budget focuses on day-to-day expenses, the capital budget focuses on long-term investment decisions, and the static budget is based on a fixed level of activity and cannot adjust to changes.

Question 19

Which budget is used to assess managerial efficiency?

Accepted Answer

A flexible budget is used to assess managerial efficiency because it is based on actual activity levels, allowing for a more accurate analysis of how effectively resources were utilized. This allows for a better understanding of whether managers were able to manage their budgets effectively based on changes in activity levels. The other budget types (operational, capital, static) do not take into account changes in activity levels and may not provide an accurate measure of managerial efficiency.

Question 20

What does inefficient use of labour imply?

Accepted Answer

Inefficient use of labour means that more labour hours or workers are required to produce the same amount of output or complete a task. This results in an unfavourable variable overhead efficiency variance, which measures the difference between the actual hours worked and the standard hours allowed for the output produced.

Quiz 11: Flexible Budgets and Overhead Analysis