Chapter 11—Flexible Budgets and Overhead Analysis
TRUE/FALSE
1. A static budget compares actual cost with budgeted costs.
2. Static budgets are the best benchmarks for preparing a performance report.
3. Before-the-fact flexible budgets give expected outcomes for a range of activity levels.
4. An after-the-fact flexible budget allows managers to generate financial results from a number of
potential scenarios.
5. A static budget is a budget for a particular level of activity.
6. When overhead is applied on the basis of direct labor hours, the variable overhead efficiency variance
always has the same sign as the labor efficiency variance.
7. The variable overhead spending variance is conceptually identical to the price variances of materials
and labor.
8. The variable overhead variance is affected by input price changes only.
9. Price changes of variable overhead items are easily controlled by production supervisors.
10. Responsibility for variable overhead spending and efficiency variances is generally assigned to
production departments.
11. Practical capacity is always used to calculate fixed overhead rates
12. Fixed overhead costs are resources acquired as used and needed.
13. The fixed overhead spending variance is affected primarily by changes in production levels.
14. The volume variance is often interpreted as a measure of capacity utilization.
15. Although general responsibility for the volume variance is usually assigned to the purchasing
department, responsibility on occasion may be assigned to the production department.
16. An activity-based budgetary approach can be used to emphasize cost reduction and process
management.
17. Activity-based budgeting focuses on estimating the costs of activities rather than the costs of
departments and plants.
18. Activity-based budgeting builds a budget for each activity based on the resources needed to provide
the required activity output levels.
19. Activity-based budgeting supports continuous improvement and process management.
20. Activity flexible budgeting is the prediction of what activity costs will be as related output changes.
21. Because activities are what consume resources, activity-based budgeting may prove to be a much more
powerful planning and control tool than the traditional approach.
22. An activity-based budgetary approach can be used to emphasize cost increases through the reduction
of wasteful activities and improving the efficiency of necessary activities.
23. The first step of building an activity-based budget is to identify the activities within an organization.
24. For a static activity budget in a company already using an ABC or ABM system, the activities within
the organization must be identified.
25. Activity-based budgeting classifies costs as variable or fixed with respect to the activity output
measure.
26. In an activity framework, controlling costs is equivalent to managing activities.
27. Activity flexible budgeting is the prediction of what activity costs will be as production output
changes.
28. An activity-based budgeting system may help support continuous improvement and process
management.
MATCHING
Match the following terms with the items below:
a.
(Actual hours − Standard hours)SVOR
b.
Prediction of what activity costs will be as activity output changes
c.
A measure of capacity utilization
d.
Actual variable overhead − (SVOR Actual hours)
e.
Difference between the actual amount and the flexible budget amount
f.
A budget that specifies costs for a range of activity
g.
A budget for a particular level of activity
h.
Estimating activity output and then assessing the cost of resources to produce this output
i.
A report that compares actual with planned costs
j.
Difference between actual and budgeted fixed overhead
1. Performance report
2. Static budget
3. Flexible budget
4. Activity-based budgeting
5. Fixed overhead spending variance
6. Activity flexible budget
7. Fixed overhead volume variance
8. Variable overhead efficiency variance
9. Variable overhead spending variance
10. Flexible budget variance
COMPLETION
1. A _____________________ compares actual costs with budgeted costs.
2. A _______________ is a budget created in advance that is based on a particular level of activity.
3. A _________________ enables a firm to compute expected costs for a range of activity levels.
4. Budgeted costs change because total variable costs go up as output increases, therefore flexible
budgets are sometimes referred to as _______________.
5. A difference between the actual amount and the flexible budget amount is known as the
____________________.
6. The ____________________ budget gives expected outcomes for a range of activity levels.
7. The ________________ budget is based on the actual level of activity.
8. Often, the flexible budget formulas are based on ________________ instead of units.
9. The _____________________ measures the aggregate effect of differences between the actual
variable overhead rate and the standard variable overhead rate.
10. The ________________________ measures the change in the actual variable overhead cost that
occurs because of efficient (or inefficient) use of direct labor
11. _______________________ is the difference between the actual variable overhead and applied
variable overhead.
12. ______________________ is a prerequisite for assigning responsibility.
13. The variable overhead efficiency variance is directly related to the __________________ or usage
variance.
14. The _____________________ is the difference between actual fixed overhead and applied fixed
overhead.
15. The ______________________ is the difference between the actual fixed overhead and the budgeted
fixed overhead.
16. The ____________________ is the difference between budgeted fixed overhead and applied fixed
overhead.
17. _________________ are capacity costs acquired in advance of usage.
18. The _________________________ focuses on the estimation of the costs of activities rather than the
costs of departments and plants.
19. Activity-based budgeting begins with the _____________ and _______________ budgets.
20. _______________________ is the prediction of what activity costs will be as related output changes.
MULTIPLE CHOICE
1. A static budget is
a.
considered a good choice for benchmarks in preparing a performance report.
b.
computes expected costs for a range of activity levels.
c.
compares actual costs with budgeted costs.
d.
prepared for a particular level of activity.
e.
None of these are correct.
2. Which budget should be used to determine managerial effectiveness?
a.
before-the-fact flexible budget
b.
after-the-fact flexible budget
c.
static budget
d.
financial budget
e.
cash budget
3. Which budget is used to assess managerial efficiency?
a.
sales budget
b.
production budget
c.
static budget
d.
flexible budget
e.
cash budget
4. A budget that allows the determination of expected costs for various levels of activity is a(n)
a.
operational budget.
b.
sales budget.
c.
production budget.
d.
financial budget.
e.
flexible budget.
5. To create a meaningful performance report,
a.
actual costs are compared with the expected costs found in the static budget.
b.
actual costs are calculated as a percentage of sales.
c.
actual costs are compared with the prior year’s actual costs.
d.
expected costs of the static budget are compared with the expected costs of the flexible
budget.
e.
actual costs are compared with the expected costs at the same level of activity.
6. A before-the-fact flexible budget
a.
calculates expected costs for various levels of activity.
b.
allows managers to deal with uncertainty.
c.
can be used to generate results for a number of plausible scenarios.
d.
is a useful planning tool.
e.
All of these.
7. An after-the-fact flexible budget
a.
is a budget for the actual level of activity.
b.
is used for performance reports.
c.
calculates what costs should have been for the actual level of activity.
d.
is used to compare expected costs with actual costs.
e.
All of these.
8. A budget prepared for a particular level of activity is a(n)
a.
operational budget.
b.
ABB budget.
c.
static budget.
d.
flexible budget.
e.
variable budget.
9. A static budget is best used to
a.
measure whether or not a manager accomplishes his or her goals.
b.
compare expected costs at the actual level of activity with the actual costs.
c.
assess how well costs were controlled during the year.
d.
determine managerial efficiency.
e.
None of these.
10. Assume that the expectations on the static budget were met. We can conclude that
a.
the static budget was ill conceived.
b.
the effectiveness of the manager is not in question.
c.
the manager is very efficient.
d.
there is no need for a flexible budget.
e.
None of these.
11. A performance report
a.
always uses static budgets.
b.
compares actual costs with budgeted costs.
c.
uses a static or a flexible budget.
d.
both compares actual costs with budgeted costs and always uses static budget.
e.
both always uses static budgets and usually uses flexible budgets.
12. Flexible budgets are powerful control tools because
a.
they allow managers to deal with uncertainty.
b.
they allow the calculation of what cost should be for the actual level of activity.
c.
they allow the preparation of meaningful performance reports.
d.
they help measure managerial efficiency.
e.
All of these.
13. The variable overhead spending variance measures the aggregate effect of differences between the
a.
the total variable overhead and the applied variable overhead.
b.
the total variable overhead and total budgeted overhead costs.
c.
the total variable overhead and the budgeted overhead for the expected activity.
d.
the actual variable overhead rate and the standard variable overhead rate.
e.
None of these.
Figure 11-1.
Jason, Inc. produces leather purses. Jason has developed a static budget for the first quarter, based on
20,000 direct labor hours. During the quarter, the actual activity was 22,000 direct labor hours. Data
for the first quarter are summarized as follows:
Static budget
(20,000 hours)
Actual costs
(22,000 hours)
Direct materials cost
$ 80,000
$ 87,000
Direct labor cost
160,000
174,000
Building rental
48,000
50,000
Total
$288,000
$311,000
14. Refer to Figure 11-1. Comparing the static budget to the actual outcomes, we can say the following:
a.
the manager had more direct labor hours.
b.
the variances are all unfavorable.
c.
the comparison is not useful for assessing managerial efficiency.
d.
a flexible budget should be used for assessing efficiency.
e.
All of these.
15. Refer to Figure 11-1. What is the flexible budget amount for the first quarter?
a.
$288,000
b.
$311,000
c.
$312,000
d.
$261,000
e.
Cannot be determined.
16. Refer to Figure 11-1. What is the flexible budget variance for the first quarter?
a.
$1,000 U
b.
$23,000 U
c.
$23,000 F
d.
$1,000 F
e.
None of these.
Direct materials
$ 88,000
$ 87,000
Direct labor
Building rental
Total
$312,000
$311,000
Figure 11-2.
Lawson, Inc. produces plastic grocery bags. Lawson has developed a static budget for the month of
July based on 8,000 direct labor hours. During the quarter, the actual activity was 9,000 direct labor
hours. Data for July are summarized as follows:
Static budget
(8,000 hours)
Actual costs
(9,000 hours)
Direct materials cost
$ 96,000
$118,000
17. Refer to Figure 11-2. Comparing the static budget to the actual costs, we can conclude that
a.
the manager spent more than should have been spent.
b.
immediate action is needed to reduce costs.
c.
the plant manager was clearly not efficient.
d.
the plant manager should be dismissed.
e.
None of these.
18. Refer to Figure 11-2. What is the flexible budget for July?
a.
$142,000
b.
$159,000
c.
$171,000
d.
$165,000
e.
None of these.
19. Refer to Figure 11-2. What is the flexible budget variance for July?
a.
$12,000 U
b.
$12,000 F
c.
$29,000 U
d.
$29,000 F
e.
None of these.
Figure 11-3.
Montgomery Company has developed the following flexible budget formulas for its four overhead
items:
Variable rate per
Overhead item
Fixed Cost
direct labor hour
Maintenance
$10,000
$3.00
Power
$1,500
$0.30
Indirect labor cost
$12.00
Equipment lease
$7,000
Total
$18,500
$15.30
Montgomery normally produces 15,000 units (each unit requires 0.30 direct labor hours); however this
year 19,000 units were produced with the following actual costs:
Overhead item
Actual costs
Maintenance
$14,000
Power
$2,200
Indirect labor cost
$70,000
Equipment lease
$7,000
Total costs
$93,200
20. Refer to Figure 11-3. Prepare an overhead budget for the expected activity level of 10,000 units. The
total budgeted overhead is
a.
$139,400.
b.
$64,400.
c.
$124,000.
d.
$12,400.
e.
None of these.
21. Refer to Figure 11-3. Calculate the after-the-fact budget for the actual level of activity.
a.
$91,600
b.
$115,000
c.
$118,600
d.
$77,400
e.
None of these.
22. Refer to Figure 11-3. Calculate the variance for maintenance using an after-the-fact flexible budget.
a.
$13,000 U
b.
$13,100 F
c.
$11,000 U
d.
$1,000 F
e.
None of these.
23. Refer to Figure 11-3. Using an after-the-fact flexible budget, calculate the variance for power.
a.
$1,000 F
b.
$1,010 U
c.
$3,000 U
d.
$1,010 F
e.
None of these.
24. Refer to Figure 11-3. Using an after-the-fact flexible budget, calculate the total budget variance.
a.
$12,510 U
b.
$3,600 U
c.
$5,000 F
d.
$12,510 F
e.
None of these.
25. The total variable overhead variance is the difference between
a.
the actual overhead and the budgeted overhead.
b.
the total actual variable overhead and the total budgeted variable overhead.
c.
the total actual variable overhead and the total applied variable overhead.
d.
the total actual variable overhead and the total applied overhead.
e.
None of these.
26. In a standard cost system, variable overhead is applied
a.
using actual direct labor hours.
b.
using budgeted indirect labor hours.
c.
using direct labor hours at practical capacity.
d.
using standard direct labor hours.
e.
All of these.
27. The formula for the variable overhead spending variance can be expressed as follows:
a.
(AH − SH)SVOR.
b.
(AVOR − SVOR)SH.
c.
(AVOR − SVOR)AH.
d.
(AH − SH)AVOR.
e.
None of these.
28. The variable overhead efficiency variance claims to measure
a.
changes in spending efficiency.
b.
productive efficiency.
c.
changes in variable overhead costs because of the efficient (inefficient) use of the cost
driver.
d.
changes in variable overhead costs attributable to inefficient purchase of variable inputs.
e.
None of these.
29. The formula for calculating the variable overhead efficiency variance is
a.
(AVOR AH) − (SVOR AH).
b.
(AVOR − SVOR)SH.
c.
(AH − SH)SVOR.
d.
(AH − SH)AVOR.
e.
None of these.
30. The two variances for variable overhead are
a.
spending and efficiency variances.
b.
spending and budget variances.
c.
budget and volume variances.
d.
spending and volume variances.
e.
volume and efficiency variances.
31. Inefficient usage of labor implies a(n)
a.
both unfavorable variable overhead efficiency variance and unfavorable variable overhead
spending variance.
b.
favorable variable overhead efficiency variance.
c.
unfavorable variable overhead spending variance.
d.
favorable variable overhead spending variance.
e.
unfavorable variable overhead efficiency variance.
32. Responsibility for the variable overhead spending variance is usually assigned to
a.
the purchasing department.
b.
the production department.
c.
the engineering department.
d.
the personnel department.
e.
None of these.
33. A performance report for variable overhead reveals
a.
the aggregate variable overhead spending and efficiency variances.
b.
the volume and spending variances.
c.
the spending and efficiency variances for each variable overhead item.
d.
both the aggregate variable overhead spending and efficiency variances and the spending
and efficiency variances for each variable overhead item.
e.
both the volume and spending variances and the spending and efficiency variances for
each variable overhead item.
34. Markus, Inc. produces a specialized machine part used in forklifts. For last year’s operations, the
following data were gathered:
Units produced:
55,000
Direct labor:
29,000 hours @ $9.00
Actual variable overhead:
$135,000
Markus employs a standard costing system. During the year, a variable overhead rate of $5.00 was
used. The labor standard requires 0.50 hours per unit produced. The variable overhead spending and
efficiency variances are, respectively
a.
$10,000 U and $7,500 U.
b.
$10,000 F and $7,500 U.
c.
$7,500 U and $10,000 F.
d.
$10,000 F and $7,500 F.
e.
None of these.
35. Shorts, Inc. produces small engines. For last year’s operations, the following data were gathered:
Units produced:
100,000
Direct labor:
160,000 hours @ $12.00
Actual variable overhead:
$1,300,000
Shorts, Inc. employs a standard costing system. During the year, a variable overhead rate of $8.00 was
used. The labor standard requires 1.5 hours per unit produced. The variable overhead spending and
efficiency variances are, respectively
a.
$100,000 U and $20,000 U.
b.
$100,000 U and $20,000 F.
c.
$20,000 U and $80,000 U.
d.
$20,000 U and $80,000 F.
e.
None of these.