Chapter 23
FLEXIBLE BUDGETS AND STANDARD COSTS
1. Standard costs can serve as a basis for evaluating actual performance.
2. Standard material, labor, and overhead costs can be obtained from standard cost tables
published by the Institute of Management Accountants.
3. Standard costs provide a basis for assessing the reasonableness of actual costs incurred for
producing a product or service.
4. When standard costs are used, factory overhead is assigned to products with a
predetermined standard overhead rate.
5. Companies promoting continuous improvement strive to achieve practical standards rather
than ideal standards.
6. While companies strive to achieve ideal standards, reality implies that some loss of
materials usually occurs with any process.
7. A cost variance is the difference between actual cost and standard cost.
8. A budget performance report that includes variances can have variances caused by both
price differences and quantity differences.
9. A cost variance equals the sum of the quantity variance and the price variance.
10. When computing a price variance, the price is held constant.
11. Within the same budget performance report, it is impossible to have both favorable and
unfavorable variances.
12. Cost variances are ignored under management by exception.
13. Management by exception allows managers to focus on the most significant variances in
performance.
14. Variable budget is another name for a flexible budget.
15. Fixed budget performance reports compare actual results with the expected amounts in the
fixed budget.
16. Another name for a static budget is a variable budget.
17. Fixed budgets are also known as flexible budgets.
18. The amounts in a flexible budget are based on one expected level of sales or production.
19. A variable or flexible budget is so named because it only focuses on variable costs.
20. A fixed budget performance report never provides useful information for evaluating
variances.
21. Sales variances allow managers to focus on sales mix as well as sales quantities.
22. Sales variances may be computed in a manner similar to cost variances–that is, computing
both price and volume variances.
23. A flexible budget expresses all costs on a per unit basis.
24. Although a fixed budget is only useful over the relevant range of operations, a flexible
budget is useful over all possible production levels.
25. A flexible budget expresses variable costs on a per unit basis and fixed costs on a total
basis.
26. The purchasing department is often responsible for the price paid for materials that may
create a direct materials price variance.
27. A direct labor cost variance may be broken down into a controllable variance and a
volume variance.
28. When the actual cost of direct materials used exceeds the standard cost, the company must
have experienced an unfavorable direct materials price variance.
29. A favorable direct materials price variance might lead to an unfavorable direct materials
quantity variance because the company purchased inferior materials.
30. One possible explanation for direct labor rate and efficiency variances is the use of
workers with different skill levels.
31. An overhead cost variance is the difference between the actual overhead incurred for the
period and the standard overhead applied.
32. A volume variance is the difference between overhead at maximum production volume
and that at the budgeted production volume.
33. An unfavorable variance is recorded with a debit.
34. If cost variances are material, they should always be closed directly to Cost of Goods
Sold.
35. Standard costs are:
A. Actual costs incurred to produce a specific product or perform a service.
B. Preset costs for delivering a product or service under normal conditions.
C. Established by the IMA.
D. Rarely achieved.
E. Uniform among companies within an industry.
36. The costs that should be incurred under normal conditions to produce a specific product or
component or to perform a specific service are:
A. Variable costs.
B. Fixed costs.
C. Standard costs.
D. Product costs.
E. Period costs.
37. The difference between actual and standard cost caused by the difference between the
actual price and the standard price is called the:
A. Standard variance.
B. Quantity variance.
C. Volume variance.
D. Controllable variance.
E. Price variance.
38. The difference between actual and standard cost caused by the difference between the
actual quantity and the standard quantity is called the:
A. Controllable variance.
B. Standard variance.
C. Budget variance.
D. Quantity variance.
E. Price variance.
39. The difference between the actual cost incurred and the standard cost is called the:
A. Flexible variance.
B. Price variance.
C. Cost variance.
D. Controllable variance.
E. Volume variance.
40. A process of examining the differences between actual and budgeted costs and describing
them in terms of the amounts that resulted from price and quantity differences is called:
A. Cost analysis.
B. Flexible budgeting.
C. Variable analysis.
D. Cost variable analysis.
E. Variance analysis.
41. Standard costs are used in the calculation of:
A. Price and quantity variances.
B. Price variances only.
C. Quantity variances only.
D. Price, quantity, and sales variances.
E. Quantity and sales variances.
42. A company provided the following direct materials cost information. Compute the cost
variance.
Standard costs assigned:
Direct materials standard cost (405,000 units @ $2/unit $810,000
Actual costs
Direct Materials costs incurred (403,750 units @ $2.20/unit) $888,250
A. $2,500 Favorable.
B. $78,250 Favorable
C. $78,250 Unfavorable
D. $80,750 Favorable.
E. $80,750 Unfavorable.
43. An analytical technique used by management to focus on the most significant variances
and give less attention to the areas where performance is satisfactory is known as:
A. Controllable management.
B. Management by variance.
C. Performance management.
D. Management by objectives.
E. Management by exception.
44. A planning budget based on a single predicted amount of sales or production volume is
called a:
A. Sales budget.
B. Standard budget.
C. Flexible budget.
D. Fixed budget.
E. Variable budget.
45. A report based on predicted amounts of revenues and expenses corresponding to the actual
level of output is called a:
A. Rolling budget.
B. Production budget.
C. Flexible budget.
D. Merchandise purchases budget.
E. Fixed budget.
46. Static budget is another name for:
A. Standard budget.
B. Flexible budget.
C. Variable budget.
D. Fixed budget.
E. Master budget.
47. Variable budget is another name for:
A. Cash budget.
B. Flexible budget.
C. Fixed budget.
D. Manufacturing budget.
E. Rolling budget.
48. Identify the situation that will result in a favorable variance.
A. Actual revenue is higher than budgeted revenue.
B. Actual revenue is lower than budgeted revenue.
C. Actual income is lower than expected.
D. Actual costs are higher than budgeted costs.
E. Actual expenses are higher than budgeted expenses.
49. A flexible budget performance report compares the differences between:
A. Actual performance and budgeted performance based on actual sales volume.
B. Actual performance over several periods.
C. Budgeted performance over several periods.
D. Actual performance and budgeted performance based on budgeted sales volume.
E. Actual performance and standard costs at the budgeted sales volume.
50. Sales variance analysis is useful for:
A. Planning purposes only.
B. Budgeting purposes only.
C. Control purposes only.
D. Planning and control purposes.
E. Planning and budgeting purposes.
51. An internal report that helps management analyze the difference between actual
performance and budgeted performance based on the actual sales volume (or other level of
activity), and which presents the differences between actual and budgeted amounts as
variances, is called a(n):
A. Sales budget performance report.
B. Flexible budget performance report.
C. Master budget performance report.
D. Static budget performance report.
E. Operating budget performance report.
52. A flexible budget is prepared:
A. Before the operating period only.
B. After the operating period only.
C. During the operating period only.
D. At any time in the planning period.
E. A flexible budget should never be prepared.
53. A company’s flexible budget for 12,000 units of production showed sales, $48,000;
variable costs, $18,000; and fixed costs, $16,000. The operating income expected if the
company produces and sells 16,000 units is:
A. $ 2,667.
B. $14,000.
C. $18,667.
D. $24,000.
E. $35,000.
54. Based on predicted production of 12,000 units, a company anticipates $150,000 of fixed
costs and $123,000 of variable costs. The flexible budget amounts of fixed and variable costs
for 10,000 units are:
A. $125,000 fixed and $102,500 variable.
B. $125,000 fixed and $123,000 variable.
C. $102,500 fixed and $150,000 variable.
D. $150,000 fixed and $123,000 variable.
E. $150,000 fixed and $102,500 variable.
55. Product A has a sales price of $10 per unit. Based on a 10,000-unit production level, the
variable costs are $6 per unit and the fixed costs are $3 per unit. Using a flexible budget for
12,500 units, what is the budgeted operating income from Product A?
A. $12,500.
B. $25,000.
C. $20,000.
D. $30,000.
E. $35,000.
56. A company’s flexible budget for 10,000 units of production reflects sales of $200,000;
variable costs of $40,000; and fixed costs of $75,000. Calculate the expected level of
operating income if the company produces and sells 13,000 units.
A. $110,500.
B. $85,000.
C. $133,000.
D. $100,000.
E. $50,500.
57. Based on a predicted level of production and sales of 12,000 units, a company anticipates
reporting operating income of $26,000 after deducting variable costs of $72,000 and fixed
costs of $10,000.
Based on this information, the budgeted amounts of fixed and variable costs for 15,000 units
would be:
A. $10,000 of fixed costs and $72,000 of variable costs.
B. $10,000 of fixed costs and $90,000 of variable costs.
C. $12,500 of fixed costs and $90,000 of variable costs.
D. $12,500 of fixed costs and $72,000 of variable costs.
E. $10,000 of fixed costs and $81,000 of variable costs.
58. Which department is often responsible for the direct materials price variance?
A. The accounting department.
B. The production department.
C. The purchasing department.
D. The finance department.
E. The budgeting department.
59. Kyle, Inc. has collected the following data on one of its products. The actual cost of the
direct materials used is:
Direct materials standard (4 lbs. @ $1/lb.) $4 per finished unit
Total direct materials cost variance—unfavorable $13,750
Actual direct materials used 150,000 lbs.
Actual finished units produced 30,000 units
A. $133,750.
B. $150,000.
C. $106,250.
D. $158,750.
E. $120,000.