Chapter 21—Flexible Budgets and Overhead Analysis Key
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.
29. Match the following terms with the items below:
1. Fixed overhead volume
2. Variable overhead
Estimating activity output and then assessing the cost of
Prediction of what activity costs will be as activity output
8. Variable overhead
9. Fixed overhead spending
Difference between the actual amount and the flexible
30. A _____________________ compares actual costs with budgeted costs.
31. A _______________ is a budget created in advance that is based on a particular level of activity.
32. A _________________ enables a firm to compute expected costs for a range of activity levels.
33. Budgeted costs change because total variable costs go up as output increases, therefore flexible budgets are
sometimes referred to as _______________.
34. A difference between the actual amount and the flexible budget amount is known as the
____________________.
35. The ____________________ budget gives expected outcomes for a range of activity levels.
36. The ________________ budget is based on the actual level of activity.
37. Often, the flexible budget formulas are based on ________________ instead of units.
38. The _____________________ measures the aggregate effect of differences between the actual variable
overhead rate and the standard variable overhead rate.
39. The ________________________ measures the change in the actual variable overhead cost that occurs
because of efficient (or inefficient) use of direct labor
40. _______________________ is the difference between the actual variable overhead and applied variable
overhead.
41. ______________________ is a prerequisite for assigning responsibility.
42. The variable overhead efficiency variance is directly related to the __________________ or usage
variance.
43. The _____________________ is the difference between actual fixed overhead and applied fixed overhead.
44. The ______________________ is the difference between the actual fixed overhead and the budgeted fixed
overhead.
45. The ____________________ is the difference between budgeted fixed overhead and applied fixed
overhead.
46. _________________ are capacity costs acquired in advance of usage.
47. The _________________________ focuses on the estimation of the costs of activities rather than the costs
of departments and plants.
48. Activity-based budgeting begins with the _____________ and _______________ budgets.
49. _______________________ is the prediction of what activity costs will be as related output changes.
50. A static budget is
51. Which budget should be used to determine managerial effectiveness?
52. Which budget is used to assess managerial efficiency?
53. A budget that allows the determination of expected costs for various levels of activity is a(n)
54. To create a meaningful performance report,
55. A before-the-fact flexible budget
56. An after-the-fact flexible budget
57. A budget prepared for a particular level of activity is a(n)
58. A static budget is best used to
59. Assume that the expectations on the static budget were met. We can conclude that
60. A performance report
61. Flexible budgets are powerful control tools because
62. The variable overhead spending variance measures the aggregate effect of differences between the
63. 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)
$ 80,000
$ 87,000
160,000
174,000
48,000
50,000
$288,000
$311,000
Refer to Figure 11-1. Comparing the static budget to the actual outcomes, we can say the following:
64. 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)
$ 80,000
$ 87,000
160,000
174,000
48,000
50,000
$288,000
$311,000
Refer to Figure 11-1. What is the flexible budget amount for the first quarter?
65. 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)
$ 80,000
$ 87,000
160,000
174,000
48,000
50,000
$288,000
$311,000
Refer to Figure 11-1. What is the flexible budget variance for the first quarter?
66. 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)
$ 96,000
$118,000
40,000
47,000
6,000
6,000
$142,000
$171,000
Refer to Figure 11-2. Comparing the static budget to the actual costs, we can conclude that
67. 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)
$ 96,000
$118,000
40,000
47,000
6,000
6,000
$142,000
$171,000
Refer to Figure 11-2. What is the flexible budget for July?
68. 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)
$ 96,000
$118,000
40,000
47,000
6,000
6,000
$142,000
$171,000
Refer to Figure 11-2. What is the flexible budget variance for July?
69. 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
Refer to Figure 11-3. Prepare an overhead budget for the expected activity level of 10,000 units. The total budgeted overhead is
70. 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
Refer to Figure 11-3. Calculate the after-the-fact budget for the actual level of activity.
71. 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
Refer to Figure 11-3. Calculate the variance for maintenance using an after-the-fact flexible budget.
72. 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
Refer to Figure 11-3. Using an after-the-fact flexible budget, calculate the variance for power.
73. 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
Refer to Figure 11-3. Using an after-the-fact flexible budget, calculate the total budget variance.
74. The total variable overhead variance is the difference between
75. In a standard cost system, variable overhead is applied
76. The formula for the variable overhead spending variance can be expressed as follows:
77. The variable overhead efficiency variance claims to measure
78. The formula for calculating the variable overhead efficiency variance is
79. The two variances for variable overhead are
80. Inefficient usage of labor implies a(n)
81. Responsibility for the variable overhead spending variance is usually assigned to
82. A performance report for variable overhead reveals
83. Markus, Inc. produces a specialized machine part used in forklifts. For last year’s operations, the following
data were gathered:
Units produced:
Direct labor:
Actual variable overhead:
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
84. Shorts, Inc. produces small engines. For last year’s operations, the following data were gathered:
Units produced:
Direct labor:
Actual variable overhead:
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
85. During the year, Hawkings produced 10,000 units, used 20,000 direct labor hours, and incurred variable
overhead of $90,000. Budgeted variable overhead for the year was $88,000. The hours allowed per unit are 2.1.
The standard variable overhead rate is $4.00 per direct labor hour. The variable overhead spending variance is
86. Budgeted variable overhead for the year is $120,000. Expected activity is 20,000 standard direct labor
hours. The actual hours worked were 18,000 and the standard hours allowed for actual production were 19,500.
The variable overhead efficiency variance is
87. Folson Company is planning to produce 4,250,000 speakers for the coming year. Actual production was
4,000,000 speakers. Each speaker requires 0.80 direct labor hours per unit. Predetermined overhead rates are
calculated using expected production, measured in direct labor hours. The budgeted variable overhead for the
coming year is $680,000. The actual variable overhead incurred was $714,000. The applied variable overhead
for the year is
88. Harry Company’s standard variable overhead rate is $6 per direct labor hour, and each unit requires 2
standard direct labor hours. During March, Harry recorded 6,000 actual direct labor hours, $37,000 actual
variable overhead costs, and 2,900 units of product manufactured.
What is the total variable overhead variance for March for Harry?
89. An unfavorable variable overhead spending variance may be caused by
90. Gina Production Company uses a standard costing system. The following information pertains to 2011.
Actual factory overhead costs ($16,500 is fixed)
$ 40,125
Actual direct labor costs (11,250 hours)
$131,625
Standard direct labor for 5,500 units:
Standard hours allowed
11,000 hours
Labor rate
$12.00
The factory overhead rate is based on an activity level of 10,000 units. Standard cost data for 5,000 units is as follows:
Variable factory overhead
$22,500
Fixed factory overhead
13,500
Total factory overhead
$36,000
What is the variable overhead efficiency variance for Gina Production Company?
91. If variable manufacturing overhead is applied based on direct labor hours and there is an unfavorable direct
labor efficiency variance