Chapter 9—Flexible Budgets and Overhead Analysis Key
1. A performance report compares actual cost with budgeted costs.
2. Static budgets are the best benchmarks for preparing a performance report.
3. Before-the-fact flexible budgets are especially useful for comparing expected costs with actual costs.
4. An after-the-fact flexible budget is used to compute what cost should have been for the actual level of
activity.
5. A static budget is used to measure the efficiency of a manager whereas a flexible budget is used to measure
the effectiveness of a manager.
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 both input price changes and by how efficiently overhead is
used.
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 cost items required by organizational units.
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 assumes that activity cost varies with units of product.
20. Activity flexible budgeting predicts what activity costs will be as direct labor hours change.
21. Because activities are what consume resources, activity-based budgeting may prove to be a much more
powerful planning and control tool.
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 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. The variable cost component for each activity should correspond to the committed resources.
29. An activity-based budgeting system may help support continuous improvement and process management.
30. A static budget is
31. Which budget should be used to determine managerial effectiveness?
32. Which budget is used to assesses managerial efficiency?
33. A budget that allows the determination of expected costs for various levels of activity is a(n)
34. To create a meaningful performance report,
35. A before-the-fact flexible budget
36. An after-the-fact flexible budget
37. A budget prepared for a particular level of activity is a(n)
38. A static budget is best used to
39. Assume that the expectations on the static budget were met. We can conclude that:
40. A performance report
41. Flexible budgets are powerful control tools because
42. The total variable overhead variance is the difference between
43. The variable overhead spending variance measures the aggregate effect of differences between the
44. In a standard cost system, variable overhead is applied
45. The formula for the variable overhead spending variance can be expressed as follows:
46. The variable overhead efficiency variance claims to measure
47. The formula for calculating the variable overhead efficiency variance is
48. The two variances for variable overhead are
49. Inefficient usage of labor implies a(n)
50. Responsibility for the variable overhead spending variance is usually assigned to
51. A performance report for variable overhead reveals:
52. The standard fixed overhead rate is often calculated as
53. The total fixed overhead variance is calculated by the following formula:
54. The two variances for fixed overhead are
55. The formula for the fixed overhead volume variance is
56. The formula for the fixed overhead spending variance is
57. The fixed overhead volume variance is a measure of
58. The fixed overhead spending variance
59. Responsibility for the fixed overhead volume variance is
60. Because fixed overhead is made up of many items:
61. Which of the following relationships is valid concerning fixed overhead budgeted at the beginning of the
year?
62. The total fixed overhead variance is
63. An activity-budgetary system has the following benefit(s):
64. Which of the following is not one of the three steps in building an activity-based budget?
65. The major differences between activity-based budgeting and traditional budgeting are found in
66. In budgeting at the activity level, the cost behavior of each activity is defined with respect to
67. In an activity framework controlling costs translates into
68. Activity flexible budgeting
69. Activity flexible budgeting provides a more accurate prediction of costs than a traditional flexible budgeting
approach because
70. A performance report using activity flexible budgeting compares
71. For activity flexible budgeting, a cost formula is developed for each
72. In an activity flexible budget, the variable cost component typically corresponds to
73. In an activity flexible budget, the fixed cost component typically correspond to
74. Figure 9-1.
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
$ 80,000
$ 87,000
Direct labor
160,000
174,000
Rent
48,000
50,000
Total
$288,000
$311,000
Refer to Figure 9-1. Comparing the static budget to the actual outcomes, we can say the following:
75. Figure 9-1.
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
$ 80,000
$ 87,000
Direct labor
160,000
174,000
Rent
48,000
50,000
Total
$288,000
$311,000
Refer to Figure 9-1. what is the flexible budget variance for the first quarter?
76. Figure 9-1.
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
$ 80,000
$ 87,000
Direct labor
160,000
174,000
Rent
48,000
50,000
Total
$288,000
$311,000
Refer to Figure 9-1. What is the flexible budget amount for the first quarter?
77. Figure 9-2.
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)
Direct Materials
$ 96,000
Power
40,000
Salary of plant supervisor
6,000
Total
$142,000
Refer to Figure 9-2. Comparing the static budget to the actual costs, we can conclude that:
78. Figure 9-2.
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)
Direct Materials
$ 96,000
Power
40,000
Salary of plant supervisor
6,000
Total
$142,000
Refer to Figure 9-2. What is the flexible budget for July?
79. Figure 9-2.
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)
Direct Materials
$ 96,000
Power
40,000
Salary of plant supervisor
6,000
Total
$142,000
Refer to Figure 9-2. What is the flexible budget variance for July?
80. Figure 9-3.
Jackson Company has developed the following flexible budget formulas for its four overhead items:
Overhead item
Fixed Cost
Variable rate per direct labor hour
Maintenance
$8,000
$2.00
Power
$2,000
$0.40
Direct labor
$10.00
Equipment lease
$5,000
Jackson normally produces 10,000 units (each unit requires 0.10 direct labor hours); however this year 15,000 units were produced with the
following actual costs:
Overhead item
Actual costs
Maintenance
$14,000
Power
$3,600
Direct labor
$16,000
Equipment lease
$5,000
Refer to Figure 9-3. Prepare an overhead budget for the expected activity level of 10,000 units. The total budgeted overhead is:
81. Figure 9-3.
Jackson Company has developed the following flexible budget formulas for its four overhead items:
Overhead item
Fixed Cost
Variable rate per direct labor hour
Maintenance
$8,000
$2.00
Power
$2,000
$0.40
Direct labor
$10.00
Equipment lease
$5,000
Jackson normally produces 10,000 units (each unit requires 0.10 direct labor hours); however this year 15,000 units were produced with the
following actual costs:
Overhead item
Actual costs
Maintenance
$14,000
Power
$3,600
Direct labor
$16,000
Equipment lease
$5,000
Refer to Figure 9-3. Calculate the after-the-fact budget for the actual level of activity.
82. Figure 9-3.
Jackson Company has developed the following flexible budget formulas for its four overhead items:
Overhead item
Fixed Cost
Variable rate per direct labor hour
Maintenance
$8,000
$2.00
Power
$2,000
$0.40
Direct labor
$10.00
Equipment lease
$5,000
Jackson normally produces 10,000 units (each unit requires 0.10 direct labor hours); however this year 15,000 units were produced with the
following actual costs:
Overhead item
Actual costs
Maintenance
$14,000
Power
$3,600
Direct labor
$16,000
Equipment lease
$5,000
Refer to Figure 9-3. Calculate the variance for maintenance using an after-the-fact flexible budget.
83. Figure 9-3.
Jackson Company has developed the following flexible budget formulas for its four overhead items:
Overhead item
Fixed Cost
Variable rate per direct labor hour
Maintenance
$8,000
$2.00
Power
$2,000
$0.40
Direct labor
$10.00
Equipment lease
$5,000
Jackson normally produces 10,000 units (each unit requires 0.10 direct labor hours); however this year 15,000 units were produced with the
following actual costs:
Overhead item
Actual costs
Maintenance
$14,000
Power
$3,600
Direct labor
$16,000
Equipment lease
$5,000
Refer to Figure 9-3. Using an after-the-fact flexible budget, calculate the variance for power.
84. Figure 9-3.
Jackson Company has developed the following flexible budget formulas for its four overhead items:
Overhead item
Fixed Cost
Variable rate per direct labor hour
Maintenance
$8,000
$2.00
Power
$2,000
$0.40
Direct labor
$10.00
Equipment lease
$5,000
Jackson normally produces 10,000 units (each unit requires 0.10 direct labor hours); however this year 15,000 units were produced with the
following actual costs:
Overhead item
Actual costs
Maintenance
$14,000
Power
$3,600
Direct labor
$16,000
Equipment lease
$5,000
Refer to Figure 9-3. Using an after-the-fact flexible budget, calculate the total budget variance.
85. 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: