Flexible Budgets and Variance Analysis

CHAPTER 8
FLEXIBLE BUDGETS AND VARIANCE ANALYSIS
LEARNING OBJECTIVES:
1. Distinguish between flexible budgets and static budgets.

2. Use flexible-budget formulas to construct a flexible budget based on the volume of
sales.
3. Prepare an activity-based flexible budget.
4. Explain the performance evaluation relationship between static budgets, flexible
budgets, and actual costs.
5. Compute activity-level variances and flexible-budget variances.
6. Compute and interpret price and quantity variances for inputs based on cost-driver
activity.
7. Compute variable overhead spending and efficiency variances.
8. Compute the fixed overhead spending variance.
TRUE / FALSE:
LEARNING OBJECTIVE 1
1. A static budget is prepared for a fixed level of activity.

True
2. The static budget variance is the variance of actual results from the static budget.
True
3. Performance report is a generic term that usually means a comparison of actual results
with some budget.
True
4. If actual expenses are less than expected expenses, the expense variance in the
performance report will be unfavorable.
False
5. A static budget has multiple levels of activity.

False
6. The flexible budget is identical to the master budget in format.

True
7. A favorable expense variance is when budgeted expenses are less than actual expenses.
False
8. A flexible budget is different from a variable budget.

False
13
9. A flexible budget adjusts for changes in sales volume and other cost-driver activities.
True
10. An activity-based budget is based on budgeted costs for every activity and related cost
driver.
True
11. As the terms are used in the budgeting process, it is possible for a company to be efficient
at the same time it is ineffective.
True
12. The reasons that actual results differ from the master budget are independent of one
another.
False
13. By using a flexible budget, changes in activity level cannot cause any variances between
the flexible budget and actual results.
True
14. By using a static budget, changes in activity level cannot cause any variances between the
flexible budget and actual results.
False
15. Total static-budget variances = activity-level variances + flexible-budget variances.

True
16. Efficiency is the degree to which a goal, objective, or target is met.

False
17. Standard cost systems value products according to actual costs.

False
18. Currently attainable standards are levels of performance that can be achieved, although
their achievement is unlikely.
False
19. The unfavorable variances resulting from ideal standards are intended to constantly remind
personnel of the continuous need for improvement.
True
20. If the total sales-activity variance and the static-budget variance are equal to each other,
there is no flexible-budget variance.
True
14
21. Sales-activity variances measure how efficient managers have been in meeting the
planned sales objective.
False
22. Favorable variances do not require investigation.

False
23. In most companies, variances are investigated only if they exceed a minimum dollar or
percentage deviation from budgeted amounts.
True
24. The total flexible-budget variance can be broken down into a price variance and an
effectiveness variance.
False
25. Favorable flexible-budget variances are good.

False
26. Variances are signals that actual operations are different from what was anticipated.
True
27. An expected cost is the cost that is least likely to be attained.

False
28. Using standard costs is popular with companies in the United States.
True
29. Perfection standards and ideal standards are different.

False
30. Ideal standards make no provisions for waste, spoilage, and machine breakdowns.
True
31. Ideal standards have an adverse effect on employee motivation.

True
32. Currently attainable standards do not make allowances for spoilage and waste.
False
33. One of the first questions a manager should consider when explaining a large variance is
whether expectations were valid.
True
34. One cause of a flexible-budget variance might be a difference between expected and
actual hourly wages for factory workers.
True
15
35. A quantity variance measures actual deviations from the quantity of inputs that should
have been used to achieve the actual output quantity.
True
36. Materials price variance = (actual price – standard price) x standard quantity allowed.
False
37. Direct-labor quantity variance = (actual quantity used – standard quantity allowed) x
actual price.
False
38. The quantity and efficiency variances are different.

False
39. A favorable materials price variance may lead to an unfavorable materials usage variance.
True
40. A favorable direct-labor quantity variance may lead to an unfavorable direct-labor price
variance.
False
41. Price variances reflect the organization’s efficiency at actual levels of activity.
False
42. The labor flexible-budget variance equals the labor price variance plus the labor quantity
variance.
True
43. The variable-overhead spending variance is the difference between the actual variable
overhead and the amount of variable overhead budgeted for the actual level of cost-driver
activity.
True
44. The overhead efficiency variance indicates to management how much overhead cost it
may waste by not controlling the use of cost-driver activity.
True
45. Most organizations believe that it is not worthwhile to monitor individual overhead to the
same extent as labor and material variances.
True
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MULTIPLE CHOICE:
46. _____ probably would not be used as a measure of activity in a flexible budget.
a. Sales volume
b. Number of direct labor hours worked
c. Number of machine hours used
d. Number of hours worked by salespeople
47. A static budget is another name for the _____budget.
a. financial
b. operating
c. strategic
d. master
48. An example of a favorable variance is _____.
a. actual revenues are less than expected

b. actual expenses are less than expected
c. material prices are greater than expected
d. expected labor costs are less than actual costs
49. _____ compares actual results with budget.
a. Performance report
b. Variance
c. Sensitivity analysis
d. Dynamic analysis
50. Which of the following statements is false?
a. Flexible budgets help provide a basis for management by exception.

b. Flexible budgets are not based on the same revenue and cost behavior
assumptions as the static budget.
c. Flexible budgets are prepared for a range of activity.
d. Flexible budgets are automatically matched to changes in activity levels.
51. Differences between the static budget and the flexible budget are due to _____.
a. problems of cost control

b. poor usage of material and labor
c. a combination of price and material variances
d. actual activity differing from expected activity levels
17
52. A variance is the difference between _____.
a. a budgeted amount and a benchmark amount

b. the required number of inputs for the number of outputs
c. an actual result and a budgeted amount
d. a budgeted amount and a standard amount
53. The type of budget that serves as the original benchmark for evaluating performance is
called a _____ budget.
a. balanced
b. cost
c. flexible
d. static
54. A budget that is often changed at the end of a reporting period is called a _____budget.
a. balanced
b. cost
c. flexible
d. trial balance
55. Farm Bureau Insurance Company had a static budgeted operating income of $8.6 million;
however, actual income was $6.4 million. _____ is the static-budget variance of
operating income.
a. $6.4 million favorable

b. $8.6 million unfavorable
c. $2.2 million favorable
d. $2.2 million unfavorable
$8.6 million - $6.4 million = $2.2 million
56. If the actual level of sales significantly exceeds the sales in the static budget, the
variances associated with the variable costs will probably be _____.
a. favorable
b. unfavorable
c. zero
d. undeterminable
57. John Company’s master budget sales were $225,000. Actual sales were $220,000.
Sales in the prior year were $219,000. The static-budget variance for sales was _____.
a. $5,000 favorable
b. $5,000 unfavorable
c. $6,000 favorable
d. $6,000 unfavorable
$225,000 - $220,000 = $5,000 unfavorable

18
58. Flat Company currently produces cardboard boxes in an automated process. Expected
production per month is 50,000 units. The required direct materials cost is $0.30 per unit.
Manufacturing fixed overhead costs are $25,000 per month. Manufacturing overhead is
allocated based on units of production. _____ is the budgeted manufacturing fixed
overhead rate.
a. $2.08 per unit

b. $0.30 per unit
c. $0.50 per unit
d. None of these answers is correct
$25,000 / 50,000 = $0.50
59. Flat Company currently produces cardboard boxes in an automated process. Expected
production per month is 40,000 units. The required direct materials cost $0.30 per unit.
allocated based on units of production. ____ is the flexible budget for 40,000 and 20,000
units, respectively.
a. $26,000 and $20,000

b. $36,000 and $30,000
c. $40,000 and $34,000
d. $44,000 and $38,000
($0.30 x 40,000) + $24,000 = $36,000

($0.30 x 20,000) + $24,000 = $30,000
60. The Foot Company currently produces sandals in an automated process. Expected
production per month is 20,000 units. The required direct materials cost $1.50 per unit.
allocated based on units of production. _____ is the budgeted manufacturing fixed
overhead rate.
a. $.50 per unit

b. $1.50 per unit
c. $2.25 per unit
$45,000 / 20,000 = $2.25
19
61. The Foot Company currently produces sandals in an automated process.
Expected production per month is 20,000 units. The required direct materials cost is
$1.50 per unit. Manufacturing fixed overhead costs are $30,000 per month. Manufac-
turing overhead is allocated based on units of production. _____ is the flexible budget
for 15,000 and 20,000 units, respectively.
a. $22,500 and $30,000

b. $52,500 and $60,000
c. $45,000 and $60,000
d. $88,000 and $76,000
($1.50 x 15,000) + $30,000 = $52,500

($1.50 x 20,000) + $30,000 = $60,000
62. Loopy Company had the following information: At a manufacturing level of 5,000 units,
variable and fixed manufacturing costs are $32 and $20 per unit, respectively. Selling
price is $70 per unit. _____ is the total manufacturing cost for 10,000 units.
a. $250,000
b. $700,000
c. $420,000
($32 x 10,000) + ($20 x 5,000) = $420,000
63. Loopy Company had the following information: At a manufacturing level of 5,000 units,
variable and fixed manufacturing costs are $30 and $10 per unit, respectively. Selling
price is $60 per unit. _____ is the total manufacturing cost for 15,000 units.
a. $450,000
b. $500,000
c. $570,000
d. $900,000
($30 x 15,000) + ($10 x 5,000) = $500,000
64. Hut Company’s variable selling and administrative cost is $48,000 when production is
6,000 units. _____ are the variable selling and administrative expenses for 7,000 and
8,000 units, respectively.
a. $48,000 and $48,000

b. $56,000 and $64,000
c. $64,000 and $56,000
($48,000 / 6,000) x 7,000 = $56,000

($48,000 / 6,000) x 8,000 = $64,000
20
65. Bond Company’s depreciation cost is $63,000 when production is 21,000 units.
_____ are the total depreciation expenses for 15,000 and 20,000 units, respectively.
a. $45,000 and $60,000

b. $60,000 and $45,000
c. $63,000 and $63,000
66. Pizza Company planned to produce 12,000 units. This level of activities required 40 set-
ups at a cost of $18,000 plus $500 per set-up. Actual sales were 10,000 units, requiring
15 set-ups and 12,000 machine hours. Actual set-up cost was $26,000. _____ is the
static budget amount for set-ups.
a. $26,000
b. $38,000
c. $21,000
d. $25,500
($500 x 40) + $18,000 = $38,000
67. Peppy Company planned to produce 12,000 units. This level of activities required 20 set-
flexible budget amount for set-ups.
a. $26,000
b. $22,000
c. $29,500
d. $7,500
($500 x 15) + $22,000 = $29,500
68. Actual results might differ from the static budget because _____.
a. sales and other cost-driver activities were not the same as originally forecasted
b. revenues or variable costs per unit of activity were not as expected
c. fixed costs per period were not as expected
d. all of these answers are correct
21
69. Activity-level variances plus flexible-budget variances equals _____.
a. total static-budget variances

b. total standard variances
c. total actual variances
d. none of these answers is correct
70. Ben Company planned to produce 12,000 units. This level of activities required 20 set-
static budget-variance for set-ups.
a. $2,500 favorable
c. $2,000 favorable
$26,000 – [($500 x 15) + $18,000] = $500 (U)

[($500 x 20) + $18,000] – [$500 x 15) + $18,000] = $2,500 (F)
$500 (U) + $2,500 (F) = $2,000 (F)
71. Seinfeld Company planned to produce 12,000 units. This level of activities required 20
set-ups at a cost of $18,000 plus $500 per set-up. Actual sales were 10,000 units,
requiring 15 set-ups and 12,000 machine hours. Actual set-up cost was $26,000. _____
is the flexible-budget variance for set-ups.
a. $2,000 favorable
c. $500 favorable
d. $500 unfavorable
$26,000 – [($500 x 15) + $18,000] = $500 (U)
72. Efficiency is indicated by _____.
a. sales-activity variances
b. static-budget variances
c. flexible-budget variances
73. Effectiveness is indicated by _____.
a. sales-activity variances
b. static-budget variances
c. flexible-budget variances
22
74. Blue Company planned to sell 35,000 units. Actual sales were 30,000 units.
Based on this information, Blue Company was _____.
a. efficient
b. inefficient
c. effective
d. ineffective
75. Black Company planned to produce and sell 900 units at a total cost of $180,000. Actual
production was 900 units at a cost of $170,000, Black Company was _____.
a. efficient
b. inefficient
c. effective
d. ineffective
76. White Company planned to produce 12,000 units. Processing required 16,000 machine
hours at a cost of $15,000 + $12 per machine hour. Actual sales were 14,000 units
requiring 20,000 machine hours. Actual processing cost was $222,000. _____ is the
static budget amount for processing.
a. $207,000
b. $213,500
c. $222,000
d. $225,000
$15,000 + (16,000 x $12) = $207,000
77. Pink Company planned to produce 12,000 units. Processing required 16,000 machine
hours at a cost of $15,000 + $10.50 per machine hour. Actual sales were 14,000 units
flexible budget amount for processing.
a. $188,000
b. $213,500
c. $222,000
d. $235,500
$15,000 + (21,000 x $10.50) = $235,500
23
78. Green Company planned to produce 12,000 units. Processing required 16,000 machine
static-budget variance for processing.
a. $39,000 favorable
c. $42,000 favorable
$222,000 – [$15,000 + (16,000 x $10.50)] = $39,000 (U)
79. Purple Company planned to produce 12,000 units. Processing required 16,000 machine
flexible-budget variance for processing.
a. $3,000 favorable
c. $3,000 unfavorable
$222,000 – [(20,000 x $10.50) + $15,000] = $3,000 (F)
80. Roger Company planned to produce 12,000 units. Processing required 16,000 machine
activity-level variance for processing.
[(20,000 x $10.50) + $15,000] – [(16,000 x $10.50) + $15,000] = $42,000 (U)
81. If the flexible-budget variance was $6,000 favorable, and the sales-activity variance was
$3,000 favorable, the total master-budget variance was _____.
a. $9,000 favorable
c. $3,000 favorable
$6,000 (F) + $3,000 (F) = $9,000 (F)
24
82. Identify which of the statements below is not a reason why actual results would differ
from those projected in the master budget.
a. Current period projected sales volume differed from the prior period projection.
b. Actual sales volume differed from projected sales volume.
c. Variable costs per unit differed from expected amounts.
d. Actual fixed costs were different than expected.
83. Identify which statement below would not be a possible reason for a variance between a
flexible budget and actual results.
a. Material prices were different than expected.

b. Labor prices were different than expected.
c. The actual volume of activity was different than expected.
d. The amount of labor used per unit of output was different than expected.
84. If the total sales-activity variance was $8,000 favorable, and the total static-budget
variance was $10,000 favorable, then the total flexible-budget variance must have been:
b. $2,000 favorable
d. indeterminable
$10,000 (F) - $8,000 (F) = $2,000 (F)
85. Identify which of the following is not an example of "efficient" performance.
a. More goods were produced and sold than anticipated.

b. Direct labor hours per unit were less than expected.
c. Direct material used per unit was less than expected.
d. More outputs were achieved with less inputs than predicted.
86. Flexible-budget variances are designed to measure the _____.
a. effectiveness of operations at projected level of activity

b. effectiveness of operations at actual level of activity
c. efficiency of operations at projected level of activity
d. efficiency of operations at actual level of activity
87. Flexible budgets help to measure the _____.
a. differences between projected and actual activity levels

b. efficiency of operations at the actual activity level
c. amount by which standard quantity and expected prices differ
d. reasons why projected activity levels were not attained
25
88. The following data are for Point Corporation:
Flexible
Budget for
Static Actual Sales
Actual Budget Activity
Units 18,000 16,000 18,000

Sales $360,000 $320,000 $360,000
Variable costs 234,000 192,000 216,000
Contribution margin $126,000 $128,000 $144,000
Fixed costs 76,000 80,000 80,000
Operating income $50,000 $48,000 $64,000
The total of the flexible-budget variances is _____.
c. $2,000 favorable
$50,000 - $64,000 = $14,000 (U)
89. The following data are for Bob Corporation:
Flexible
Budget for
Static Actual Sales
Units 18,000 16,000 18,000

Sales $360,000 $320,000 $360,000
Variable costs 234,000 192,000 216,000
Fixed costs 76,000 80,000 80,000
The total of the sales-activity variances is _____.
$48,000 - $64,000 = $16,000 (F)
26
90. The following data are for Newhart Corporation:
Flexible
Budget for
Static Actual Sales
Units 18,000 16,000 18,000

Sales $360,000 $320,000 $360,000
Variable costs 234,000 192,000 216,000
Fixed costs 76,000 80,000 80,000
The total of the master budget variances is _____.
d. $2,000 favorable
$50,000 - $48,000 = $2,000 (F)
91. A standard cost is a unit cost that _____.
a. should never be revised

b. is the average cost for the industry
c. the company attained in the most recently completed period
d. should be attained
92. Which of the following is a true statement?
a. The standard set for flexible budgets should always be attainable.

b. The standard set for flexible budgets should always be set higher than expected.
c. There is no one right statement here because the experts disagree.
d. The standard set for flexible budgets should always be a standard that can easily be
achieved because employees ignore unreasonable goals.
93. Identify which of the following statements about "perfection standards" is true.
a. It is generally believed that they have a negative influence on employee morale.

b. They are expressions of the most efficient performance possible.
c. They usually result in unfavorable variances.
d. All of these answers are correct.
27
94. Identify which statement below about "currently attainable standards" is not true.
a. They allow for normal spoilage and nonproductive time.

b. Because they allow for waste, they usually result in favorable variances.
c. They represent projections of what will probably be attained.
d. Employees usually view these goals as reasonable.
95. Variances should be investigated if they _____.
a. are unfavorable
b. are different from the prior period results
c. exceed certain stated dollar or percentage deviations from the budget
d. are favorable
96. A _____ is most likely to be held directly accountable for a quantity variance.
a. machine operator
b. production supervisor
c. marketing director
d. purchasing agent
97. A _____ is most likely to be held accountable for price variances.
a. machine operator
b. production supervisor
c. purchasing agent
d. marketing director
98. Eagle Company had a favorable flexible-budget direct-material variance. In this case, it
would not be possible for the direct-material price and quantity variances, respectively, to
be _____.
a. favorable and unfavorable

b. unfavorable and favorable
c. unfavorable and unfavorable
d. favorable and favorable
99. The quantity variance can be calculated by multiplying the expected input price by the
difference between the _____.
a. standard inputs allowed and projected inputs allowed at actual output

b. quantity of inputs actually used and the quantity of inputs that should have been used
for projected output
c. standard inputs allowed and projected inputs allowed for expected output
d. quantity of inputs actually used and the quantity of inputs that should have been
used for actual output
28
100. A price variance is favorable if _____.
a. standard cost exceeds actual cost

b. standard quantity exceeds actual quantity
c. actual cost exceeds standard cost
d. actual quantity exceeds standard quantity
101. If the direct-labor price variance is $800 favorable, and the direct-labor usage variance is
$700 unfavorable, then _____ must be true.
a. the total direct-labor flexible-budget variance is $100 favorable

b. actual total wages paid were $800 less than expected
c. actual labor used was more than planned
$800 (F) + $700 (U) = $100 (F)
102. If the ending inventory of material is greater than beginning inventory, then the
direct-material price variance is based on the _____.
a. standard quantity allowed for actual production

b. quantity used
c. quantity purchased
d. goods actually produced
103. The following information is for Brooklyn Corporation:

Direct
Material
Standard price per unit of input $29

Actual price per unit of input $27
Standard inputs allowed per unit of output 3 pounds
Actual units of input 9,000 pounds
Actual units of output 3,000 units
* Direct material is measured in pounds
_____ is the direct-material price variance.
a. $6,000 favorable
d. $18,000 favorable
9,000 x ($29 - $27) = $18,000 (F)
29
104. The following information is for Euclid Corporation:
Direct
Material

_____ is the direct-material usage variance.
a. $250 unfavorable
b. $250 favorable
d. $8,300 favorable
[8, 300 – (2,770 x 3)] x $25 = $250 (F)
105. The following information is for Pepper Pike Corporation:

Direct
Material

_____ is the total direct-material flexible-budget variance.
a. $16,400 unfavorable
b. $16,400 favorable
($20 - $18) x 8,300 = $16,600 (F)

[(2,770 x 3) – 8,300] x $20 = $200 (F)
$16,600 (F) + $200 (F) = $16,800 (F)
30
106. Strongsville Company produces 2,500 units. Each unit was expected to require 2 labor
hours at a cost of $10 per hour. Total labor cost was $55,250 for 4,750 hours worked.
Direct labor is measured in hours. _____ is the direct-labor price variance.
a. $5,250 favorable
c. $7,750 favorable
$55,250 – (4,750 x $10) = $7,750 (U)
107. Berea Company produces 2,500 units. Each unit was expected to require 2 labor hours at
a cost of $10 per hour. Total labor cost was $55,250 for 4,750 hours worked. Direct labor
is measured in hours. _____ is the direct-labor quantity variance.
a. $2,750 favorable
c. $2,500 favorable
[4,750 - (2,500 x 2)] x $10 = $2,500 (F)
108. Super Company produces 2,500 units. Each unit was expected to require 2 labor hours at
a cost of $10 per hour. Total labor cost was $55,250 for 4,750 hours worked. Direct labor
is measured in hours. _____ is the total flexible-budget variance for direct labor.
a. $5,250 favorable
c. $7,500 favorable
$55,250 – (4,750 x $10) = $7,750 (U)

[4,750 - (2,500 x 2)] x $10 = $2,500 (F)
$7,750 (U) + $2,500 (F) = $5,250 (U)
31
109. The Patriot Company makes chairs for which the following standards have been
developed:
Standard Inputs Standard Price

Expected for Each Expected per
Unit of Output Unit of Output
Direct materials 13 pounds $3 per pound

Direct labor 2 hours $23 per hour
Production of 250 chairs was expected in March, but 300 chairs were actually completed.
Direct materials purchased and used were 2,700 pounds at an actual price of $4.40 per
pound. Direct-labor cost for the month was $10,620, and the actual pay per hour was
$19.00. _____ is the standard direct-material cost for each chair produced.
a. $19.00
b. $39.00
c. $44.00
d. $46.00
13 x $3 = $39
110. The Charger Company makes tables for which the following standards have been
developed:


Production of 230 tables was expected in July, but 250 tables were actually completed.
$18.00. _____ is the direct-material price variance for July.
b. $1,100 favorable
c. $800 unfavorable
d. $800 favorable
2,200 x ($4.50 - $4.00) = $1,100 (U)
32
111. The Vito Company makes tables for which the following standards have been developed:


Production of 200 tables was expected in July, but 220 tables were actually completed.
$18.00. _____ is the direct-material quantity variance for July.
a. $880 unfavorable
b. $880 favorable
c. $800 unfavorable
d. $800 favorable
$4 x (2,000 - (220 x 10)) = $800 (F)
112. The Long Company makes tables for which the following standards have been
developed:


Production of 200 tables was expected in August, but 220 tables were actually completed.
$18.00. _____ is the standard labor cost for each table produced.
a. $20
b. $120
c. $48
d. $4
$30 x 4 = $120
33
113. The Luke Company makes tables for which the following standards have been
developed:

Direct materials 17 pounds $5.20 per pound

Production of 200 tables was expected in May, but 220 tables were actually completed.
$18.00. _____ is the direct-labor price variance for the month of May.
b. $1,180 favorable
d. $1,200 favorable
($10,620 / $18) x ($16 - $18) = $1,180 (U)
114. The Paul Company makes tables for which the following standards have been developed:


Production of 200 tables was expected in June, but 220 tables were actually completed.
$18.00. _____ is the direct-labor quantity variance for the month of June.
a. $1,120 favorable
c. $1,260 favorable
[($10,620 / $18) - (220 x 3)] x $16 = $1,120 (F)
34
115. The Snowman Company makes mugs for which the following standards have been
developed:

Direct materials 5 ounces $2 per ounce

Direct labor 3.2 hours $9 per hour
Production of 400 mugs was expected in July, but 440 mugs were actually completed.
Direct materials purchased and used were 2,100 ounces at an actual price of $2.20 per
ounce. Direct-labor cost for the month was $5,310, and the actual pay per hour was
$10.00. _____ is the standard direct-material cost for each mug produced.
a. $9.00
b. $10.00
c. $13.20
d. $32.00
5 x $2 = $10
116. The Reindeer Company makes mugs for which the following standards have been
developed:


$9.00. _____ is the direct-material price variance for July.
a. $630 unfavorable
b. $630 favorable
c. $400 unfavorable
d. $400 favorable
2,100 x ($2.30 - $2.00) = $630 (U)
35
117. The Cheers Company makes mugs for which the following standards have been
developed:


$9.00. _____ is the direct-material quantity variance for July.
a. $220 unfavorable
b. $220 favorable
c. $200 unfavorable
d. $200 favorable
$2 x [2,100 - (400 x 5)] = $200 (F)
118. The Petunia Company makes mugs for which the following standards have been
developed:


Production of 400 mugs was expected in August, but 440 mugs were actually completed.
$9.00. _____ is the standard labor cost for each mug produced.
a. $22.50
b. $20
c. $10
d. $1
$8 x 2.5 = $20
36
119. The Violet Company makes mugs for which the following standards have been
developed:


Production of 400 mugs was expected in June, but 440 mugs were actually completed.
$9.00. _____ is the direct-labor price variance for the month of June.
a. $1,770 favorable
b. $1,590 favorable
d. $1,600 favorable
($5,310 / $9) x ($12 - $9) = $1,770 (F)
120. The Red Company makes mugs for which the following standards have been developed:


Production of 400 Mugs was expected in June, but 440 mugs were actually completed.
$9.00. _____ is the direct-labor quantity variance for the month of June.
a. $1,560 favorable
c. $1,800 favorable
[($5,310 / $9) – 440] x ($8x1.5) = $1,800 (U)
37
121. In a manufacturing area of an organization, poor product design, problems with the
quality of materials, and scheduling conflicts will, more than likely, result in a (n) _____
materials efficiency variance.
a. favorable
b. unfavorable
c. favorable
d. unfavorable
122. The following data for the Popular Company pertain to the production of 2,000 clay
pigeons during July:
Standard variable-overhead cost was $6.00 per pound of clay.

Total actual variable-overhead cost was $18,200.
Standard variable-overhead cost allowed for units produced was $20,000.
Variable overhead-efficiency variance was $740 unfavorable.
_____ is standard direct-material amount per clay pigeon.
a. 1.67 pound
b. 3.50 pounds
c. 6.00 pounds
d. 10.00 pounds
($20,000 / 2,000) / $6 = 1.67 pound
123. The following data for the Safety Company pertain to the production of 3,000 clay
Standard variable-overhead cost was $5.00 per pound of clay.

Total actual variable-overhead cost was $11,340.
Variable-overhead efficiency variance was $340 unfavorable.
_____ is the variable-overhead rate variance.
a. $560 unfavorable
b. $800 favorable
c. $800 unfavorable
d. $1,000 favorable
($12,000 + $340) - $11,340 = $1,000 (F)
38
124. The following data for the Hermit Company pertain to the production of 2,000 clay
Standard variable-overhead cost: $6.00 per pound of clay.

Total actual variable-overhead cost: $11,000.
_____ is the variable-overhead flexible-budget variance.
a. $1,000 favorable
b. $240 unfavorable
c. $1,280 favorable
$12,000 - $11,000 = $1,000 (F)
125. The following data for the Glass Company pertain to the production of 2,000 bottles
during June:
Standard variable-overhead cost: $26.00 per pound of glass.

_____ is standard direct-material amount per bottle.
a. .50 pound
b. 2.80 pounds
c. 13.00 pounds
($26,000 / 2,000) / $26 = .50 pound
126. The following data for the See Through Company pertain to the production of 1,000
bottles during June:

_____ is the variable-overhead rate variance.
b. $1,200 favorable
d. $1,940 favorable
($26,000 + $740) - $24,800 = $1,940 (F)

39
127. The following data for the Fragile Company pertain to the production of 1,000 bottles
during July:

_____ is the variable-overhead flexible-budget variance.
a. $1,000 favorable
b. $540 unfavorable
c. $2,280 favorable
$26,000 - $25,000 = $1,000 (F)
40
SHORT ANSWER:
128. The difference between the actual results and the master budget
Static-budget variance
129. This is another name for the flexible budget
Variable budget
130. A variance that occurs when actual expenses are less than budgeted expenses
Favorable-expense variance
131. A budget that adjusts for changes in sales volume and other cost driver activities
Flexible budget
132. A budget that is based on only one level of activity
Static budget
133. Actual expenses are greater than budgeted expenses
Unfavorable-expense variance
134. A budget based on budgeted costs for each activity and related cost driver
Activity-based flexible budget
135. The degree to which a goal, objective, or target is met
Effectiveness
136. The degree to which inputs are used in relation to a given level of outputs
Efficiency
137. Differences between the static-budget amounts and the flexible budget
Activity-level variances
41
138. Variances between the flexible budget and actual results
Flexible-budget variances
139. This variance measures how effective managers have been in meeting the planned sales
objective.
Sales-activity variances
140. The cost most likely to be attained
Expected cost
141. A carefully determined cost per unit that should be attained
Standard cost
142. Levels of performance that can be achieved by realistic levels of effort
Currently attainable standards
143. Expressions of the most efficient performance possible under the best conceivable
conditions
Perfection (or ideal) standards
144. Actual output in units measured in standard direct-labor hours
Standard hours allowed
145. This is the difference between the quantity of inputs actually used and the quantity of
inputs that should have been used to achieve the actual quantity of output multiplied by
the expected price of the input
Quantity (efficiency) variance
146. The difference between actual input prices and expected input prices multiplied by the
actual quantity of inputs used
Price variance
147. (Actual price – standard price) x actual quantity of material
Materials price variance
42
148. (Actual price – standard price) x actual quantity of labor
Direct-labor price variance
149. (Actual quantity used – standard quantity allowed) x standard price of material
Materials quantity variance
150. (Actual quantity used – standard quantity allowed) x standard price of material
Direct-labor quantity variance
151. The difference between the actual cost-driver activity and the amount allowed for the
actual output achieved costed at the standard variable-overhead rate
Variable-overhead efficiency variance
152. The difference between the actual variable overhead and the variable overhead budgeted
for the actual level of the cost-driver activity
Variable-overhead spending variance
43
PROBLEMS:
153. Fill in the blanks to complete the flexible budget for Meier Company.
Budget
Formula Various Levels
per Unit of Output
Units 3,000 3,500 4,000
Sales $25 ________ ________ ________
Variable costs:
Manufacturing $8 ________ ________ ________
Administrative ________ $10,500 ________
Fixed costs:
Manufacturing ________ ________ $25,000
Administrative $12,500 ________ ________
Operating income / (loss) ________ ________ ________
Answer:
Various Levels
of Output
Units 3,000 3,500 4,000
Sales $75,000 $87,500 $100,000

Variable costs:
Manufacturing 24,000 28,000 32,000
Administrative 9,000 10,500 12,000
Fixed costs:
Manufacturing 25,000 25,000 25,000
Operating income (loss) $4,500 $11,500 $18,500
44
154. Use the following data to prepare a flexible budget for possible sales/production levels of
5,000, 5,500, and 6,000 units. Make sure to show the contribution margin at each activity
level.
Sales price $12.00per unit
Variable costs:
Manufacturing $6.00 per unit
Administrative $1.50 per unit
Selling $.50 per unit
Fixed costs:
Manufacturing $15,000
Administrative $5,000
Answer:
Flexible Budget for Various Levels
of Sales/Production Activity
Units 5,000 5,500 6,000
Sales $60,000 $66,000 $72,000

Variable costs:
Manufacturing 30,000 33,000 36,000
Selling 2,500 2,750 3,000
Total variable costs $40,000 $44,000 $48,000
Fixed costs:
Manufacturing 15,000 15,000 15,000
Operating income (loss) $-0- $2,000 $4,000
45
LEARNING OBJECTIVES 2 and 5
155. Job set-up costs for Rob Ublind Company are variable costs based on the number of jobs. Rob
Ublind Company expected to work 600 jobs at a total cost of $189,000. Rob Ublind
Company worked a total of 630 jobs and actual job set-up costs totaled $177,000.
Required:
Compute the master-budget variance, activity-level variance, and flexible-budget

variance for job set-up costs.
Answer:
Activity-level variance: $189,000 – [($189,000 / 600) x 630] = $9,450 (U)
Flexible-budget variance: $177,000 – [($189,000 / 600) x 630] = $21,450 (F)
Master-budget variance: $9,450 (U) - $21,450 (F) = $12,000 (F)
46
156. The following data are for the month of January for the Submissive Company, a maker of
boots:
Static-budget data: Sales of 9,000 pairs at $90 per pair; variable costs of $69 per
pair; total fixed costs of $108,000.
Actual results: Sales of 9,600 pairs at $87 per pair; variable costs of $72 per
pair; total fixed costs of $109,200.
Required:
a. What was the January master-budget operating income?
b. What were the total sales-activity and flexible-budget variances for the month of
January?
Answer:
a. Master-budget operating income:
Sales (9,000 x $90) $810,000

Variable costs (9,000 x $69) (621,000)
Fixed costs (108,000)
Operating income $81,000
b. Sales-activity variance:
Flexible budget for actual sales:

Sales (9,600 x $90) $864,000
Variable costs (9,600 x $69) (662,400)
Sales-activity variance = $93,600 - $81,000 = $12,600 (F)
Actual results:
Sales (9,600 x $87) $835,200

Variable costs (9,600 x $72) (691,200)
Flexible-budget variance = $34,800 - $93,600 = $58,800 (U)
47
157. Given the following information:
Variable-overhead costs incurred $20,570

Material purchased and used 2,900 pounds
Direct labor costs incurred 2,450 hours; $24,500
Finished units produced 500 units
Actual material cost $37 per pound
Standard direct-labor cost $9 per hour
Standard material cost $40 per pound
Standard variable overhead $8 per hour
Standard pounds of material in a financial unit 6
Standard direct-labor hours per finished unit 5
Required:
Compute the price and quantity variances for direct material, labor, and the spending and
efficiency variances for variable overhead. Indicate whether each variance is favorable or
unfavorable.
Answer:
Direct material:
Price variance = ($37 - $40) x 2,900 = $8,700 (F)
Quantity variance = [2,900 - (500 x 6)] x $40 = $4,000 (F)
Flexible-budget variance = $8,700 (F) + $4,000 (F) = $12,700 (F)
Direct labor:
Price variance = $24,500 - ($9 x 2,450) = $2,450 (U)
Quantity variance = [2,450 - (500 x 5)] x $9.00 = $450 (F)
Flexible-budget variance = $2,450 (U) - $450 (F) = $2,000 (U)
Variable overhead:
Spending variances = $20,570 – (2,450 x $8) = $970 (U)
Efficiency variance = [2,450 – [(500 x 5)] x $8 = $400 (F)
48
158. Given the following data:
Direct Direct
Material Labor
Standard price per unit of input $12 per foot $14 per hour
Actual price per unit of input $14 per foot $13 per hour
Standard inputs allowed per unit
of output 5 feet 3 hours
Actual units of input 2,500 feet 1,550 hours
Actual units produced 600 units
Required:
Compute the price, quantity and flexible-budget variances for direct material and labor.
Indicate whether each variance is favorable or unfavorable.
Answer:
Direct material:
Price variance = ($14 - $12) x 2,500 = $5,000 (U)
Flexible-budget variance = $5,000 (U) + $6,000 (F) = $1,000 (F)
Direct labor:
Price variance = ($13 - $14) x 1,550 = $1,550 (F)
Flexible-budget variance = $1,550 (F) - $3,500 (F) = $5,050 (F)
49
159. The following data are for the month of July for Andrew Corporation, a company that
makes trophies.
Standard Inputs Standard
Expected for Each Price per
Unit of Output Unit of Input
Direct material 5 pounds $12 per pound

During the month of July, the company actually produced 1,000 trophies, which is 100
units less than expected. Direct material purchased and used amounted to 5,500 pounds
at a cost of $12.50 per pound. Actual direct labor was 1,450 hours at an actual cost of
$13.00 per hour.
Required:
a. What is the standard cost per statue for direct material and direct labor?
b. Compute the price and quantity variances for direct material and direct labor.
Answer:
a. Direct-material standard cost: 5 x $12 = $60 per unit
Direct-labor standard cost: 1.5 x $12 = $18 per unit
b. Direct material:
Price variance = ($12.50 - $12.00) x 5,500 = $2,750 (U)
Quantity variance = (5,500 - 5,000) x $12 = $6,000 (U)
Direct labor:
Price variance = ($13.00 - $12.00) x 1,450 = $1,450 (U)
Quantity variance = (1,450 - 1,500) x $12.00 = $600 (F)
50
160. The following data pertain to March operations for the Katherine Company:
Actual Inputs Actual Price

for Each Unit per Unit
of Output of Input
Direct material 11 yards $12 per yard

Actual output was 1,000 units. Katherine Company’s per unit standards call for 15 yards
of direct material at $10.00 per yard and 4 hours of direct labor at $9.50 per hour.
Katherine Company purchased 11,000 yards of material.
Required:
Compute the price and quantity variances for direct material and direct labor.
Answer:
Direct material:
Price variance = 11,000 yards x ($12 - $10) = $22,000 (U)
Quantity variance = 1,000 units x (11 yards – 15 yards) x $10 = $40,000 (F)
Direct labor:
Price variance = ($8.00 - $9.50) x (1,000 units x 4.2 hours) = $6,300 (F)
Quantity variance = [1,000 units x (4.2 hours - 4 hours)] x $9.50 = $1,900 (F)
51
161. Fill in the missing information in the following table:
Direct Direct
Material Labor
Actual quantity used per unit 4.0 pounds (c)

Actual price paid $8 per pound $12 per hour
Standard quantity per unit 2 pounds 4 hours
Standard price per unit (a) $11 per hour
Price variance $2,000 (U) $1,000 (U)
Usage variance (b) $700 (F)
Flexible-budget variance $500 (U) (d)
Actual quantity produced 500 units
Answer:
a. [($8.00 - (a)) x (500 x 4.0)] = $2,000 (U)
(a) = Standard price per unit of direct material = $7 per pound
b. $2,000 (U) + (b) = $500 (U)
(b) = Quantity variance = $1,500 (F)
c. ($12 - $11) x Actual hours used = $1,000 (U)
Actual hours used = 1,000 hours, so
(c) = 1,000 hours / 500 units = 2.00 hours per unit
d. $1,000 (U) - $700 (F) = $300 (U) flexible-budget variance
52
162. The most recent operating budget for Skipper Company is based on production of 42,000
units with 1.0 machine hour allowed per unit. Variable manufacturing overhead is
anticipated to be $20 per unit. Actual production was 45,000 units using 40,000 machine
hours. Actual variable cost was $725,000.
Required:
Compute the commonly used variances for a variable overhead report. Do not prepare
the report.
Answer:
Spending variance = $725,000 – (40,000 x $20) = $75,000 (F)
Efficiency variance = [40,000 – (45,000 x 1)] x $20 = $100,000 (F)
53
CRITICAL THINKING:
163. Differentiate between a static-budget variance and a flexible-budget variance.
Answer:
A master-budget variance is the difference between the originally planned (static

budget) amount and the actual amount. A flexible-budget variance is the difference
between the actual amount and the amount that is expected for the actual level of
output achieved.
164. Why should a budgeted cost not be merely an extension of past experience?
Answer:
A budgeted cost should not be merely an extension of past experience. It should be a

careful combination of all known relevant factors, including past performance
divested of avoidable inefficiency plus the predicted effects of changes currently
taking place.
165. What are two possible interpretations of "currently attainable standards"?
Answer:
The first interpretation is that standards are set just tightly enough so that
employees regard their fulfillment as highly probable if normal effort and diligence
are exercised. The second interpretation is that standards are set more tightly so
that employees regard their fulfillment as possible though unlikely.
166. What are some common causes of quantity variances?
Answer:
Some common causes of quantity or efficiency variances are improper handling,

poor quality of material, poor workmanship, changes in methods, new workers, slow
machines, breakdowns, and faulty designs.
54

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CHAPTER 8

FLEXIBLE BUDGETS AND VARIANCE ANALYSIS

1. Distinguish between flexible budgets and static budgets.

1. A static budget is prepared for a fixed level of activity.

5. A static budget has multiple levels of activity.

6. The flexible budget is identical to the master budget in format.

8. A flexible budget is different from a variable budget.

15. Total static-budget variances = activity-level variances + flexible-budget variances.

16. Efficiency is the degree to which a goal, objective, or target is met.

17. Standard cost systems value products according to actual costs.

22. Favorable variances do not require investigation.

25. Favorable flexible-budget variances are good.

27. An expected cost is the cost that is least likely to be attained.

29. Perfection standards and ideal standards are different.

31. Ideal standards have an adverse effect on employee motivation.

38. The quantity and efficiency variances are different.

47. A static budget is another name for the _____budget.

48. An example of a favorable variance is _____.

a. actual revenues are less than expected

49. _____ compares actual results with budget.

50. Which of the following statements is false?

a. Flexible budgets help provide a basis for management by exception.

a. problems of cost control

a. a budgeted amount and a benchmark amount

a. $6.4 million favorable

$8.6 million - $6.4 million = $2.2 million

$225,000 - $220,000 = $5,000 unfavorable

a. $2.08 per unit

$25,000 / 50,000 = $0.50

a. $26,000 and $20,000

($0.30 x 40,000) + $24,000 = $36,000

a. $.50 per unit

$45,000 / 20,000 = $2.25

a. $22,500 and $30,000

($1.50 x 15,000) + $30,000 = $52,500

($32 x 10,000) + ($20 x 5,000) = $420,000

($30 x 15,000) + ($10 x 5,000) = $500,000

a. $48,000 and $48,000

($48,000 / 6,000) x 7,000 = $56,000

a. $45,000 and $60,000

($500 x 40) + $18,000 = $38,000

($500 x 15) + $22,000 = $29,500

a. total static-budget variances

$26,000 – [($500 x 15) + $18,000] = $500 (U)

$26,000 – [($500 x 15) + $18,000] = $500 (U)

72. Efficiency is indicated by _____.

73. Effectiveness is indicated by _____.

$15,000 + (16,000 x $12) = $207,000

$15,000 + (21,000 x $10.50) = $235,500

$222,000 – [$15,000 + (16,000 x $10.50)] = $39,000 (U)

$222,000 – [(20,000 x $10.50) + $15,000] = $3,000 (F)

[(20,000 x $10.50) + $15,000] – [(16,000 x $10.50) + $15,000] = $42,000 (U)

$6,000 (F) + $3,000 (F) = $9,000 (F)

a. Material prices were different than expected.

$10,000 (F) - $8,000 (F) = $2,000 (F)

85. Identify which of the following is not an example of "efficient" performance.

a. More goods were produced and sold than anticipated.

86. Flexible-budget variances are designed to measure the _____.

a. effectiveness of operations at projected level of activity

87. Flexible budgets help to measure the _____.

a. differences between projected and actual activity levels

Units 18,000 16,000 18,000