Static and flex budget (budget)

Question 1

10A flexible budget is appropriate for
A. Control of fixed factory overhead but not direct materials and direct labor.
B. Control of direct materials and direct labor but not selling and administrative expenses.
C. Any level of activity, regardless of range.
D. Control of direct labor and direct materials but not fixed factory overhead

Answer 1

Answer (D) is correct.
A flexible budget is actually a series of several budgets prepared for many levels of operating activity.
A flexible budget is designed to allow adjustment of the budget to the actual level of activity before
comparing the budgeted activity with actual results. This flexibility is important if costs vary with the
activity level. Thus, a flexible budget is particularly appropriate for control of direct labor and direct
materials (both variable costs) but is not necessary for control of fixed factory overhead. By definition,
overhead costs do not change as activity levels change

Question 2

1A static budget
A. Drops the current month or quarter and adds a future month or a future quarter as the current month or
quarter is completed.
B. Presents a statement of expectations for a period but does not present a firm commitment.
C. Presents the plan for only one level of activity and does not adjust to changes in the level of activity.
D. Presents the plan for a range of activity so that the plan can be adjusted for changes in activity.

Answer 2

Answer (C) is correct.
A static budget plans for only one level of activity and does not provide for changed levels of activity

Question 3

2A major disadvantage of a static budget is that
A. It is more difficult to develop than a flexible budget.
B. It is made for only one level of activity.
C. Variances tend to be smaller than when flexible budgeting is used.
D. Variances are more difficult to compute than when flexible budgeting is used.

Answer 3

Answer (B) is correct.
Static budgets are prepared based on the best estimates for output to be produced and costs to be
incurred before the period begins. If there are any variations in conditions actually experienced, the
static budget is unhelpful for diagnosing specific problem areas since it only reflects one level of
activity.

Question 4

4The difference between the actual amounts and the flexible budget amounts for the actual output
achieved is the
A. Production volume variance.
B. Flexible budget variance.
C. Sales volume variance.
D. Standard cost variance.

Answer 4

Answer (B) is correct.
A flexible budget is prepared at the end of the budget period when the actual results are available. A
flexible budget reflects the revenues that should have been earned and costs that should have been
incurred given the achieved levels of production and sales. The difference between the flexible budget
and actual figures is known as the flexible budget variance.

Question 5

6When preparing a performance report for a cost center using flexible budgeting techniques, the
planned cost column should be based on the
A. Budgeted amount in the original budget prepared before the beginning of the year.
B. Actual amount for the same period in the preceding year.
C. Budget adjusted to the actual level of activity for the period being reported.
D. Budget adjusted to the planned level of activity for the period being reported.

Answer 5

Answer (C) is correct.
If a report is to be used for performance evaluation, the planned cost column should be based on the
actual level of activity for the period. The ability to adjust amounts for varying activity levels is the
primary advantage of flexible budgeting.

Question 6

9Which one of the following statements regarding the difference between a flexible budget and a
static budget is true?
A. A flexible budget primarily is prepared for planning purposes, while a static budget is prepared for
performance evaluation.
B. A flexible budget provides cost allowances for different levels of activity, whereas a static budget
provides costs for one level of activity.
C. A flexible budget includes only variable costs, whereas a static budget includes only fixed costs.
D. A flexible budget is established by operating management, while a static budget is determined by top
management.

Answer 6

Answer (B) is correct.
A flexible budget provides cost allowances for different levels of activity, but a static budget provides
costs for only one level of activity. Both budgets show the same types of costs. In a sense, a flexible
budget is a series of budgets prepared for many different levels of activity. A flexible budget allows
adjustment of the budget to the actual level of activity before comparing the budgeted activity with
actual results.

Question 7

13Flexible budgets
A. Provide for external factors affecting company profitability.
B. Are used to evaluate capacity use.
C. Are budgets that project costs based on anticipated future improvements.
D. Accommodate changes in activity levels.

Answer 7

Answer (D) is correct.
A flexible budget is actually a series of budgets prepared for various levels of activity. A flexible
budget adjusts the master budget for changes in activity so that actual results can be compared with
meaningful budget amounts.

Question 8

14When compared to static budgets, flexible budgets
A. Offer managers a more realistic comparison of budget and actual fixed cost items under their control.
B. Provide a better understanding of the capacity variances during the period being evaluated.
C. Encourage managers to use fewer fixed cost items and more variable cost items that are under their
control.
D. Offer managers a more realistic comparison of budget and actual revenue and cost items under their
control.

Answer 8

Answer (D) is correct.
A flexible budget provides managers with the revenues and costs that “should” have been earned and
incurred given the actual level of production achieved. This information is far more useful than the
static budget prepared before the fiscal period began when the production level was uncertain

Question 9

16A company is focused on continuous improvement and wants to ensure that its budgeting process
supports this goal. The company has already eliminated much of the waste from activities during previous budget
periods and now wants to concentrate on value-added activities and improving relationships with suppliers and
customers. Which of the following is the least beneficial budget solution for this company
A. Flexible budgeting
B. Activity-based budgeting.
C. Zero-based budgeting.
D. Continuous budgeting.

Answer 9

Answer (A) is correct.
A flexible budget is adaptable to various levels of production. Flexible budgeting enables an
organization to compute the levels of cost that “should” have been incurred given the level of output
actually achieved. The flexible budget is usually prepared at the end of the period, making it the least
beneficial budget solution for this company

Question 10

18An advantage of using a flexible budget compared to a static budget is that, in a flexible budget,
A. Shortfalls in planned production are clearly presented.
B. Standards can easily be changed to adjust to changing circumstances.
C. Fixed cost variances are more clearly presented.
D. Budgeted costs for a given output level can be compared with actual costs for the same level of output.

Answer 10

Answer (D) is correct.
The actual level of production for a period is rarely identical to the level that was projected when the period was being planned. Flexible budgets use standard costs to report what costs “should” have been
incurred given the actual level of production achieved

Question 11

19A controller has prepared a flexible budget for the year just ended, adjusting the original static
budget for the unexpected large increase in the volume of sales. The costs are mostly variable. The controller is
pleased to note that both actual revenues and actual costs approximated amounts shown on the flexible budget. If
actual revenues and actual costs are compared with amounts shown on the original (static) budget, what variances
would arise?
A. Both revenue variances and cost variances would be favorable.
B. Revenue variances would be favorable and cost variances would be unfavorable
C. Revenue variances would be unfavorable and cost variances would be favorable.
D. Both revenue variances and cost variances would be unfavorable.

Answer 11

Answer (B) is correct.
Since actual sales volume exceeded expectations, revenue variances will be favorable. By the same
token, the higher level of output resulted in the company incurring more production costs than
expected.

Question 12

20The monthly sales volume of a corporation varies from 7,000 units to 9,800 units over the course of
a year. Management is currently studying anticipated selling expenses along with the related cash resources that will
be needed. Which of the following types of budgets (1) should be used in planning and (2) will provide
the best feedback in performance reports for comparing planned expenditures with actual amounts?
Planning Performance Reporting
A. Static Static
B. Static Flexible
C. Flexible Static
D. Flexible Budget

Answer 12

Answer (D) is correct.
A flexible budget is always more useful than a static budget. A static budget is only helpful when
exactly the combination of circumstances on which it is based are actually experienced. Using a
flexible budget in the planning stages will allow the corporation to project the results of multiple
combinations of factors, and using one in measuring performance will allow the corporation to most
accurately identify areas of success and failure

Question 13

21Which one of the following will allow a better use of standard costs and variance analysis to help
improve managerial decision-making?
A. Set standards with the help of line personnel directly involved in the process.
B. Do not differentiate between variable and fixed overhead in calculating overhead variances.
C. Use standard costs only for inventory valuation.
D. Use the prior year’s average actual cost as the current year’s standard

Answer 13

Answer (A) is correct.
Standard costs should be set with input from the personnel who are most familiar with input usage

Question 14

22A plan that is created using budgeted revenue and costs but is based on the actual units of output is
known as a
A. Continuous budget.
B. Flexible budget.
C. Strategic plan.
D. Static budget.

Answer 14

Answer (B) is correct.
A flexible budget is a series of several budgets prepared for many levels of sales and production. A
flexible budget is designed to allow adjustment of the budget to the actual level of activity before
comparing the budgeted activity with actual results.

Question 15

23Comparing actual results with a budget based on achieved volume is possible with the use of a
A. Monthly budget.
B. Master budget.
C. Rolling budget.
D. Flexible budget.

Answer 15

Answer (D) is correct.
A flexible budget is essentially a series of several budgets prepared for various levels of sales and
production. At the end of the period, management can compare actual costs or performance with the
appropriate budgeted level in the flexible budget. A flexible budget is designed to allow adjustment of
the budget to the actual level of activity before comparing the budgeted activity with actual results

Question 16

24The use of standard costs in the budgeting process signifies that an organization has most likely
implemented a
A. Flexible budget.
B. Capital budget.
C. Zero-based budget.
D. Static budget.

Answer 16

Answer (A) is correct.
A flexible budget is a series of budgets prepared for various levels of sales and production. Another
view is that it is based on cost formulas, or standard costs. Thus, the cost formulas are fed into the
computerized budget program along with the actual level of sales or production. The result is a budget
created for the actual level of activity

Question 17

26Due to an unexpected road construction project, traffic passing by a restaurant has significantly
increased. As a result, restaurant volume has similarly increased well beyond the level expected. Which type of
budget would be most appropriate in helping the restaurant manager plan for restaurant labor costs?
A. Zero-based budget.
B. Rolling budget.
C. Activity-based budget.
D. Flexible budget.

Answer 17

Answer (D) is correct.
A flexible budget is adaptable to unanticipated levels of production. Flexible budgeting enables an
organization to compute the levels of cost that “should” have been incurred given the level of output
actually achieved

Question 18

27An organization’s revenues and variable costs vary significantly with seasonal weather conditions.
This variability has frustrated management’s attempts to evaluate the organization’s actual results against budgeted
performance because there are often large variances in revenues. Which one of the following budgeting methods
is most likely to assist management in planning and assessment of results?
A. Zero-based budgeting.
B. Continuous budgeting.
C. Flexible budgeting
D. Project budgeting.

Answer 18

Answer (C) is correct.
A flexible budget adjusts for changes in the volume of activity. It can be adapted to any level of
production. To create a flexible budget, standard costs are determined for the underlying cost drivers.
Standard costs may be used to isolate variances. This kind of budgeting will aid management in
evaluating the large variances caused by the seasonal weather conditions.

Question 19

28A firm has begun using budgeting to evaluate performance. Budgets were prepared for the current
year based on anticipated sales of 40,000 units. Actual sales totaled 45,000. What type of budgeting methodology
should the firm use to evaluate performance this year?
A. Zero-based budgeting.
B. Continuous budgeting.
C. Static budgeting.
D. Flexible budgeting.

Answer 19

Answer (D) is correct.
A flexible budget is a series of budgets prepared for various levels of sales and production, which is
suited for evaluating performance when actual sales do not equal anticipated sales.

Question 20

29A retirement home provides accommodations for up to 200 residents on its 4-acre retirement
community. The manager was disappointed to see that last month’s actual results were quite different from the
budget for March. The retirement home charged $2,000 per resident as planned. Expenses are categorized by the
four departments that run the community home: Housekeeping, Maintenance, Dietary, and Nursing. The manager is
not sure what went wrong and is concerned she will need to lay off employees if this happens again in April.
March’s budget and actual results are shown below.
March Budget
Revenue ($2,000 per resident × 180 residents) $360,000
Less expenses:
Housekeeping ($65,000 plus $15 per resident) 67,700
Maintenance ($30,000 plus $23 per resident) 34,140
Dietary ($40,000 plus $180 per resident) 72,400
Nursing ($85,000 plus $300 per resident) 139,000
Operating income $ 46,760
March Actual Results
Revenue $400,000
Less expenses:
Housekeeping 97,800
Maintenance 59,200
Dietary 75,800
Nursing 144,900
Operating income $ 22,300
Using flexible budgeting, which one of the following statements is correct?
A. All four departments have an unfavorable variance.
B. Nursing is the department with the highest unfavorable variance.
C. The revenue variance is favorable.
D. Housekeeping and Maintenance departments have unfavorable variances.

Answer 20

Answer (D) is correct.
At $2,000 revenue per resident, sales volume is at 200 residents ($400,000 ÷ $2,000). The flexible
budget gives Nursing a budget of $145,000 (200 residents × $300 cost per resident + $85,000). At an
actual cost of $144,900, the variance is favorable by $100. In addition, Dietary is given a flexible
budget of $76,000 (200 residents × $180 cost per resident + $40,000). At an actual cost of $75,800, the
variance is favorable by $200. Housekeeping is given a flexible budget of $68,000 (200 residents ×
$15 per resident + $65,000), resulting in an unfavorable variance of $29,800 (flexible $68,000
compared to actual of $97,800. Maintenance is given a flexible budget of $34,600 (200 residents × $23
per resident + $30,000), resulting in an unfavorable variance of $24,600 (flexible $34,600 compared to
actual $59,200).

Question 21

30At the beginning of the year, a company budgeted to sell 600,000 units at a price of $12 per unit. It
actually sold 585,000 units at a price of $12.50 per unit. The sales-volume variance is
A. $112,500 favorable.
B. $180,000 unfavorable.
C. $187,500 unfavorable.
D. $292,500 favorable

Answer 21

Answer (B) is correct.
For a single product, the sales-volume variance is the change in the contribution margin attributable
solely to the difference between the actual and budgeted unit sales. It can be calculated as follows: (AQ
× SP) – (SQ × SP). The actual and standard quantities are 585,000 and 600,000, respectively. The
standard price is $12 per unit. Thus, the sales-volume variance is $180,000 unfavorable [(585,000 ×
$12) – (600,000 × $12)].

Question 22

31A manufacturing firm has certain peak seasons, the summer season and the last two weeks of
February. During these periods of increased output, the firm leases additional production equipment and hires
additional temporary employees. Which one of the following budget techniques would best fit this firm’s needs?
A. Zero-based budgeting because it is based on manager input.
B. Project budgeting because discrete financial information is available
C. Flexible budgeting because it allows for adjustments to the budget based on actual activity levels
D. Static budgeting because it shows the changes in sales or production levels.

Answer 22

Answer (C) is correct.
Flexible budgeting adjusts for changes in volume of activity. It can be adapted to any level of
production. Budgeted levels of revenues and expenses are based on actual quantities of production and
standard costs

Question 23

Nash Glassworks Company has budgeted fixed
manufacturing overhead of $100,000 per month. The
company uses absorption costing for both external and
internal financial reporting purposes. Budgeted
overhead rates for cost allocations for the month of
April using alternative unit output denominator levels
are shown in the next column.
Capacity Budgeted Budgeted
Levels Denominator Level Overhead
(units of output) Cost Rate
Theoretical 1,500,000 $.0667
Practical 1,250,000 .0800
Normal 775,000 .1290
Master-budget 800,000 .1250
Actual output for the month of April was 800,000 units of
glassware.
Question: 33The choice of a production volume level as a denominator in the computation of fixed overhead
rates can significantly affect reported net income. Which one of the following statements is true for Nash
Glassworks Company if its beginning inventory is zero, production exceeded sales, and variances are adjustments to
cost of goods sold? The choice of
A. Practical capacity as the denominator level will result in a lower net income amount than if master-budget
capacity is chosen.
B. Normal capacity as the denominator level will result in a lower net income amount than if any other
capacity volume is chosen.
C. Master-budget capacity as the denominator level will result in a lower net income amount than if
theoretical capacity is chosen.
D. Practical capacity as the denominator level will result in a higher net income amount than if normal
capacity is chosen.

Answer 23

Answer (A) is correct.
The choice of practical rather than master budget capacity as the denominator level will result in a
lower absorption costing net income. Practical capacity is the maximum level at which output is
produced efficiently, with an allowance for unavoidable interruptions, for example, for holidays and
scheduled maintenance. Because this level will be higher than master-budget (expected) capacity, its
use will usually result in the underapplication of fixed overhead. For example, given costs of $100,000
and master-budget capacity of 800,000 units, $.125 per unit is the application rate. If practical capacity
is 1,250,000 units, the application rate is $.08 per unit. If actual production is 800,000 units, fixed
overhead will not be over- or underapplied given the use of master-budget capacity. However, there
will be $36,000 (450,000 units × $.08) of underapplied fixed overhead if practical capacity is the
denominator level. Consequently, given that the beginning inventory is zero and that production
exceeded sales, less fixed overhead will be inventoried at the lower practical capacity rate than at the
master-budget rate. Thus, master-budget net income will be greater.

Question 24

34A furniture maker has recently finished operations for the current year and is in the process of
planning next year’s production budget. In the current year, it had a budgeted production volume of 1,000 tables to
be sold at a price of $200 each. Each table had a budgeted requirement of 5 pounds of direct materials, and the direct
materials had an estimated cost of $80/lb. However, upon the close of the current year, it was discovered that each
table required only 4.5 pounds of direct materials, and the direct materials had an actual cost of $100/lb. Assuming
that the company produces and sells 1,000 tables for $200 per table, what is the flexible budget variance for the
current year?
A. $90,000 unfavorable.
B. $90,000 favorable.
C. $50,000 unfavorable.
D. $50,000 favorable

Answer 24

Answer (A) is correct.
A flexible budget variance results from variation in the efficiency and effectiveness of producing
actual output. It is calculated as
Flexible budget variance = Actual results – Flexible budget
= (Actual quantity × Actual price) –
(Actual quantity × Standard price)
The materials and costs are given on a per-unit basis. Thus, these figures must be multiplied by the
number of units sold (1,000) to determine the actual and flexible budget results.
Actual results = 4.5 lbs/unit × $100/lb × 1,000 units = $450,000
Flexible budget results = 4.5 lbs/unit × $80/lb × 1,000 units = $360,000
Flexible budge variance = $450,000 – $360,000 = $90,000
Because the actual costs are greater than the budgeted costs, the variance is unfavorable