Chapter 6 !

Static Budgets

• The original approved budget

• Prepared for a single level of activity

• Prepared before the accounting period begins

Flexible Budgets

• Present a budget for any level of activity actually achieved

  Note: variable expenses change with activity level. Fixed expenses remain constant regardless of activity level, as long as you remain within the relevant range.

The master budget is an example of a

static budget.

pro-forma budget.

flexible budget.

cash budget.

Static budget

A favorable variance is a variance that

• decreases operating income relative to the budgeted amount.

• increases operating income relative to the budgeted amount.

• decreases cash relative to the budgeted amount.

• increases costs relative to the budgeted amount.

• increases operating income relative to the budgeted amount.

The direct materials quantity variance is part of the direct materials flexible budget variance that is caused by:

purchasing more inventory than used.

using more or less material than the standard quantity allowed for budgeted production.

using more or less material than the standard quantity allowed for actual production.

paying more or less than the standard cost per unit for direct materials.

using more or less material than the standard quantity allowed for actual production.

Which of the following is a possible reason why actual prices might differ from standard prices, resulting in a direct materials price variance?

The company may order more materials than it expects to use.

The company may purchase fewer materials than used.

The company may receive more materials than ordered.

The vendors may change their prices as a result of changes in the market.

The vendors may change their prices as a result of changes in the market.

If a company uses more direct labor hours than the standard allowed, the result is

a reduction in operating income.

an unfavorable direct labor hour variance.

an favorable efficiency variance.

an inflated Wages and Salaries Payable account on the balance sheet.

A reduction in operating income

Why do variances have little meaning until their causes are identified?

Because they cannot be calculated correctly until the causes are known

Because identifying their causes will immediately decrease net income

Because identifying their causes allows managers to take correct action

Because identifying their causes will immediately increase net income

Because identifying their causes allows managers to take correct action

If the actual average wage rate is $4.50 per direct labor hour, but the standard wage rate is $4.70 per direct labor hour, the direct labor

rate variance will be favorable.

efficiency variance will be

favorable. rate variance will be unfavorable.

efficiency variance will be unfavorable.

Rate variance will be favorable