1. Which of the following statements is correct?

neither of the above statements are correct

Feedback:
The correct answer is D (Learning Objective 1):
Managers should not assume that unfavorable cost variances always indicate bad performance and that favorable cost variances always indicate good performance. Unfavorable cost variances may result from an increase in revenues (e.g., ingredient costs may be higher than expected because more meals were served in a restaurant than anticipated). And, favorable cost variances may result from a decrease in revenues (e.g., ingredient costs may be lower than expected because less meals were served in a restaurant than anticipated).

2.
Lizzie's Riverside Grill compares monthly operating results with a static budget prepared at the beginning of the year. When actual sales are less than budget, the restaurant would usually report favorable variances on:

variable food costs but not fixed superivsory salaries


The correct answer is B (Learning Objective 1):
Since supervisory salaries are fixed, they would not be expected to change when then activity level (i.e., sales) changes. As such, actual supervisory salaries would be expected to equal budgeted supervisory salaries, and no variance would be expected. However, since food costs are variable, they would be expected to decrease as the activity level (i.e., sales) decreased. As such, because a static budget is being used (and actual sales are less than budgeted sales), actual food costs would be expected to be less than budgeted food costs, and a favorable variance would be reported.

3.
A company's static budget estimate of total overhead costs was $400,000 based on the assumption that 20,000 units would be produced and sold. The company estimates that 30% of its overhead is variable and the remainder is fixed. What would be the total overhead cost according to the flexible budget if 24,000 units were produced and sold?

424,000

Feedback:
The correct answer is C (Learning Objective 1):
First, determine the budgeted variable overhead as follows.
Budgeted variable overhead = Budgeted overhead cost of $400,000 x 30% (variable portion) = $120,000
Next, determine the budgeted variable overhead per unit as follows.
Budgeted variable overhead of $120,000 ÷ 20,000 units produced and sold = $6.00 per unit Then, determine the budgeted fixed overhead as follows.
Budgeted fixed overhead = Budgeted overhead cost of $400,000 x 70% (fixed portion) = $280,000.
Finally, the flexible budget at 24,000 units is determined as follows.
Budgeted variable overhead of (24,000 units x $6.00 per unit variable overhead) + budgeted fixed overhead of $280,000 = $424,000

4.
A major weakness of static budgets is that:

A)	they are geared only to a single level of activity.
	B)	they cannot be used to assess whether variable costs are under control.
	C)	they force the manager to compare actual costs at one level of activity to budgeted costs at a different level of activity.

5.
If the average selling price is greater than expected, the revenue variance is:

labeled as favorable

6.
An activity variance is the difference between:

A)	a revenue or cost item in the static planning budget and the same item in the flexible budget.

7.
If the actual cost incurred is greater than what the cost should have been as set forth in the flexible budget, the variance is:

labeled as unfavorable

8.
Which of the following statements is not correct?

	To generate a favorable overall revenue and spending variance, managers must take actions to protest selling prices.

9. Let q1 represents client visits and q2 represents hours of operations. The electricity cost for Blissful Spa depends on both client-visits and the hours of operations and its cost formula is $400 + $0.10q1 + 2.00 q2. If the actual number of client visits is 800 and the salon was open for 200 hours during the month, the flexible budget amount for electricity is:

880
Feedback:
The correct answer is B (Learning Objective 5):
Electricity cost = $400 + $0.10q1 + $1.00 q2
Electricity cost = $400 + ($0.10 x 800) + ($2.00 x 200) = $880

10.
Which of the following statements is not correct?

D)	Comparing static planning budget costs to actual costs only makes sense if the cost is variable.