Practice Exam

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Chapter 9
Which of the following statements is correct?|

| Unfavorable cost variances always indicate bad performance.| | Favorable cost variances always indicate good performance.| | Both of the above statements are correct.|
| Neither of the above statements are correct.|

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).| A company's static budget estimate of total overhead costs was $805,000 based on the assumption that 23,000 units would be produced and sold. The company estimates that 20% of its overhead is variable and the remainder is fixed. The total overhead cost according to the flexible budget if 27,000 units were produced and sold is (Do not round intermediate calculations.):|

| $837,000|
| $805,000|
| $833,000|
| $913,500|

First, determine the budgeted variable overhead as follows. Budgeted variable overhead = Budgeted overhead cost of $805,000 × 20% (variable portion) = $161,000 Next, determine the budgeted variable overhead per unit as follows. Budgeted variable overhead of $161,000 ÷ 23,000 units produced and sold = $7.0 per unit Then, determine the budgeted fixed overhead as follows. Budgeted fixed overhead = Budgeted overhead cost of $805,000 × 80% (fixed portion) = $644,000. Finally, the flexible budget at 27,000 units is determined as follows. Budgeted variable overhead of (27,000 units × $7.00 per unit variable overhead) + budgeted fixed overhead of $644,000 = $833,000|

An activity variance is the difference between:|

| a revenue or cost item in the static planning budget and the same item in the flexible budget.| | how much the revenue should have been, given the actual level of activity, and the actual revenue for the period.| | how much a cost should have been, given the actual level of activity, and the actual amount of the cost.| | None of these.|

An activity variance is the difference between a revenue or cost item in the static planning budget and the same item in the flexible budget. A revenue (rather than activity) variance is the difference between how much the revenue should have been, given the actual level of activity, and the actual revenue for the period. A spending (rather than activity) variance is the difference between how much a cost should have been, given the actual level of activity, and the actual amount of the cost.|

A restaurant has a cost with the following cost formula: $2,100 + $5.7q, where q is the number of meals served. The restaurant's planning budget is based on 2,100 meals. Its actual level of activity was 2,000 meals and the actual amount of the cost at that level of activity was $13,600. The activity variance for this cost is:|

| $100 U|
| $570 F|
| $100 F|
| $570 U|

Activity variance = Planning budget − Flexible budget
Activity variance = ($2,100 + $5.7 × 2,100) − ($2,100 + $5.7 × 2,000) = $14,070 − $13,500 = $570 F|

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

| labeled as unfavorable.|
| labeled as favorable.|
| an activity variance.|
| cannot be labeled as favorable or unfavorable without obtaining an explanation.|

If the average selling price is greater than expected, the revenue variance is favorable|

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

| an activity variance.|
| cannot be labeled as favorable or unfavorable without...
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