Chapter 16

Question 1

In essence, the terms “master budget” and “operating budget” mean the same thing and can be
used interchangeably.

Answer 1

F

Question 2

Variances are the difference between actual results and budgeted results.

Answer 2

T

Question 3

In general, and holding all other things constant, an unfavorable variance decreases operating
profits.

Question 4

A favorable variance is not necessarily good, and an unfavorable variance is not necessarily bad.

Question 5

The terms “master budget” and “flexible budget” mean the same thing and can be used
interchangeably.

Answer 5

F

Question 6

A flexible budget adjusts the static budget to reflect the actual activity level achieved during the
period.

Answer 6

T

Question 7

If the budgeted activity level is greater than the actual activity level, then the total budgeted costs
of the master budget will be greater than the total budgeted costs of the flexible budget.

Answer 7

T

Question 8

The difference between operating profits in the master budget and operating profits in the flexible
budget is called a sales price variance.

Question 9

The sales activity variance is the result of a difference between budgeted units sold and actual
units sold.

Answer 9

T

Question 10

The sales price variance is the actual selling price per unit times the difference between budgeted
number of units and the actual number of units sold.

Answer 10

F

Question 11

Production cost variances are input variances, while sales activity variances are output
variances.

Answer 11

T

Question 12

The flexible and master budget amounts are the same for fixed marketing and administrative
costs.

Answer 12

T

Question 13

The standard cost for a unit of output is the standard price per unit of input times the standard
number of inputs per one unit of output.

Answer 13

T

Question 14

Both the actual material used and the standard quantity allowed for material is based on the
actual output attained.

Answer 14

T

Question 15

It is possible to have a favorable direct material price variance and an unfavorable direct material
efficiency variance.

Answer 15

T

Question 16

The materials price variance is computed by multiplying the difference between the actual price
and the standard price by the actual quantity of materials used in production.

Answer 16

F

Question 17

The direct labor efficiency variance can be the result of poor supervision or poor scheduling by
divisional managers.

Answer 17

T

Question 18

Variance analysis for fixed production costs is virtually the same as for variable production costs.

Answer 18

F

Question 19

The budget (or spending) variance for fixed production costs is the difference between the actual
fixed costs and the budgeted fixed costs on the master budget.

Answer 19

T

Question 20

The production volume variance is the difference between fixed costs on the flexible budget and
the fixed costs on the master budget.

Answer 20

F

Question 21

When using standard costing, costs are transferred through the production process at their
standard costs.

Question 22

Standards and budgets are the same thing.

Answer 22

F

Question 23

A standard cost system may be used in: (CPA adapted)

A. job-order costing but not process costing.
B. either job-order costing or process costing.
C. process costing but not job-order costing.
D. neither process costing nor job-order costing.

Answer 23

A. job-order costing but not process costing.

Question 24

Which of the following statements is(are) true?
(A) A favorable variance is not necessarily good, and an unfavorable variance is not necessarily
bad.
(B) The master budget includes operating budgets (e.g., production budget) and financial
budgets (e.g., cash budget).

A. Only A is true.
B. Only B is true.
C. Both A and B are true.
D. Neither A nor B is true.

Answer 24

C

Question 25

An operating budget would not include a:

A. cash budget.
B. sales budget.
C. labor budget.
D. production budget.

Answer 25

A

Question 26

A variance can best be described as:

A. benchmarks common to other firms in the same industry.
B. differences between planned results and actual results.
C. useful for performance evaluations but not making decisions.
D. generally accepted accounting principles when standards are used.

Answer 26

B

Question 27

The most fundamental variance analysis compares:

A. standard material prices with actual material prices.
B. standard direct labor rates with actual direct labor rates.
C. budgeted sales revenue with actual sales revenue.
D. budgeted operating income with actual operating income.

Answer 27

D.

Question 28

In general, the terms favorable and unfavorable are used to describe the effect of a variance on:

A. net income.
B. sales revenue.
C. production costs.
D. operating expenses.

Answer 28

A

Question 29

Which of the following statements regarding variances is(are) false?
(A) In general and holding all other things constant, an unfavorable variance decreases operating
profits.
(B) A favorable variance is not always good, and an unfavorable variance is not always bad.

A. Only A is false.
B. Only B is false.
C. Both A and B are false.
D. Neither A nor B is false.

Answer 29

D.

Question 30

Which of the following variances will always be favorable when actual sales exceeds budgeted
sales?

A. Variable cost.
B. Fixed cost.
C. Sales activity.
D. Operating profit.

Answer 30

D.

Question 31

Which of the following organizational policies is most likely to result in undesirable managerial
behavior? (CMA adapted)

A. Raj Chemicals sponsors television coverage of cricket matches between national teams
representing India and Pakistan. The expenses of such media sponsorship are not allocated to
its various divisions.
B. Felix Eagle, the chief executive officer of Eagle Rock Brewery, wrote a memorandum to his
executives stating, “Operating plans are contracts and they should be met without fail.”
C. The budgeting process at Lawrence Manufacturing starts with operating managers providing
goals for their respective departments.
D. Gallen Lighting holds quarterly meetings of departmental managers to consider possible
changes in the budgeted targets due to changing conditions.

Answer 31

A

Question 32

When a manager is concerned with monitoring total cost, total revenue, and net profit conditioned
upon the level of productivity, an accountant should normally recommend: (CPA adapted)

Flexible Budgeting Standard Costing
A. Yes Yes
B. Yes No
C. No Yes
D. No No

A. Option A
B. Option B
C. Option C
D. Option D

Answer 32

B