Chapter 7 - Budgetary control (comparing budget and actual costs)

Question 1

Fixed budget

Answer 1

Are budgets set in advance and their purpose is to provide a single achievable target for the entire business to work towards.

Question 2

Flexible budget

Answer 2

Which recognises different cost behaviors are designed to change, as the volume of activity changes

Question 3

Flexible budget - Planning

Answer 3

E.G. A business may expect to sell 10k units, but research tells us that output might be 8k units or 12k units. The business may therefore prepare a contingency plans at each level of activity.

Question 4

Flexible budget - Control

Answer 4

Flexible budgets can be used to prepare a flexed budget to which actual results can be compared

Question 5

Flexed budgets

Answer 5

Are prepared at the actual activity level that was achieved during the period, in order to show what the standard costs should have been at that particular activity level.

Question 6

Variance analysis - Favourable

Answer 6

Better than the standard allows

Question 7

Variance analysis - Adverse

Answer 7

Worse than the standard allows

Question 8

When to investigate variances

Answer 8

The manager should consider:

• Size of the variance (is it material or not)
• Controllability of the variance
• Trend emerging

Question 9

Materials variance - Adverse price factors

Answer 9

• Unexpected price increase from the supplier
• Loss of a previous trade or bulk buying discount
• Purchase of a higher grade of materials
• Negative change to currency conversion rate

Question 10

Materials variance - Fabourable price factors

Answer 10

• Better price from a supplier
• Bulk purchase discount from supplier
• Purchase of lower grade materials
• Positive change to currency conversion rate

Question 11

Materials variance - Adverse usage factors

Answer 11

• Wastage due to lower grade material used
• Wastage due to lower grade of labour used
• Problems with machinery

Question 12

Materials variance - Favourable usage factors

Answer 12

• Higher grade of material used, leading to less wastage
• Higher grade of labour used, leading to less wastage
• New machinery providing greater efficiency

Question 13

Labour variance - Adverse rate factors

Answer 13

• Unexpected increase in the rates of pay for employees

- Use of a higher grade of labour than anticipated

Question 14

Labour variance - Favourable rate factors

Answer 14

• Use of lower grade labour than budgeted for

Question 15

Labour variance - Adverse hours factors

Answer 15

• Use of a less skilled labour
• Lower grade materials
• More idle time than budgeted
• Poor supervisors
• Problems with machinery

Question 16

Labour variance - Favourable hours factors

Answer 16

• More skilled staff used
• Higher grade materials
• Less idle time
• Use of new and more efficient machinery

Question 17

Total materials variance

Answer 17

Is a comparison of the standard total cost of materials for actual production, to the total actual cost of materials

Question 18

Materials price variance

Answer 18

Is a comparison of the standard cost of the actual material purchased, to the actual cost of material purchased

Question 19

Materials usage variance

Answer 19

Is a comparison of the standard usage of material for actual production units, to the actual usage of material for actual production units, valued at standard cost per unit of material

Question 20

Total labour variance

Answer 20

Is a comparison of the standard labour cost of actual production units, to the actual labour cost of actual production units

Question 21

Labour rate variance

Answer 21

Is a comparison of the standard cost of actual hours paid, to the actual cost of actual hours paid

Question 22

Labour efficiency variance

Answer 22

Is a comparison of the standard hours of actual production units, to the actual hours of actual production units, valued at standard rate per hour.