Unit 7

Question 1

static budget

Answer 1

prepared before the period begins and is valid for only the planned level of activity

a budget geared toward a single level of activity

Question 2

flexible budget

Answer 2

a budget that is geared to a range of activity, rather than to a single level meaning it is dynamic in nature.

Question 3

Advantages of the flexible budget approach

Answer 3

1. Show revenues and expenses that should have occurred at the actual level of activity
2. May be prepared for any activity level in the relevant range
3. Reveal variances due to good cost control or lack of cost control.
4. Improve performance evaluation.

Question 4

Central Concept

Answer 4

If you can tell me what your activity was for the period, I will tell you what your costs and revenue should have been.

Question 5

The Measure of Activity

Answer 5

1. There should be a causal relationship between the activity base and variable overhead costs.
2. The activity base should not be expressed in currency.
3. The activity base should be simple and easily understood

Question 6

Preparing a Flexible Budget

Answer 6

1. Total variable costs change in direct proportion to changes in activity.
2. Total fixed costs remain unchanged within the relevant range.

Question 7

A flexed budget reveals what cost should be for various levels of activity.

Answer 7

1. If a costs variable, the flexible amount is calculated by multiplying the cost per unit with the level of activity.
2. If the cost is fixed, the original budgeted cost is used as the flexible amount.

Question 8

What is the primary difference between a static budget and a flexible budget?

Answer 8

The static budget is prepared for a single level of activity, while a flexible
budget is adjusted for different activity levels.

Question 9

flexible budget amount

Answer 9

If the cost is fixed, the original total budgeted fixed cost is used

Question 10

budget variance

Answer 10

the difference between the actual fixed overhead cost incurred during a period and the budgeted fixed overhead cost.

Question 11

Unfavourable variance

Answer 11

the entity is was unable to achieve the budgeted level of activity
Actual activity is below budgeted activity

Question 12

favourable variance

Answer 12

when actual costs are less than budgeted costs.

Question 13

What causes the cost control variance?

Answer 13

1. Spending too much for resources.
2. Using the resources inefficiently