AAT L4 Management Accounting: Budgeting & Evaluation 2 — Questions and Answers
Question 1: In a production budget, the quantity to be produced is calculated as:
- Sales volume minus opening inventory plus closing inventory
- Sales volume plus required closing inventory minus opening inventory (Correct answer)
- Opening inventory plus closing inventory divided by sales
- Purchases plus sales volume
Correct answer: Sales volume plus required closing inventory minus opening inventory
Production required = Sales volume + Closing inventory target − Opening inventory. The production budget ensures enough units are manufactured to meet sales demand and build up (or run down) inventory as planned.
Question 2: The sales volume variance (in standard costing) is calculated as:
- (Actual selling price − Standard selling price) × Actual volume
- (Actual volume − Budgeted volume) × Standard profit per unit (Correct answer)
- (Budgeted volume − Actual volume) × Actual profit per unit
- Actual revenue − Budgeted revenue
Correct answer: (Actual volume − Budgeted volume) × Standard profit per unit
Sales volume variance measures the effect of selling a different number of units than budgeted, valued at standard profit per unit (or standard contribution per unit under marginal costing).
Question 3: The direct materials price variance is:
- (Standard quantity − Actual quantity) × Standard price
- (Standard price − Actual price) × Actual quantity purchased (Correct answer)
- (Actual price − Standard price) × Standard quantity
- (Actual quantity − Standard quantity) × Actual price
Correct answer: (Standard price − Actual price) × Actual quantity purchased
Materials price variance = (Standard price − Actual price) × Actual quantity. A favourable variance means the actual price paid was less than standard; adverse means it was more.
Question 4: Adverse direct labour efficiency variance arises when:
- The wage rate paid exceeds the standard rate
- Workers take longer than the standard hours for actual production (Correct answer)
- Workers are paid overtime at a premium
- The production volume exceeds budget
Correct answer: Workers take longer than the standard hours for actual production
Labour efficiency variance = (Standard hours for actual output − Actual hours) × Standard rate. Adverse means actual hours exceeded standard hours — workers were slower than expected.
Question 5: The fixed overhead volume variance is caused by:
- Actual fixed overheads differing from budget
- Actual production volume differing from budgeted volume, affecting overhead absorption (Correct answer)
- Changes in the variable overhead rate
- Idle time in production
Correct answer: Actual production volume differing from budgeted volume, affecting overhead absorption
Fixed overhead volume variance arises because actual production volume differs from budgeted volume; since the OAR is calculated on budgeted volume, more or less overhead is absorbed than budgeted.
Question 6: Which variance investigates the difference between budgeted and actual fixed overhead expenditure?
- Fixed overhead volume variance
- Fixed overhead efficiency variance
- Fixed overhead expenditure (spending) variance (Correct answer)
- Fixed overhead capacity variance
Correct answer: Fixed overhead expenditure (spending) variance
Fixed overhead expenditure variance = Budgeted fixed overhead − Actual fixed overhead. It isolates whether the business spent more or less on fixed overheads than budgeted, independent of activity.
AAT L4 Management Accounting: Budgeting & Evaluation 2
In a production budget, the quantity to be produced is calculated as: