CBS Performance Measurement & Variance Analysis 1 — Questions and Answers
Question 1: What does a favorable budget variance indicate?
- Actual costs exceeded budgeted costs
- Actual revenue fell below budgeted revenue
- Actual results were better than budgeted expectations (Correct answer)
- The budget was not properly prepared
Correct answer: Actual results were better than budgeted expectations
A favorable variance means actual performance exceeded the budget plan, such as lower costs or higher revenues than projected.
Question 2: Which formula correctly calculates a spending (expenditure) variance?
- Actual Cost – Standard Cost for Actual Output
- Budgeted Cost – Actual Cost (Correct answer)
- Actual Hours × Standard Rate – Standard Hours × Standard Rate
- Standard Cost – Budgeted Cost
Correct answer: Budgeted Cost – Actual Cost
A spending variance is computed as Budgeted Cost minus Actual Cost, so a positive result is favorable (spent less than budgeted).
Question 3: A 'flexible budget' differs from a 'static budget' in that it:
- Is fixed for the entire fiscal year
- Adjusts cost allowances based on actual activity levels (Correct answer)
- Is prepared only after the period ends
- Excludes variable costs from the analysis
Correct answer: Adjusts cost allowances based on actual activity levels
A flexible budget recalculates budgeted figures at the actual level of activity, enabling meaningful variance analysis by separating volume effects from efficiency effects.
Question 4: Which variance measures the difference between budgeted revenue and actual revenue due solely to the difference in units sold?
- Price variance
- Efficiency variance
- Sales volume variance (Correct answer)
- Spending variance
Correct answer: Sales volume variance
The sales volume variance isolates the impact of selling more or fewer units than planned, holding price constant at the budgeted rate.
Question 5: When analyzing variances, 'management by exception' means that managers should:
- Investigate every single budget variance regardless of size
- Focus investigative resources on variances that are material or exceed a threshold (Correct answer)
- Ignore all variances under 10% of budget
- Report all variances to the board of directors
Correct answer: Focus investigative resources on variances that are material or exceed a threshold
Management by exception directs attention and resources to variances that are significant enough to warrant action, rather than investigating every minor deviation.
Question 6: Which of the following is a key performance indicator (KPI) used to measure budget execution efficiency in the public sector?
- Gross margin percentage
- Budget utilization rate (Correct answer)
- Price-to-earnings ratio
- Debt-to-equity ratio
Correct answer: Budget utilization rate
Budget utilization rate (actual expenditure as a percentage of appropriated budget) is a standard KPI in public-sector budget monitoring to assess whether agencies are spending as planned.
Question 7: An unfavorable labor efficiency variance results when:
- Workers are paid more per hour than the standard wage rate
- Actual hours worked exceed the standard hours allowed for actual output (Correct answer)
- The number of units produced exceeds the budget
- Overhead costs are under-absorbed
Correct answer: Actual hours worked exceed the standard hours allowed for actual output
A labor efficiency variance is unfavorable when actual hours worked are greater than the standard hours allowed, meaning workers took longer than planned to produce the output.
CBS Performance Measurement & Variance Analysis 1
What does a favorable budget variance indicate?