CBS Performance Measurement & Variance Analysis 2 — Questions and Answers
Question 1: What is the purpose of a variance analysis report in budget management?
- To set next year's budget targets
- To explain differences between budgeted and actual financial results (Correct answer)
- To record all journal entries for the period
- To calculate employee bonuses
Correct answer: To explain differences between budgeted and actual financial results
Variance analysis reports identify and explain deviations between planned (budgeted) and actual results, helping management understand performance and take corrective action.
Question 2: A company budgeted $500,000 in sales but achieved $480,000. How is this variance classified?
- Favorable, $20,000
- Unfavorable, $20,000 (Correct answer)
- Favorable, $480,000
- Neutral, $20,000
Correct answer: Unfavorable, $20,000
When actual revenue is below the budget target, the variance is unfavorable because the organization performed worse than planned by $20,000.
Question 3: Which budgeting method establishes performance targets based on prior-period spending plus an incremental adjustment?
- Zero-based budgeting
- Activity-based budgeting
- Incremental budgeting (Correct answer)
- Rolling budget
Correct answer: Incremental budgeting
Incremental budgeting starts with the prior year's figures and adds or subtracts a percentage to arrive at the new budget, making it the most common and simplest method.
Question 4: In flexible budget variance analysis, the 'activity variance' measures the effect of:
- Paying higher prices for materials than budgeted
- Operating at a different volume than originally planned (Correct answer)
- Using more direct labor hours than standard
- Incurring more overhead than budgeted
Correct answer: Operating at a different volume than originally planned
The activity variance (also called the volume variance) captures the financial impact of actual production or service volume differing from the original static budget volume.
Question 5: A return on investment (ROI) metric is best used in performance measurement to evaluate:
- Whether payroll was processed on time
- How effectively capital was deployed to generate profit (Correct answer)
- The accuracy of the accounts payable ledger
- Compliance with tax filing deadlines
Correct answer: How effectively capital was deployed to generate profit
ROI measures the profitability of an investment relative to its cost, making it a key metric for assessing how well capital resources are being utilized.
Question 6: Which document formally compares budgeted versus actual figures and identifies causes of variances for management review?
- Chart of accounts
- Budget-to-actual report (Correct answer)
- Trial balance
- Cash disbursement journal
Correct answer: Budget-to-actual report
A budget-to-actual report (also called a budget performance report) is the primary tool for comparing planned financial targets to actual results within a reporting period.
Question 7: Which concept describes a budgeting approach where new budgets are prepared continuously, adding a future period as each current period ends?
- Static budgeting
- Zero-based budgeting
- Rolling (continuous) budgeting (Correct answer)
- Program budgeting
Correct answer: Rolling (continuous) budgeting
Rolling budgets are continuously updated by adding a new period (e.g., a month or quarter) as the current period concludes, keeping the planning horizon constant.
CBS Performance Measurement & Variance Analysis 2
What is the purpose of a variance analysis report in budget management?