Budgeting & Variance Analysis Flashcards

A manager notices that actual labor costs exceeded the flexible budget by $12,000. This difference is best described as a:

Answer: Unfavorable budget variance

When actual costs exceed budgeted costs, the result is an unfavorable (adverse) budget variance.

Which budgeting method requires managers to justify every expense from zero each budget cycle rather than using prior-year figures as a baseline?

Answer: Zero-based budgeting

Zero-based budgeting (ZBB) starts from a 'zero base' and requires all expenses to be justified anew each period.

The materials price variance is calculated by multiplying the actual quantity purchased by the difference between:

Answer: Actual price and standard price

Materials price variance = Actual Quantity × (Actual Price − Standard Price), isolating the cost difference per unit purchased.

A rolling (continuous) budget is best described as one that:

Answer: Always covers a fixed future period by adding a new period as one ends

A rolling budget continuously extends the planning horizon—when one month ends, a new month is added so a full period (e.g., 12 months) is always covered.

Which variance measures the difference between budgeted fixed overhead and the fixed overhead absorbed by actual production?

Answer: Fixed overhead volume variance

The fixed overhead volume variance arises when actual production output differs from budgeted output, causing under- or over-absorption of fixed overhead.

A department's budget shows $80,000 for supplies, but actual spending was $74,000. The variance is:

Answer: $6,000 favorable

Spending less than budgeted for costs produces a favorable variance because the organization retained $6,000 more than planned.

A participative (bottom-up) budget approach is most likely to increase:

Answer: Employee motivation and commitment to targets

Participative budgeting involves employees in setting their own targets, which typically increases buy-in, motivation, and commitment to achieving those goals.