CPM Budgeting & Variance Analysis 2 — Questions and Answers
Question 1: A manager notices that actual labor costs exceeded the flexible budget by $12,000. This difference is best described as a:
- Favorable budget variance
- Unfavorable budget variance (Correct answer)
- Volume variance
- Sales mix variance
Correct answer: Unfavorable budget variance
When actual costs exceed budgeted costs, the result is an unfavorable (adverse) budget variance.
Question 2: Which budgeting method requires managers to justify every expense from zero each budget cycle rather than using prior-year figures as a baseline?
- Incremental budgeting
- Rolling budgeting
- Zero-based budgeting (Correct answer)
- Activity-based budgeting
Correct answer: Zero-based budgeting
Zero-based budgeting (ZBB) starts from a 'zero base' and requires all expenses to be justified anew each period.
Question 3: The materials price variance is calculated by multiplying the actual quantity purchased by the difference between:
- Actual price and standard price (Correct answer)
- Standard quantity and actual quantity
- Budgeted hours and actual hours
- Actual overhead and budgeted overhead
Correct answer: Actual price and standard price
Materials price variance = Actual Quantity × (Actual Price − Standard Price), isolating the cost difference per unit purchased.
Question 4: A rolling (continuous) budget is best described as one that:
- Allocates costs based on activity drivers
- Always covers a fixed future period by adding a new period as one ends (Correct answer)
- Sets budget targets at zero for all cost centers
- Ties compensation directly to budget achievement
Correct 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.
Question 5: Which variance measures the difference between budgeted fixed overhead and the fixed overhead absorbed by actual production?
- Variable overhead efficiency variance
- Fixed overhead volume variance (Correct answer)
- Labor rate variance
- Sales price variance
Correct 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.
Question 6: A department's budget shows $80,000 for supplies, but actual spending was $74,000. The variance is:
- $6,000 unfavorable
- $6,000 favorable (Correct answer)
- $74,000 favorable
- $80,000 unfavorable
Correct answer: $6,000 favorable
Spending less than budgeted for costs produces a favorable variance because the organization retained $6,000 more than planned.
Question 7: A participative (bottom-up) budget approach is most likely to increase:
- Central control over resource allocation
- Budget padding by subordinates
- Employee motivation and commitment to targets (Correct answer)
- The speed of the budget preparation process
Correct 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.
CPM Budgeting & Variance Analysis 2
A manager notices that actual labor costs exceeded the flexible budget by $12,000.
This difference is best described as a: