CPM Budgeting & Variance Analysis 3 — Questions and Answers
Question 1: When comparing a flexible budget to a static budget, the key advantage of the flexible budget is that it:
- Eliminates the need for variance analysis
- Adjusts cost allowances to the actual level of activity achieved (Correct answer)
- Uses only historical data for planning
- Holds all costs fixed regardless of output
Correct answer: Adjusts cost allowances to the actual level of activity achieved
A flexible budget recalculates cost allowances based on actual activity, making variance analysis more meaningful by separating volume effects from efficiency effects.
Question 2: The labor efficiency variance is calculated as:
- (Actual Rate − Standard Rate) × Actual Hours
- (Standard Hours − Actual Hours) × Standard Rate (Correct answer)
- (Actual Hours − Budgeted Hours) × Actual Rate
- (Standard Cost − Actual Cost) ÷ Units Produced
Correct answer: (Standard Hours − Actual Hours) × Standard Rate
Labor efficiency variance = (Standard Hours for actual output − Actual Hours worked) × Standard Rate, measuring whether workers were more or less efficient than planned.
Question 3: A capital budget is primarily used to plan for:
- Day-to-day operating expenses
- Employee salaries and wages
- Long-term investments in assets such as equipment and facilities (Correct answer)
- Short-term cash flow needs
Correct answer: Long-term investments in assets such as equipment and facilities
Capital budgets address long-term investment decisions, covering expenditures on assets expected to provide benefits over multiple years.
Question 4: Which of the following best describes 'budgetary slack'?
- The gap between the master budget and the flexible budget
- Deliberately understating revenue or overstating expense targets to make goals easier to achieve (Correct answer)
- The difference between budgeted and actual fixed costs
- Unused budget authority carried forward to the next period
Correct answer: Deliberately understating revenue or overstating expense targets to make goals easier to achieve
Budgetary slack occurs when managers intentionally build cushion into budgets—lower revenue targets or higher cost targets—to improve their chances of meeting or beating goals.
Question 5: An unfavorable sales volume variance most directly indicates that:
- The selling price was set too low
- Actual units sold were less than budgeted units (Correct answer)
- Variable costs were higher than expected
- Fixed overhead was under-absorbed
Correct answer: Actual units sold were less than budgeted units
The sales volume variance compares budgeted and actual unit sales; fewer units sold than planned produces an unfavorable outcome.
Question 6: In variance analysis, which report format is most useful for identifying which departments exceeded their budget by the largest absolute dollar amount?
- Common-size income statement
- Contribution margin income statement
- Responsibility accounting performance report (Correct answer)
- Break-even analysis chart
Correct answer: Responsibility accounting performance report
A responsibility accounting performance report organizes actual vs. budgeted figures by cost center or department, making it easy to pinpoint where budget overruns occurred.
Question 7: A company uses activity-based budgeting (ABB). The primary driver of this approach is to:
- Reduce headcount in the finance department
- Base budgeted costs on the activities needed to produce planned output rather than on historical spending (Correct answer)
- Set all department budgets equal to the prior year minus 5%
- Eliminate all indirect costs from the budget
Correct answer: Base budgeted costs on the activities needed to produce planned output rather than on historical spending
ABB identifies the activities required to meet planned output and then determines the resources—and costs—those activities will consume, linking spending to work actually performed.
CPM Budgeting & Variance Analysis 3
When comparing a flexible budget to a static budget, the key advantage of the flexible budget is that it: