FAC Finance and Accounting Budgeting & Cost Management 3 — Questions and Answers
Question 1: A company's labor efficiency variance is $15,000 unfavorable. This means:
- Workers were paid more per hour than the standard rate
- More labor hours were used than the standard hours allowed for actual output (Correct answer)
- Fewer units were produced than budgeted
- Overtime premiums exceeded the budgeted amount
Correct answer: More labor hours were used than the standard hours allowed for actual output
An unfavorable labor efficiency variance indicates that actual hours worked exceeded the standard hours allowed for the units actually produced.
Question 2: Target costing is best described as:
- Setting costs equal to actual production expenses after manufacturing
- Subtracting desired profit from market price to determine an allowable cost (Correct answer)
- Allocating overhead based on machine hours used in production
- Calculating break-even units before entering a new market
Correct answer: Subtracting desired profit from market price to determine an allowable cost
Target costing works backward from a competitive market price, deducting the required profit margin to arrive at the maximum allowable cost.
Question 3: In responsibility accounting, a profit center is distinguished from a cost center in that a profit center manager is responsible for:
- Only controlling costs within a department
- Both revenues and costs, and therefore profitability (Correct answer)
- Capital investment decisions as well as revenues and costs
- Complying with external financial reporting standards
Correct answer: Both revenues and costs, and therefore profitability
A profit center manager controls both revenues and costs, whereas a cost center manager is only accountable for costs.
Question 4: Which costing method is MOST appropriate when a firm wants to understand the long-run cost of sustaining each product line, including batch-level and product-sustaining costs?
- Job order costing
- Process costing
- Activity-based costing (ABC) (Correct answer)
- Variable (direct) costing
Correct answer: Activity-based costing (ABC)
ABC assigns costs to products using multiple cost drivers at different levels (unit, batch, product, facility), providing a more accurate long-run cost picture.
Question 5: A budget that considers the time value of money and discounts expected future cash flows is most commonly used in:
- Operating budget preparation
- Capital expenditure budgeting (Correct answer)
- Cash flow budgeting for daily operations
- Flexible budget variance analysis
Correct answer: Capital expenditure budgeting
Capital expenditure budgets evaluate long-term investments using discounted cash flow techniques such as NPV and IRR.
Question 6: The spending variance for variable overhead is calculated as:
- (Standard hours − actual hours) × standard variable overhead rate
- (Actual variable overhead) − (actual hours × standard variable overhead rate) (Correct answer)
- Budgeted fixed overhead − actual fixed overhead
- (Actual units − budgeted units) × standard variable overhead rate
Correct answer: (Actual variable overhead) − (actual hours × standard variable overhead rate)
The variable overhead spending variance compares actual variable overhead incurred to what should have been incurred for the actual hours worked at the standard rate.
Question 7: A company is preparing a cash budget and must decide when to include a credit sale in the cash receipts schedule. The correct approach is to:
- Record cash receipt when the sale is invoiced
- Record cash receipt in the period the cash is expected to be collected (Correct answer)
- Record cash receipt based on the accrual principle
- Record cash receipt at the time inventory is shipped
Correct answer: Record cash receipt in the period the cash is expected to be collected
A cash budget records inflows when cash is actually expected to be received, reflecting the collection pattern of receivables rather than the timing of the sale.
FAC Finance and Accounting Budgeting & Cost Management 3
A company's labor efficiency variance is $15,000 unfavorable.
This means: