Finance for Non-Finance Managers Budgeting and Variance Analysis 2 — Questions and Answers
Question 1: Sales volume variance measures the impact of:
- Selling at a different price than budgeted
- Selling a different quantity than budgeted (Correct answer)
- Changes in production costs
- Changes in the exchange rate
Correct answer: Selling a different quantity than budgeted
Sales volume variance isolates the effect of selling more or fewer units than budgeted, at the standard margin.
Question 2: Price variance in a budget context refers to:
- Difference between standard and actual cost per unit (Correct answer)
- Difference between units produced and units budgeted
- Difference between cash collected and invoices raised
- Difference between fixed and variable costs
Correct answer: Difference between standard and actual cost per unit
Price (or rate) variance measures the difference between what was paid per unit and what the budget assumed.
Question 3: Which of the following is a fixed cost?
- Raw materials cost per unit
- Sales commissions
- Monthly building lease payment (Correct answer)
- Shipping cost per order
Correct answer: Monthly building lease payment
A fixed cost like rent does not change with production volume, unlike variable costs that vary per unit.
Question 4: Incremental budgeting is based on:
- Starting from zero and building up from scratch
- Adding a percentage increase to the previous period's budget (Correct answer)
- Using activity-based costing for every line item
- Allocating budgets only to new projects
Correct answer: Adding a percentage increase to the previous period's budget
Incremental budgeting adjusts the prior year's budget by a set increment, making it quick but potentially perpetuating inefficiencies.
Question 5: A department manager reports a $10,000 favorable cost variance. The MOST likely explanation is:
- The department spent $10,000 more than budgeted
- The department spent $10,000 less than budgeted (Correct answer)
- Revenue was $10,000 above budget
- Headcount increased by $10,000 above plan
Correct answer: The department spent $10,000 less than budgeted
A favorable cost variance means actual costs were lower than the budget, saving $10,000.
Question 6: Which budget focuses specifically on long-term asset purchases such as machinery or facilities?
- Operating budget
- Cash budget
- Capital expenditure budget (Correct answer)
- Revenue budget
Correct answer: Capital expenditure budget
The capital expenditure (capex) budget plans for investments in long-term assets like equipment, buildings, or technology.
Finance for Non-Finance Managers Budgeting and Variance Analysis 2
Sales volume variance measures the impact of: