Activity Variances & Flexible Budgeting
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Activity Variances & Flexible Budgeting

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Questions and Answers

What primarily causes an activity variance?

  • Administrative costs exceeding budgeted amounts
  • Changes in competitive pricing strategies
  • Differences between actual and planned activity levels (correct)
  • Fluctuations in market demand for services
  • Which method is relevant for calculating activity variances?

  • Standard costing and cost variances
  • Traditional budgeting methods
  • Flexible budgeting concepts (correct)
  • Activity-based costing techniques
  • In the context of performance reports, what is the effect of an unfavorable activity variance?

  • Indicates higher revenues than anticipated
  • Suggests increased efficiency in operations
  • Shows that actual activity was lower than planned (correct)
  • Reflects lower costs than the budgeted amount
  • Which of the following best defines an activity variance?

    <p>The difference between actual activity and planned activity levels</p> Signup and view all the answers

    How does flexible budgeting aid in variance analysis?

    <p>By allowing for the comparison of budgeted costs with actual costs at different activity levels</p> Signup and view all the answers

    What is the amount of net operating income reported in the performance report?

    <p>$6,450</p> Signup and view all the answers

    In variance analysis, what aspect is primarily affected by an increase in actual activity level?

    <p>1</p> Signup and view all the answers

    Which of the following statements is true about flexible budgeting?

    <p>It allows for adjustments based on actual activity levels.</p> Signup and view all the answers

    What happens to total fixed costs when the activity level changes within the relevant range?

    <p>They remain unchanged.</p> Signup and view all the answers

    Which of the following reflects a misconception about cost behavior concerning flexible budgets?

    <p>Fixed costs vary with activity levels.</p> Signup and view all the answers

    How can one determine the causes of cost variances in a performance report?

    <p>By analyzing the differences in actual variable costs.</p> Signup and view all the answers

    What should be adjusted to accurately reflect the actual level of activity in variance analysis?

    <p>Planning budget</p> Signup and view all the answers

    What factor significantly influences the performance of Larry's Lawn Service based on the given data?

    <p>Variable cost management</p> Signup and view all the answers

    What is a key characteristic of flexible budgets?

    <p>They can be adjusted for different levels of activity.</p> Signup and view all the answers

    What is the main purpose of using a flexible budget?

    <p>To evaluate managerial performance accurately.</p> Signup and view all the answers

    Which of the following statements about planning budgets is true?

    <p>They are prepared for a specific planned level of activity.</p> Signup and view all the answers

    In the context of Larry’s Lawn Service, what is considered the most appropriate cost driver?

    <p>The number of lawns mowed.</p> Signup and view all the answers

    What is one advantage of using flexible budgets in performance evaluation?

    <p>They enable direct comparison between planned and actual costs.</p> Signup and view all the answers

    What is the main limitation of a static planning budget?

    <p>It does not change with actual levels of activity.</p> Signup and view all the answers

    Which of the following is NOT a benefit of using flexible budgets?

    <p>Guaranteed maximum profits.</p> Signup and view all the answers

    What aspect of variance analysis can flexible budgets improve?

    <p>Identifying differences between actual and expected costs.</p> Signup and view all the answers

    Study Notes

    Activity Variances

    • Activity variances result from differences in the actual level of activity versus the planned level of activity.
    • The actual activity level was greater than the planned activity level in the Larry's Lawn Service example.
    • This resulted in higher actual variable costs than planned, making it difficult to determine efficiency based only on static budget comparisons.

    Flexible Budgeting

    • Flexible budgeting allows for comparing costs based on the actual level of activity.
    • It adjusts the planning budget to reflect the actual activity level, enabling a fair assessment of managerial efficiency.
    • Flexible budgets help control costs and improve performance evaluation.

    Fixed and Variable Costs

    • Total variable costs change proportionally to changes in activity.
    • Total fixed costs remain unchanged within the relevant range of activity.

    Planning & Flexible Budgets

    • A planning budget is prepared for a specific, planned level of activity.
    • It becomes less effective for performance evaluation when actual activity varies from the planned level.
    • Flexible budgets adjust for different activity levels, enabling a more accurate comparison of actual costs to expected costs.
    • Flexible budgets can be prepared for any activity level within the relevant range.

    Larry's Lawn Service Example

    • Larry's Lawn Service based its planning budget on mowing 500 lawns in a single month.
    • This assumption was used to create the static planning budget.
    • As the actual activity level changed, a flexible budget tool was needed to adjust for those changes and accurately evaluate performance.

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    Description

    This quiz covers the concepts of activity variances and flexible budgeting, highlighting the differences between actual and planned activity levels. It explores how flexible budgets can assist in evaluating managerial efficiency. Understanding fixed and variable costs is also a key aspect of this topic.

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