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Questions and Answers
What primarily causes an activity variance?
Which method is relevant for calculating activity variances?
In the context of performance reports, what is the effect of an unfavorable activity variance?
Which of the following best defines an activity variance?
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How does flexible budgeting aid in variance analysis?
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What is the amount of net operating income reported in the performance report?
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In variance analysis, what aspect is primarily affected by an increase in actual activity level?
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Which of the following statements is true about flexible budgeting?
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What happens to total fixed costs when the activity level changes within the relevant range?
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Which of the following reflects a misconception about cost behavior concerning flexible budgets?
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How can one determine the causes of cost variances in a performance report?
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What should be adjusted to accurately reflect the actual level of activity in variance analysis?
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What factor significantly influences the performance of Larry's Lawn Service based on the given data?
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What is a key characteristic of flexible budgets?
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What is the main purpose of using a flexible budget?
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Which of the following statements about planning budgets is true?
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In the context of Larry’s Lawn Service, what is considered the most appropriate cost driver?
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What is one advantage of using flexible budgets in performance evaluation?
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What is the main limitation of a static planning budget?
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Which of the following is NOT a benefit of using flexible budgets?
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What aspect of variance analysis can flexible budgets improve?
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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.
