Question: The variance analysis cycle ______.

Answer: begins with the preparation of performance reports

Question: An unchanged planning budget is known as a(n)_______planning budget.

Answer: static

Question: When comparing the static planning budget to actual activity, a problem that arises when actual activity is higher than budgeted activity is that ______.

Answer: net income is higher than expected but all or most expense variances are unfavorable

Question: When preparing a flexible budget, the level of activity ______.

Answer: affects variable costs only

Question: Commission expense is budgeted to be $16,000 at a planned sales level of 4,000 units. If only 2,900 units are sold, how much commission expense will appear on the flexible budget, and is the activity variance favorable or unfavorable?

Answer: $11,600 and favorable

Reason:

Flexible budget expense: $16,000 ÷ 4,000 = $4 per unit × 2,900 units = $11,600. Since the flexible budget expense < planning budget expense, the variance is favorable.

Question: Companies use the cycle to evaluate and improve performance.

Answer: variance analysis

Question: The difference between a revenue or cost item in the planning budget and the same item in the flexible budget at the actual level of activity is a(n) variance.

Answer: activity

Question: Planning budgets are sometimes called ______ budgets.

Answer: static

Question: Fancy Nails has an estimated cost for supplies of $0.75 per manicure. June’s budget was based on 2,400 manicures and a total cost for supplies of $1,800. June’s actual activity was 2,500 manicures. Total cost of supplies in June was $2,000. Calculate the spending variance for June.

Answer: Reason:

Flexible budget amount for supplies: $0.75 × 2,500 manicures = $1,875.

Spending variance: $1,875 - $2,000 = $125 U.

Question: True or false: A static budget is being compared to actual activity. The variance is F for net income but U for most expenses. This suggests that actual activity was lower than budgeted.

Answer: False