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Homework # 7 : CMA P1- Performance Management I

1. A major disadvantage of a static budget is that

a. it is more difficult to develop than a flexible budget.

b. it is made for only one level of activity.
c. variances tend to be smaller than when flexible budgeting is used.
d. variances are more difficult to compute than when flexible budgeting is used.

You have answered B which is Correct!

Correct answer b. A static budget is based on the level of output planned at the start of the budget period and does
not change no matter what the level of actual output. Comparison of actual activities to static budget levels is
difficult and often misleading.

2. Arkin Co.’s controller has prepared a flexible budget for the year just ended, adjusting the
original static budget for the unexpected large increase in the volume of sales. Arkin’s costs are
mostly variable. The controller is pleased to note that both actual revenues and actual costs
approximated amounts shown on the flexible budget. If actual revenues and actual costs are
compared with amounts shown on the original (static) budget, what variances would arise?

a. Both revenue variances and cost variances would be favorable.

b. Revenue variances would be favorable and cost variances would be unfavorable.
c. Revenue variances would be unfavorable and cost variances would be favorable.
d. Both revenue variances and cost variances would be unfavorable.

You have answered B which is Correct!

Correct answer b. If a company experiences an increase in sales volume, the actual revenue will be
greater than the master budget revenue (favorable variance) and the actual costs will be greater than
the master budget costs (unfavorable variances).

3. Use of a standard cost system can include all of the following advantages except that it

a. assists in performance evaluation.

b. emphasizes qualitative characteristics.
c. permits development of flexible budgeting.
d. allows employees to better understand what is expected of them.

You have answered D which is Wrong

Correct answer b. The use of a standard cost system has several benefits but they are generally based
on quantitative factors and not qualitative characteristics.

4. Which one of the following statements is correct concerning a flexible budget cost formula?
Variable costs are stated

a. per unit and fixed costs are stated in total.

b. in total and fixed costs are stated per unit.
c. in total and fixed costs are stated in total.
d. per unit and fixed costs are stated per unit.

You have answered A which is Correct!

Correct answer a. For flexible budgets, variable costs are given per unit so that comparisons can be readily made at
various levels of output. Fixed costs are expected to remain the same over the relevant range and, therefore, are
given in total.
5. The monthly sales volume of Shugart Corporation varies from 7,000 units to 9,800 units over
the course of a year. Management is currently studying anticipated selling expenses along with
the related cash resources that will be needed. Which of the following types of budgets (1)
should be used by Shugart in planning, and (2) will provide Shugart the best feedback in
performance reports for comparing planned expenditures with actual amounts?

Planning Performance Reporting

a. Static Static.
b. Static Flexible.
c. Flexible Static.
d. Flexible Flexible.

You have answered B which is Wrong

Correct answer d. Flexible budgets are preferable for both planning purposes and performance reporting as the
flexible budget can be based on the actual amount of output and then compared to the actual revenue and costs.

6. The following performance report was prepared for Dale Manufacturing for the month of April.
Actual Results Static Budget Variance
Sales units 100,000 80,000 20,000F
Sales dollars $190,000 $160,000 $30,000F
Variable costs 125,000 96,000 29,000U
Fixed costs 45,000 40,000 5,000U
Operating income $ 20,000 $ 24,000 $ 4,000U

Using a flexible budget, Dale’s total sales-volume variance is

a. $4,000 unfavorable.
b. $6,000 favorable.
c. $16,000 favorable.
d. $20,000 unfavorable

You have answered D which is Wrong

Correct answer c. The sales-volume variance is $16,000 favorable as shown below.

Flexible Budget Static Budget

Units 100,000 80,000
Sales dollars $200,000 $160,000
Variable costs 120,000 96,000
Fixed costs 40,000 40,000
Operating income $ 40,000 $ 24,000

Sales volume variance = $40,000 - $24,000 = $16,000F

7. Of the following pairs of variances found in a flexible budget report, which pair is most likely to
be related?

a. Material price variance and variable overhead efficiency variance.

b. Labor rate variance and variable overhead efficiency variance.
c. Material usage variance and labor efficiency variance.
d. Labor efficiency variance and fixed overhead volume variance.

You have answered C which is Correct!

Correct answer c. Efficiency variances are sometimes referred to as usage variances and measure
quantity used. Material usage and labor efficiency (usage) are likely to be related, e.g., poor quality
material will likely cause excess usage and require additional labor.

8. An advantage of using a flexible budget compared to a static budget is that in a flexible

budget

a. shortfalls in planned production are clearly presented.

b. standards can easily be changed to adjust to changing circumstances.
c. fixed cost variances are more clearly presented.
d. budgeted costs for a given output level can be compared with actual costs for the same level
of output.

You have answered B which is Wrong

Correct answer d. A static budget is based on projected output while a flexible budget is based on actual output. As a
result, the actual cost of the actual output can be compared to the budgeted cost for the actual output.
9. The benefits of management by exception reporting include all of the following except

a reduction in

a. reports production costs.

b. information overload.
c. reliance on advance planning.
d. unfocused management actions.

You have answered D which is Wrong

Correct answer c. The use of management by exception reporting requires the same amount of advanced planning as
any other type of variance reporting. The time savings of management by exception arises in potentially
investigating fewer variances.

10. Lee manufacturing uses a standard cost system with overhead applied based on direct labor
hours. The manufacturing budget for the production of 5,000 units for the month of June
included 10,000 hours of direct labor at $15 per hour, $150,000. During June, 4,500 units were
produced, using 9,600 direct labor hours, incurring $39,360 of variable overhead, and showing a
variable overhead efficiency variance of $2,400 unfavorable. The standard variable overhead
rate per direct labor hour was

a. $3.85.
b. $4.00.
c. $4.10.
d. $6.00.

You have answered C which is Wrong

Correct answer b. The standard variable overhead rate per direct labor hour is $4.00 calculated as
follows.

Standard hours/unit = 10,000 hours ÷ 5,000 units

= 2 hours/unit
Standard hours for output = 4,500 units x 2 hours
= 9,000 hours
VOH efficiency variance: (9,000 – 9,600) x R = -$2,400
-600R = -$2,400
R = $4.00
Summary of Performance in this Homework

Percentage score: 40
Remarks :Average, Give your best to improve from here.Significant weakness noticed

I congratulate you for the patience demonstrated by being with me for nearly 2 months. We are about to finish 50%
of the syllabus this week. Hold your breath and commitment for next 15 days. You will do wonders in the
examination.

Happy New Year to you and family!

Regards,

Sushanta Bala