Standard Costs and Variance Analysis Paper 3

Answer (D) is correct. A flexible budget is actually a series of budgets prepared for various levels of activity. A flexible budget adjusts the master budget for changes in activity so that actual results can be compared with meaningful budget amounts.

Answer (B) is correct. A flexible budget is prepared at the end of the budget period when the actual results are available. A flexible budget reflects the revenues that should have been earned and costs that should have been incurred given the achieved levels of production and sales. The difference between the flexible budget and actual figures is known as the flexible budget variance.

Answer (C) is correct. The company planned to produce 100,000 units at $6 each ($4 variable + $2 fixed cost), or a total of $600,000, consisting of $400,000 of variable costs and $200,000 of fixed costs. Total production was only 80,000 units at a total cost of $515,000. The flexible budget for a production level of 80,000 units includes variable costs of $320,000 (80,000 units × $4). Fixed costs would remain at $200,000. Thus, the total flexible budget costs are $520,000. Given that actual costs were only $515,000, the variance is $5,000 favorable.

Answer (D) is correct. The actual level of production for a period is rarely identical to the level that was projected when the period was being planned. Flexible budgets use standard costs to report what costs “should” have been incurred given the actual level of production achieved.

Answer (B) is correct. Static budgets are prepared based on the best estimates for output to be produced and costs to be incurred before the period begins. If there are any variations in conditions actually experienced, the static budget is unhelpful for diagnosing specific problem areas since it only reflects one level of activity.

Answer (B) is correct. Since Arkin’s actual sales volume exceeded expectations, revenue variances will be favorable. By the same token, the higher level of output resulted in the company incurring more production costs than expected.

Answer (A) is correct. Variable costs by their nature are directly related to the level of activity. Thus, a flexible budget formula must use per-unit variable costs to be useful. At the same time, all fixed costs must be covered regardless of the level of output. They are most meaningful when stated in total.

Answer (D) is correct. A flexible budget is always more useful than a static budget. A static budget is only helpful when exactly the combination of circumstances on which it is based are actually experienced. Using a flexible budget in the planning stages will allow Shugart to project the results of multiple combinations of factors, and using one in measuring performance will allow the company to most accurately identify areas of success and failure.

Answer (A) is correct. A well-designed standard cost system should produce fewer unfavorable variances.

Answer (A) is correct. Standard costs should be set with input from the personnel who are most familiar with input usage.