CHAPTER 7 THEORY MULTIPLE CHOICE

1. A master budget is:

A) a budget which starts from a zero base
B) based on the level of expected output at the start of the budget period
C) developed at the end of a period
D) a type of flexible budget once actual results are known

2. Management by exception is a practice whereby managers focus more closely on:

A) variances in the larger departments
B) areas not operating as anticipated and less closely on areas that are operating as anticipated
C) activity-based budgeting
D) unfavorable variances

3. A variance is:
A) the difference between actual fixed cost per unit and standard variable cost per unit
B) the standard units of inputs for one output
C) the difference between an actual result and a budgeted performance
D) the difference between actual variable cost per unit and standard fixed cost per unit

4. An unfavorable variance indicates that:

A) the actual costs are less than the budgeted costs
B) the actual revenues exceed the budgeted revenues
C) the actual units sold are less than the budgeted units
D) the budgeted contribution margin is less than the actual amount

5. A favorable variance indicates that:

A) budgeted costs are less than actual costs
B) actual revenues exceed budgeted revenues
C) actual operating income is less than the budgeted amount
D) budgeted contribution margin is more than the actual amount

6. The flexible budget contains:

A) budgeted amounts for actual output C) actual costs for actual output
B) static budget amounts for planned output D) actual costs for planned output

7. Which of the following items will be same for a flexible budget and a master budget?
A) total variable cost C) total contribution margin
B) total expected fixed costs D) total expected revenues

8. A flexible budget:
A) is another name for management by exception
B) is developed at the end of the period
C) is based on the budgeted level of output
D) provides favorable operating results

9. The difference between the actual amounts and the flexible budget amounts for the actual output
is the:
A) flexible budget variance C) static budget variance
B) sales-volume variance D) standard cost variance

10. An unfavorable flexible-budget variance for variable costs may be the result of:
A) using more input quantities than were budgeted
B) paying lower prices for inputs than were budgeted
C) selling output at a higher selling price than budgeted
D) selling less quantity compared to the budgeted

11. In a flexible budget:

A) variable costs are calculated proportionately for the budgeted level of sales
B) fixed costs are calculated proportionately for the actual level of sales
C) fixed costs are kept at the same level of static budget
D) variable costs are kept at the same level of static budget

12. Which of the following information is needed to prepare a flexible budget?

A) actual units sold C) actual selling price per unit
B) actual variable cost D) actual fixed cost
13. Which of the following is true of flexible budget?
A) It calculates total variable cost by multiplying actual units by budgeted variable cost per unit.
B) It calculates total fixed cost by multiplying actual units by budgeted fixed cost per unit.
C) It calculates revenues by multiplying budgeted units by actual selling price per unit.
D) It calculates contribution margin by multiplying budgeted units by actual contribution margin
per unit.

14. The sales-volume variance is sometimes due to:

A) the difference between selling price and budgeted selling price
B) quality problems leading to customer dissatisfaction
C) unexpected increase in manufacturing labor time
D) unexpected increase in the use of quantities of inputs of raw material

15. An unfavorable sales-volume variance could result from:

A) an inappropriate assignment of labor or machines to specific jobs
B) competitors taking market share
C) an inefficiency of a purchasing manager in bargaining with suppliers
D) a decrease in actual selling price compared to anticipated selling price

16. If a sales-volume variance was caused by poor-quality products, then the ________ would be in
the best position to explain the variance.
A) production manager C) financial supervisor
B) sales supervisor D) logistic manager

17. The actual information pertains to the third quarter. As part of the budgeting process, the
controller for Foley Manufacturing had developed the following static budget for the third
quarter. The company is in the process of preparing the flexible budget and understanding the
results.

Actual Flexible Static

Results Budget Budget
Sales volume (in units) 11,000 10,000

Sales revenues $238,000 $ $230,000

Variable costs 150,000 $ ________ 180,000

Contribution margin 88,000 $ 50,000

Fixed costs 36,000 $ ________ 35,000

Operating profit $ 52,000 $ ___ $ 15,000

The primary reason for high actual operating profits was:

A) the variable-cost variance C) flexible budget variance for revenues
B) increased fixed costs D) lower sales volume than planned

18. Which of the following variances will always be favorable when actual sales exceed budgeted
sales?
A) variable cost B) fixed cost C) sales volume D) operating profit

19. The flexible-budget variance for direct cost inputs can be further subdivided into a:
A) static-budget variance and a sales-volume variance
B) sales-volume variance and an efficiency variance
C) price variance and an efficiency variance
D) static-budget variance and a price variance

20. An efficiency variance reflects the difference between:

A) actual input quantities used last period and current period
B) an actual input quantity and a budgeted input quantity
C) an actual input quantity used in a company and its main competitors
D) a standard input quantity in a company and its main competitors

21. Which of the following is the correct formula for the materials price variance?
A) (Actual price of input - Budgeted price of input) × Budgeted quantity of input
B) (Actual quantity of input used - Budgeted quantity of input allowed for actual output) ×
Budgeted price of input
C) (Actual price of input - Budgeted price of input) × Actual quantity of input
D) (Actual quantity of input used - Budgeted quantity of input allowed for actual output) × Actual
price of input
22. Which of the following is a disadvantage of using the standards developed by a firm itself to
develop a budget?
A) A firm's inefficiencies will be part of the data.
B) They are not based on realized benchmarks and can be unrealistic.
C) The expected future changes are not included in the standards.
D) The flexible-budget amounts are difficult to determine.

23. Standard cost per output unit for each variable direct cost input is calculated by multiplying:
A) standard input allowed for one output unit by standard price per input unit
B) standard input allowed for one output unit by actual price per input unit
C) actual input allowed for one output unit by standard price per input unit
D) actual input allowed for one output unit by actual price per input unit

24. Which of the following can be a reason for a favorable price variance for direct materials?
A) a decrease in the price of materials due to an oversupply of materials
B) an unexpected increase in the price of materials
C) less amount of material used during production than planned for actual output
D) workers taking less time to produce the products than was expected

25. A favorable efficiency variance for direct manufacturing labor indicates that:
A) a lower wage rate than planned was paid for direct labor
B) a higher wage rate than planned was paid for direct labor
C) less direct manufacturing labor-hours were used during production than planned for actual
output
D) more direct manufacturing labor-hours were used during production than planned for actual
output

26. Which of the following is the correct formula for the materials price variance?
A) (Actual price of input - Budgeted price of input) × Budgeted quantity of input
B) (Actual quantity of input used - Budgeted quantity of input allowed for actual output) ×
Budgeted price of input
C) (Actual price of input - Budgeted price of input) × Actual quantity of input
D) (Actual quantity of input used - Budgeted quantity of input allowed for actual output) × Actual
price of input

27. A favorable efficiency variance for direct labor might indicate that:
A) lower-quality materials were purchased
B) work is scheduled efficiently
C) there is an unexpected increase in direct labor rates
D) management hired underskilled workers

28. A favorable price variance for direct manufacturing labor might indicate that:
A) employees were paid more than planned C) underskilled employees are being hired
B) unexpected increase in direct labor rates D) congestion due to scheduling problems

29. An unfavorable efficiency variance for direct manufacturing labor might indicate that:
A) there is unexpected increase in direct labor rates
B) work is scheduled inefficiently
C) lower-quality materials were purchased
D) more higher-skilled workers were scheduled than planned

30. Which variance is calculated using the formula (AQ - BQ) BP?
A) efficiency variance C) total flexible-budget variance
B) price variance D) spending variance

31. Which variance is calculated by using the formula: (AP - BP) AQ?
A) efficiency variance C) total flexible-budget variance
B) price variance D) material spending variance

32. Which of the following is the correct formula for the materials price variance?
A) (Actual price of input - Budgeted price of input) × Budgeted quantity of input
B) (Actual quantity of input used - Budgeted quantity of input allowed for actual output) ×
Budgeted price of input
C) (Actual price of input - Budgeted price of input) × Actual quantity of input
D) (Actual quantity of input used - Budgeted quantity of input allowed for actual output) × Actual
price of input
33. These questions refer to flexible-budget variance formulas with the following descriptions for the
variables: A = Actual; B = Budgeted; P = Price; Q = Quantity. The best label for the formula
[(AP)(AQ) - (BP)(BQ)] is the:
A) efficiency variance. C) total flexible-budget variance
B) price variance D) spending variance

34. Handley Manufacturing Company has prepared the following flexible budget for August and is in
the process of interpreting the variances. F denotes a favorable variance and U denotes an
unfavorable variance.

Flexible Variances
Budget Price Efficiency
Material A $44,000 $1,000F $ 3,400U
Material B 66,000 200U 1,800F
Direct manufacturing labor 80,000 600U 2,300F

The most likely explanation of the above variances for Material A is that:
A) a lower price than expected was paid for Material A
B) higher-quality raw materials were used than were planned
C) the company used a higher-priced supplier
D) Material A used during September was $2,000 less than expected

35. Handley Manufacturing Company has prepared the following flexible budget for August and is in
the process of interpreting the variances. F denotes a favorable variance and U denotes an
unfavorable variance.

Flexible Variances
Budget Price Efficiency
Material A $ 40,000 $1,600F $ 3,200U
Material B 68,000 500U 1,900F
Direct manufacturing labor 85,000 200U 2,700F

The most likely explanation of the above direct manufacturing labor variances is that:
A) the average wage rate paid to employees was less than expected
B) employees did not work as efficiently as expected to accomplish the job
C) the company may have assigned more experienced employees this month than originally
planned
D) management may have a problem with budget slack and might be using lax standards for both
labor-wage rates and expected efficiency

36. A purchasing manager's performance is best evaluated using information such as:
A) usage efficiency and direct materials price variance
B) direct materials flexible-budget variance
C) direct manufacturing labor flexible-budget variance
D) price and terms bargaining effectiveness, achievement of quality goals, and direct materials
price variance

37. Which of the following could be a reason for a favorable material price variance?
A) the purchasing manager bargaining effectively with suppliers
B) the purchasing manager giving orders for small quantity to reduce storage cost
C) the purchasing manager accepting a bid from the highest-priced supplier to ensure the quality
of material
D) the personnel manager hiring under skilled workers

38. Efficiency is:

A) the degree to which a predetermined objective or target is met
B) the difference between an actual input quantity and a budgeted input quantity
C) the continuous process of comparing a firm's performance levels against the best levels of
performance in competing companies
D) the relative amount of inputs used to achieve a given output level

39. Which of the following is true of variance?

A) Managers should interpret a favorable variance as "good news".
B) Managers should not simply interpret a favorable variance as good but should understand why
the variance occurred.
C) A small variance or zero variance definitively reveals efficient performance.
D) Managers' performance must be evaluated solely on single variance.
40. The degree to which a predetermined objective or target is met is known as:
A) efficiency B) variance C) effectiveness D) marking

41. If management experiences an unfavorable direct materials efficiency variance, which of the
following would NOT be the possible corrective action?
A) improve the design of the product
B) provide additional training for the direct laborers
C) purchase higher quality materials
D) negotiate lower prices for material acquisition

42. Which of the following statements is true about analyzing a single variance?
A) It should be overemphasized to take proper decision.
B) It should be evaluated in isolation from other variances.
C) It can lead to different other variances.
D) It should be used for quality evaluation.

43. Variance analysis should be used:

A) to understand why variances arise and to improve future performance
B) as the sole source of information for performance evaluation
C) to punish employees that do not meet standards
D) to set the standards which are very easy to achieve to encourage employees to focus on
meeting standards

44. Cost variances should be investigated:

A) when they are considered within the "in-control" range as determined by management
B) when the variance is more than a certain percentage of budgeted costs, as determined by
management
C) even though the cost of investigation exceeds the benefit as determined by management
D) when the variance is less than a certain percentage of budgeted costs, as determined by
management

45. The emphasis on variance analysis and its use in performance evaluation must be such that:
A) managers focus on setting easy to attain targets
B) larger unfavorable variances should result in negative consequences for personnel held
accountable
C) management should set targets that challenge but are reasonably achievable and require
creativity and resourcefulness by personnel held accountable
D) management should stretch resources to meet goals even if continuous improvement and
quality suffers

46. Nonfinancial performance measures:

A) are usually used in combination with financial measures for control purposes
B) are rarely used to evaluate overall efficiency
C) allow managers to make informed tradeoffs
D) are often the sole basis of a manager's performance evaluations

47. Which of the following is an example of nonfinancial performance measure?

A) percentage of products started and completed without requiring any rework
B) direct manufacturing labor efficiency variance
C) direct materials price variance
D) quantity discounts obtained on order of large quantity

48. A company has a policy "investigate all variances exceeding $3,000 or 15% of the budgeted cost,
whichever is lower." There is a variance of $2,000 in repair and maintenance costs of $12,000.
What does the company do in the given situation?
A) It should be ignored as it is less than $3,000.
B) It deserves more attention as it is more than 15% of total repair cost.
C) It should be considered an in-control occurrence.
D) It should be investigated as all variances are equally important.

49. The term for understanding why actual performance deviates from planned performance is:
A) variance calculation C) favorable variance
B) organizational learning D) continuous improvement
50. Effectiveness is:
A) the relative amount of inputs used to achieve a given output level
B) the continuous process of comparing a firm's performance levels against the best levels of
performance in competing companies
C) the degree to which a predetermined objective or target is met
D) is a practice whereby managers focus more closely on areas that are not operating as expected
and less closely on areas that are

51. Which of the following is NOT a good criteria, rule or reason as to why variances should be
investigated?
A) Variances should be investigated when they are considered material.
B) Generally, materiality is based on an objective criterion such as a set percentage of deviation
from the budgeted amount.
C) In some instances, subjective judgment may replace an objective rule of thumb.
D) It is equally important to investigate favorable variances as well as unfavorable.

52. The process by which a company's products or services are measured relative to the best possible
levels of performance in competing companies is known as:
A) efficiency C) a standard costing system
B) benchmarking D) variance analysis

53. Benchmarking is a process:

A) in which overhead costs are absorbed into units of output, or 'jobs'
B) in which a firm's performance levels are compared against the best levels of performance in
competing companies or in companies having similar processes
C) which is based on calculating the breakeven point and analyzing the consequences of changes
in various factors calculating the breakeven point
D) in which the underlying processes of an organization is optimized using a systematic approach
to achieve more efficient goals

54. Which of the following statements is true of benchmarking?

A) It is a systematic approach of optimizing business processes.
B) It fails to help to improve organizational performance as benchmarking data does not provide
insight into why costs or revenues differ across companies.
C) It is difficult to ensure that the benchmark numbers are comparable due to the existence of
differences across companies.
D) It considers four major business aspects such as financial, customer, internal business
processes, and learning and growth.

55. When benchmarking, management accountants are most valuable when they:
A) present differences in the benchmarking data to management
B) highlight differences in the benchmarking data to management
C) provide insight into why costs or revenues differ across companies
D) provide complex mathematical analysis

56. Coast to Coast Bus Lines acquired the following data about the operating cost of three of its top
competitors.

Operating cost per seat per mile

Competitor A $.11
Competitor B $.15
Competitor C $.16

Management decides to use the average operating cost per seat per mile as a mark. Coast to
Coast per seat is 12.5 cents per mile.
A) It is equal to the mark. C) It compares unfavorably
B) It compares favorably. D) It compares favorably to the best performing
Competitor