Question

Chapter 8. Flexible Budgets, Standard Costs, and Variance Analysis

8–1 What is a static planning budget?

8–2 What is a flexible budget and how does it differ from a static planning budget?

8–5 What is a revenue variance and what does it mean?

8–6 What is a spending variance and what does it mean?

8–7 What does a flexible budget enable that a simple comparison of the planning budget to actual results does not do?

8–9 What is a quantity standard? What is a price standard?

8–10 Why are separate price and quantity variances computed?

8–11 Who is generally responsible for the materials price variance? The materials quantity variance? The labor efficiency variance?

8–12 The materials price variance can be computed at what two different points in time? Which point is better? Why?

Answer 1

Question 1:

Static Planning budget is a budget which does not change with volume. It is valid only for that planned activity which is decided at the time of preparing budget. It remains fixed for the entire budget period.

Question 2:

Flexible budget is a budget which can be changed with a change in volume. When there are any changes in circumstances which are beyond our control flexible budget should be used. Static budget in such circumstances becomes irrelevant. This is how flexible budget differs from static budget.

Question 3:

Revenue variance is difference between actual revenue and budgeted revenue. If it is favourable the performance is good and if it is unfavourable then it should be looked into.

Question 4:

Spending variance is the difference between Actual expenditure and budgeted expenditure. If the spending variance is favourable then credit goes to the respective department and if it is unfavourable then such department is responsible.