Chap009.doc.doc

Chapter 9 Flexible Budgets and Overhead Analysis Solutions to Questions 9-1 A static budget is prepared at the beginning of the budgeting period and is geared toward a single level of activity. It remains unchanged even if the activity level changes. 9-2 A flexible budget is a budget that is designed to cover a range of activity and that can be used to develop budgeted costs within that range to compare to actual costs incurred. By contrast, a static budget is geared for only one activity level. 9-3 If flexible budget data are based on actual hours worked, then only a spending variance will be produced on the performance report. Both a spending and an efficiency variance will be produced if flexible budget data are based on both actual hours and standard hours. 9-4 Standard hours allowed means the time that should have been taken to complete the period’s actual output. 9-5 The materials price variance consists entirely of the difference between the actual price paid and the standard price. The variable overhead spending variance consists of two elements. One element is like a price variance and results from differences between actual and standard prices for variable overhead inputs. The other element is like a quantity variance and results from differences between the amount of variable overhead inputs that should have been used and the amounts that were actually used. Ordinarily these two elements are not separated. 9-6 The overhead efficiency variance does not really measure efficiency in the use of overhead. It actually measures efficiency in the use of the base underlying the flexible budget. This base could be direct labor-hours, machine-hours, or some other measure of activity. 9-7 The denominator level of activity is the denominator in the predetermined overhead rate. 9-8 In the job-order costing chapter we were dealing with a normal cost system, whereas in this chapter we are dealing with a standard cost system. Standard costing ensures that each unit of pr