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Chapter 11 Flexible Budgets and Overhead Analysis Solutions to Questions 11-1 A static budget is a budget prepared for a single level of activity that remains unchanged even if the activity level subsequently changes. 11-2 A flexible budget can be adjusted to reflect any level of activity. By contrast, a static budget is prepared for a single level of activity and is not subsequently adjusted. 11-3 Criteria for choosing an activity base: 1. The activity base and overhead cost should be causally related. 2. The activity base should not be expressed in dollars. 3. The activity base should be simple and easy to understand. 11-4 If the flexible budget is 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 the flexible budget is based on both actual hours and standard hours. 11-5 Standard hours allowed means the time that should have been taken to complete the actual output of the period. 11-6 The materials price variance consists entirely of differences in price paid from standard. 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. 11-7 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. 11-8 A flexible budget provides the cost and activity data needed to compute the predetermined overhead rate, which is used in product costing. 11-9 The denominator level of activ