Chapter8Solutions.doc

Chapter 8 Flexible Budgets, Standard Costs, and Variance Analysis Solutions to Questions 8-1 The planning budget is prepared for the planned level of activity. It is static because it is not adjusted even if the level of activity subsequently changes. 8-2 A flexible budget can be adjusted to reflect any level of activity—including the actual level of activity. By contrast, a static planning budget is prepared for a single level of activity and is not subsequently adjusted. 8-3 Actual results can differ from the budget for many reasons. Very broadly speaking, the differences are usually due to a change in the level of activity, changes in prices, and changes in how effectively resources are managed. 8-4 From a manager’s perspective, differences between the planning budget and actual results that are due to a change in activity are very different from variances that are due to changes in prices and changes in how effectively resources are managed. Consequently, these two factors should be clearly separated from each other. When the planning budget is directly compared to actual results, these two factors are lumped together. A flexible budget solves this problem by isolating the portion of the differences between the planning budget and actual results that is due to changes in prices and changes in how effectively resources are managed. 8-5 A revenue variance is the difference between how much the revenue should have been, given the actual level of activity, and the actual revenue for the period. A revenue variance is easy to interpret. A favorable revenue variance occurs because the revenue is greater than expected for the actual level of activity. An unfavorable revenue variance occurs because the revenue is less than expected for the actual level of activity. 8-6 A spending variance is the difference between how much a cost should have been, given the actual level of activity, and the actual amount of the cost. Like the revenue variance, the interpretation of a sp