Chapter 9
Flexible Budgets and Overhead Analysis
True/False
1. Fixed costs should not be included in a flexible budget since such costs are not likely to be controllable
by managers.
Level: Medium LO: 1 Ans: F
2. It is not important that the activity base and overhead costs be causally related when developing a
flexible budget.
Level: Easy LO: 1 Ans: F
3. The activity base for a flexible budget should usually be expressed in units of activity rather than in
dollars.
Level: Easy LO: 1 Ans: T
4. The static budget should be used primarily to determine whether cost control is being maintained.
Level: Easy LO: 1 Ans: F
5. A company that wants to report both spending and efficiency variances for overhead must compute
budget allowances for both the actual amount of activity that occurred and the standard level of activity
allowed for the level of output achieved.
Level: Medium LO: 4 Ans: T
6. Responsibility for the overhead efficiency variance should be assigned to whoever is responsible for
control of the activity base underlying the flexible budget.
Level: Easy LO: 4 Ans: T
7. A favorable variable overhead efficiency variance indicates that overhead has been used efficiently.
Level: Medium LO: 4 Ans: F
8. A company has a standard cost system in which fixed and variable manufacturing overhead costs are
applied to products on the basis of direct labor-hours. The company’s choice of the denominator level of
activity has no effect on the fixed overhead budget variance.
Level: Medium LO: 5,6 Ans: T
9. In a standard cost system, overhead is applied on the basis of the actual level of activity rather than the
standard level of activity allowed for the output of a period.
Level: Medium LO: 5 Ans: F
Brewer, Introduction to Managerial Accounting, 3/e 444
,10. A company has a standard cost system in which fixed and variable manufacturing overhead costs are
applied to products on the basis of direct labor-hours. The company’s choice of the denominator level of
activity has no effect on the fixed portion of the predetermined overhead rate.
Level: Easy LO: 5 Ans: F
11. The budget variance for fixed overhead represents the difference between actual fixed overhead costs
incurred and the amount of fixed overhead applied to work in process.
Level: Medium LO: 6 Ans: F
12. There can be no volume variance for variable overhead.
Level: Medium LO: 6 Ans: T
13. An unfavorable volume variance means that a company operated at an activity level greater than that
planned for the period.
Level: Medium LO: 6 Ans: F
14. The volume variance for fixed overhead is an activity-related variance based on the difference
between the denominator level of activity and the standard level of activity allowed for the output of a
period.
Level: Medium LO: 6 Ans: T
15. A company has a standard cost system in which fixed and variable manufacturing overhead costs are
applied to products on the basis of direct labor-hours. A fixed overhead volume variance will NOT
necessarily occur in a month in which production volume differs from sales volume.
Level: Hard LO: 6 Ans: T
Multiple Choice
16. When using a flexible budget, what will occur to fixed costs as the activity level increases within the
relevant range?
A) fixed costs per unit will decrease.
B) fixed costs per unit will remain unchanged.
C) fixed costs per unit will increase.
D) fixed costs are not considered in flexible budgeting.
Source: CPA, adapted
Level: Easy LO: 1 Ans: A
445 Brewer, Introduction to Managerial Accounting, 3/e
,17. A major disadvantage of static budgets is:
A) the difficulty in developing such budgets due to the high cost of gathering the necessary information.
B) the cost behavior pattern of manufacturing overhead, which is primarily fixed.
C) that the variances between actual and budget on a static budget result from comparing actual costs at
one level of activity to budgeted costs at a different level of activity.
D) their length and complexity.
Level: Medium LO: 1 Ans: C
18. Comparing actual results to a budget based on actual activity for the period is possible with the use of
a:
A) monthly budget.
B) master budget.
C) flexible budget.
D) rolling budget.
Level: Easy LO: 1 Ans: C
19. A static budget is:
A) a budget for a single level of activity.
B) a budget that ignores inflation.
C) used only for fixed costs.
D) used when the mix of products does not change.
Level: Easy LO: 1 Ans: A
20. Last year, a department’s standard costing system reported an unfavorable variable overhead spending
variance and an unfavorable volume variance. The denominator activity level selected for allocating
overhead to the product was based on 80% of capacity. If 100% of capacity had been selected instead as
the denominator level, how would the reported unfavorable spending and volume variances be affected?
A) A above
B) B above
C) C above
D) D above
Source: CPA, adapted
Level: Hard LO: 3,5 Ans: C
21. The overhead spending variance:
A) measures the variance in amount spent for fixed overhead items.
B) includes elements of waste or excessive usage as well as elements of price variance.
C) is generally considered to be the least useful of all overhead variances.
D) measures the difference between denominator activity and standard hours allowed.
Level: Easy LO: 3 Ans: B
Brewer, Introduction to Managerial Accounting, 3/e 446
, 22. If the price a company paid for overhead items, such as utilities, decreased during the year, the
company would probably report a(n):
A) favorable efficiency variance.
B) favorable spending variance.
C) unfavorable efficiency variance.
D) unfavorable spending variance.
Level: Medium LO: 3 Ans: B
23. Variable overhead is applied on the basis of standard direct labor-hours. If the direct labor efficiency
variance is unfavorable, the variable overhead efficiency variance will be:
A) favorable.
B) unfavorable.
C) zero.
D) indeterminable since it is not related to the labor efficiency variance.
Source: CMA, adapted
Level: Medium LO: 4 Ans: B
24. Alex Company has a large underapplied overhead balance in the manufacturing overhead account.
This could be explained by:
A) an unfavorable volume variance, assuming all other variances are zero.
B) a favorable volume variance, assuming all other variances are zero.
C) standard hours allowed for the period’s output being greater than denominator hours for the period.
D) none of these.
Level: Hard LO: 5,6 Ans: A
25. In a standard cost system, overhead is applied to production on the basis of:
A) the denominator hours chosen for the period.
B) the actual hours required to complete the output of the period.
C) the standard hours allowed to complete the output of the period.
D) none of these.
Level: Medium LO: 5 Ans: C
26. The fixed overhead budget variance is measured by:
A) the difference between budgeted fixed overhead cost and actual fixed overhead cost.
B) the difference between actual fixed overhead cost and applied fixed overhead cost.
C) the difference between budgeted fixed overhead cost and applied fixed overhead cost.
D) none of these.
Level: Medium LO: 6 Ans: A
27. The Santos Company erred in selecting a denominator level of activity and chose a much lower level
than was realistic. This error would most likely result in a large:
A) favorable variable overhead efficiency variance.
B) favorable fixed overhead budget variance.
C) favorable fixed overhead volume variance.
D) unfavorable fixed overhead budget variance.
Level: Medium LO: 6 Ans: C
447 Brewer, Introduction to Managerial Accounting, 3/e
Flexible Budgets and Overhead Analysis
True/False
1. Fixed costs should not be included in a flexible budget since such costs are not likely to be controllable
by managers.
Level: Medium LO: 1 Ans: F
2. It is not important that the activity base and overhead costs be causally related when developing a
flexible budget.
Level: Easy LO: 1 Ans: F
3. The activity base for a flexible budget should usually be expressed in units of activity rather than in
dollars.
Level: Easy LO: 1 Ans: T
4. The static budget should be used primarily to determine whether cost control is being maintained.
Level: Easy LO: 1 Ans: F
5. A company that wants to report both spending and efficiency variances for overhead must compute
budget allowances for both the actual amount of activity that occurred and the standard level of activity
allowed for the level of output achieved.
Level: Medium LO: 4 Ans: T
6. Responsibility for the overhead efficiency variance should be assigned to whoever is responsible for
control of the activity base underlying the flexible budget.
Level: Easy LO: 4 Ans: T
7. A favorable variable overhead efficiency variance indicates that overhead has been used efficiently.
Level: Medium LO: 4 Ans: F
8. A company has a standard cost system in which fixed and variable manufacturing overhead costs are
applied to products on the basis of direct labor-hours. The company’s choice of the denominator level of
activity has no effect on the fixed overhead budget variance.
Level: Medium LO: 5,6 Ans: T
9. In a standard cost system, overhead is applied on the basis of the actual level of activity rather than the
standard level of activity allowed for the output of a period.
Level: Medium LO: 5 Ans: F
Brewer, Introduction to Managerial Accounting, 3/e 444
,10. A company has a standard cost system in which fixed and variable manufacturing overhead costs are
applied to products on the basis of direct labor-hours. The company’s choice of the denominator level of
activity has no effect on the fixed portion of the predetermined overhead rate.
Level: Easy LO: 5 Ans: F
11. The budget variance for fixed overhead represents the difference between actual fixed overhead costs
incurred and the amount of fixed overhead applied to work in process.
Level: Medium LO: 6 Ans: F
12. There can be no volume variance for variable overhead.
Level: Medium LO: 6 Ans: T
13. An unfavorable volume variance means that a company operated at an activity level greater than that
planned for the period.
Level: Medium LO: 6 Ans: F
14. The volume variance for fixed overhead is an activity-related variance based on the difference
between the denominator level of activity and the standard level of activity allowed for the output of a
period.
Level: Medium LO: 6 Ans: T
15. A company has a standard cost system in which fixed and variable manufacturing overhead costs are
applied to products on the basis of direct labor-hours. A fixed overhead volume variance will NOT
necessarily occur in a month in which production volume differs from sales volume.
Level: Hard LO: 6 Ans: T
Multiple Choice
16. When using a flexible budget, what will occur to fixed costs as the activity level increases within the
relevant range?
A) fixed costs per unit will decrease.
B) fixed costs per unit will remain unchanged.
C) fixed costs per unit will increase.
D) fixed costs are not considered in flexible budgeting.
Source: CPA, adapted
Level: Easy LO: 1 Ans: A
445 Brewer, Introduction to Managerial Accounting, 3/e
,17. A major disadvantage of static budgets is:
A) the difficulty in developing such budgets due to the high cost of gathering the necessary information.
B) the cost behavior pattern of manufacturing overhead, which is primarily fixed.
C) that the variances between actual and budget on a static budget result from comparing actual costs at
one level of activity to budgeted costs at a different level of activity.
D) their length and complexity.
Level: Medium LO: 1 Ans: C
18. Comparing actual results to a budget based on actual activity for the period is possible with the use of
a:
A) monthly budget.
B) master budget.
C) flexible budget.
D) rolling budget.
Level: Easy LO: 1 Ans: C
19. A static budget is:
A) a budget for a single level of activity.
B) a budget that ignores inflation.
C) used only for fixed costs.
D) used when the mix of products does not change.
Level: Easy LO: 1 Ans: A
20. Last year, a department’s standard costing system reported an unfavorable variable overhead spending
variance and an unfavorable volume variance. The denominator activity level selected for allocating
overhead to the product was based on 80% of capacity. If 100% of capacity had been selected instead as
the denominator level, how would the reported unfavorable spending and volume variances be affected?
A) A above
B) B above
C) C above
D) D above
Source: CPA, adapted
Level: Hard LO: 3,5 Ans: C
21. The overhead spending variance:
A) measures the variance in amount spent for fixed overhead items.
B) includes elements of waste or excessive usage as well as elements of price variance.
C) is generally considered to be the least useful of all overhead variances.
D) measures the difference between denominator activity and standard hours allowed.
Level: Easy LO: 3 Ans: B
Brewer, Introduction to Managerial Accounting, 3/e 446
, 22. If the price a company paid for overhead items, such as utilities, decreased during the year, the
company would probably report a(n):
A) favorable efficiency variance.
B) favorable spending variance.
C) unfavorable efficiency variance.
D) unfavorable spending variance.
Level: Medium LO: 3 Ans: B
23. Variable overhead is applied on the basis of standard direct labor-hours. If the direct labor efficiency
variance is unfavorable, the variable overhead efficiency variance will be:
A) favorable.
B) unfavorable.
C) zero.
D) indeterminable since it is not related to the labor efficiency variance.
Source: CMA, adapted
Level: Medium LO: 4 Ans: B
24. Alex Company has a large underapplied overhead balance in the manufacturing overhead account.
This could be explained by:
A) an unfavorable volume variance, assuming all other variances are zero.
B) a favorable volume variance, assuming all other variances are zero.
C) standard hours allowed for the period’s output being greater than denominator hours for the period.
D) none of these.
Level: Hard LO: 5,6 Ans: A
25. In a standard cost system, overhead is applied to production on the basis of:
A) the denominator hours chosen for the period.
B) the actual hours required to complete the output of the period.
C) the standard hours allowed to complete the output of the period.
D) none of these.
Level: Medium LO: 5 Ans: C
26. The fixed overhead budget variance is measured by:
A) the difference between budgeted fixed overhead cost and actual fixed overhead cost.
B) the difference between actual fixed overhead cost and applied fixed overhead cost.
C) the difference between budgeted fixed overhead cost and applied fixed overhead cost.
D) none of these.
Level: Medium LO: 6 Ans: A
27. The Santos Company erred in selecting a denominator level of activity and chose a much lower level
than was realistic. This error would most likely result in a large:
A) favorable variable overhead efficiency variance.
B) favorable fixed overhead budget variance.
C) favorable fixed overhead volume variance.
D) unfavorable fixed overhead budget variance.
Level: Medium LO: 6 Ans: C
447 Brewer, Introduction to Managerial Accounting, 3/e
