Flexible Budgets
Hard Practice Test
Hard Practice Test
Click the “Check Your Answer” box below each question to reveal the correct answer and explanation.
1. The cost of utilities is a variable production cost that varies with machine hours used. The actual cost of utilities was $7,320. The variance to the flexible budget was $320 unfavorable. If 5,000 machine hours are used during the month, the budgeted cost per machine hour was
a. $ 1.32
b. $ 1.75
c. $1.40
d. $1.53
Answer
C. An unfavorable variance means that the actual cost was more than budgeted. Take $7,320 actual – $320 variance = total budgeted amount. Divide the total budgeted amount of $7,000 / 5,000 machine hours to get the $1.40 cost per hour.
2. The company has prepared a flexible budget for production costs. The budget projects $260,000 fixed costs plus $5 per machine hour. The company actually produced 20,000 units using 34,000 machine hours at a total cost of $425,000. The difference between actual costs and budgeted costs is
a. 65,000 unfavorable
b. 5,000 favorable
c. 170,000 favorable
d. 26,000 unfavorable
Answer
B. You must first calculate the budgeted cost for using 34,000 machine hours. Do this by using the projection: $260,000 + ($5 x 34,000 actually used) = $430,000. Actual was $425,000, which is $5,000 less, favorable, than was expected for using 34,000 machine hours.
3. The company uses a flexible budget to plan and control manufacturing overhead costs. Overhead is applied on the basis of machine hours. The standard cost sheet shows that 5 machine hours are required to make one product. The following data is available:
Actual

Original
Budgeted 

Units produced 
22,000

20,000


Machine hours 
105,000

100,000


Variable overhead costs 
$91,000

$80,000


Fixed overhead costs 
$52,000

$50,000

Calculate the following:
Total budgeted variable overhead costs
Total budgeted fixed overhead costs
Variable overhead spending variance
Variable overhead efficiency variance
Fixed overhead budget variance
Fixed overhead volume variance
Answer
Total budgeted variable overhead costs $88,000
for 22,000 units
Total budgeted fixed overhead costs $50,000
Variable overhead spending variance $7,000 U
Variable overhead efficiency variance $4,000 F
Fixed overhead budget variance $2,000 U
Fixed overhead volume variance $5,000 F
Variable:
AQ x AP
$91,000 
AQ x SP
105,000 x $0.80 =$84,000 
SQ x SP
22,000 x 5 x $0.80 = $88,000 

variance  $7,000 U spending 
$4,000 F efficiency 
Fixed:
Actual
$52,000 
Budget
$50,000 
Applied
22,000 x 5 x $0.50 = $55,000 

variance  $2,000 U budget 
$5,000 F volume 
The formulas above are a way to calculate what costs should have been
if you produced 22,000 units. This is the amount on the right side of the
equation above. The actual is on the left. The two variances together for each,
fixed, and variable, will give the total variance to show on the report.
The variable overhead rate per unit is calculated using the original budget information:
$80,000 / 100,000 machine hours = $0.80 per machine hour x 5 hours each = per unit
The fixed overhead rate per unit is calculated using the original budget information:
$50,000 / 100,000 machine hours = $0.50 per machine hour x 5 hours each = per unit
The budgeted per unit rate is then multiplied by the actual units produced to get the
estimated cost of producing 22,000 units to compare to actual and get the variance.
4. The company has originally budgeted to produce and sell 20,000 units and use 5,000 machine hours. At this level of production variable production costs are expected to be $30,000, fixed manufacturing production costs are expected to be $88,000, fixed selling costs are expected to be $24,000 and variable selling costs are expected to be $16,000. Variable production costs are based on machine hours. It takes ¼ of a machine hour to produce a unit. The sales price per unit is $12.
Prepare a flexible budget for sales volumes of 15,000; 20,000; and 25,000.
Answer
Sales Volumes 
15,000

20,000

25,000


Sales 
180,000

240,000

300,000


– Variable production costs 
22,500

30,000

37,500


– Variable selling costs 
12,000

16,000

20,000


= Contribution margin 
145,500

194,000

242,500


– Fixed production costs 
88,000

88,000

88,000


– Fixed selling costs 
24,000

24,000

24,000


= Income before tax 
33,500

82,000

130,500

Variable costs: calculate a cost per unit based on 5,000 units and use
that cost per unit, which will not change, to get total variable costs above.
Fixed costs will be the same, they do not change.
You need cost per unit information for the flexible budget.
Convert the cost per machine hour to cost per unit
Variable Production costs are $6 per machine hour
$30,000 / 5,000
Variable Selling costs are $0.80 per unit
$16,000 / 20,000
When calculating the production cost per unit.
Take units x .25 x $6 per machine hour