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Chapter 16 - Fundamentals of Variance Analysis 16 Fundamentals of Variance Analysis Solutions to Review Questions 16-1. For performance evaluation purposes, the costing format should identify the actual costs for comparison with expected costs during the relevant period. Under absorption costing, the manufacturing fixed costs are allocated on a per unit basis. An increase in production results in a lower per unit cost. If all of the production is sold, all of the fixed cost will be charged against profit. However, if some of the costs are assigned to inventory, the result can be a deferral of costs that should be evaluated at this time. This problem is highlighted by the suggestion that one can increase production in times of declining sales in order to help the bottom line by spreading fixed costs over more units. Because variable costing excludes fixed overhead for inventory valuation (fixed overhead is treated as a period expense), there is no motivation to produce goods for inventory. 16-2. False. Only variable costs and revenues flex with changes in activity. Fixed costs are expected to remain the same when operations are in the relevant range. 16-3. (d) Appropriate for any level of activity. 16-4. (b) The master budget is based on a predicted level of activity and a flexible budget is based on the actual level of activity. 16-5. False. A standard is related to a cost per unit. Budgets focus on totals. 16-1 Chapter 16 - Fundamentals of Variance Analysis 16-6. The three primary sources of variances are: a. price variances, which arise because actual material prices differ from standards; b. efficiency variances which occur when the relationship between the usage of input factors (labor, materials, variable overhead) differs from that which would be expected to produce a given level of output; and c. activity variances, which represent differences between, planned (master budget) output levels and the output levels actually attained during the period. 16-7. The fixed cost variances differ from variable cost variances because fixed costs do not vary with the level of production activity. Therefore, the fixed costs in the flexible budget will be the same as in the master budget (within the relevant range). Additionally, there are no efficiency variances for fixed costs because there is no input-output relationship that can be applied. 16-2 Chapter 16 - Fundamentals of Variance Analysis Solutions to Critical Analysis and Discussion Questions 16-8. Preparation of the ex-post budget allows management to compare actual results with the budget that would have been instituted if certain ex-ante factors were known. The most significant of these is, typically, volume of activity. By controlling for the difference between ex-ante expectations and the ex-post volumes, comparisons between actual results and plans can be more meaningful. The controllable factors (e.g., costs per unit, efficiency, sales prices) can be isolated and evaluated.... View Full Document

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