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Unformatted text preview: 1 INCORRECT A major weakness of static budgets is that: A) they are geared only to a single level of activity. B) they cannot be used to assess whether variable costs are under control. C) they force the manager to compare actual costs at one level of activity to budgeted costs at a different level of activity. D) all of the above. Feedback: The correct answer is D (Learning Objective 1): A static budget is prepared at the beginning of the budgeting period and is valid for only the planned level of activity. It may be suitable for planning purposes, but it is inadequate for evaluating how well costs are controlled. If actual activity during a period differs from what was planned, it would be misleading to simply compare actual costs to the static budget. If activity is higher than expected, variable costs should be higher than expected. On the other hand, if activity is lower than expected, variable costs should be lower than expected. 2 INCORRECT Kevin's Bar & Grill compares monthly operating results with a static budget prepared at the beginning of the year. When actual sales are less than budget, the restaurant would usually report favorable variances on: A) fixed supervisory salaries and variable food costs. B) variable food costs but not fixed supervisory salaries. C) fixed supervisory salaries but not variable food costs D) neither fixed supervisory salaries or variable food costs Feedback: The correct answer is B (Learning Objective 1): Since supervisory salaries are fixed, they would not be expected to change when then activity level (i.e., sales) changes. As such, actual supervisory salaries would be expected to equal budgeted supervisory salaries, and no variance would be expected. However, since food costs are variable, they would be expected to decrease as the activity level (i.e., sales) decreased. As such, because a static budget is being used (and actual sales are less than budgeted sales), actual food costs would be expected to be less than budgeted food costs, and a favorable variance would be reported....
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- Spring '11
- Managerial Accounting