Question 1

When assessing responsibility centers and their managers, performance measures are of no value unless some type of performance target or standard is available for comparison.

Accepted Answer

Performance measures need to be compared against targets or standards to effectively assess the performance and responsibility of managers and their centers, ensuring accountability and goal alignment.

Question 2

For performance evaluation purposes, any difference between a budgeted and actual result is classified as an unfavorable variance.

Accepted Answer

Not all differences between budgeted and actual results are classified as unfavorable variances; a variance is considered favorable if the actual results are better than what was budgeted (e.g., higher revenues or lower costs than planned).

Question 3

In order to fix responsibility for their occurrence, and analyze their underlying causes, variances must be disaggregated.

Accepted Answer

Disaggregating variances allows for a detailed analysis of each component, helping to accurately identify specific causes and assign responsibility, thereby facilitating targeted corrective actions.

Question 4

Disaggregating variances by income statement line item is a common and effective method for isolating the underlying causes of those variances.

Accepted Answer

The answer of Disaggregating variances by income statement line item...

Question 5

A variance analysis prepared by Morton, Inc., indicated that two of the corporation's five divisions performed quite well in the past quarter, despite poor performance by the corporation as a whole. The variances used to reach this conclusion must have been disaggregated by responsibility center.

Accepted Answer

Variance analysis disaggregated by responsibility center allows for the performance of individual divisions or units within a corporation to be assessed separately, enabling the identification of specific areas (divisions in this case) that performed well or poorly.

Question 6

When preparing a static budget, all budgeted line item amounts are adjusted for the actual level of sales volume achieved.

Accepted Answer

A static budget's line item amounts remain unchanged and are not adjusted for the actual level of sales volume achieved.

Question 7

A sales volume variance reflects the difference in the bottom line income number due to differences between the actual number of units sold and the number of units forecast in the flexible budget.

Accepted Answer

The answer of A sales volume variance reflects the difference...

Question 8

If a company falls short of the level of sales volume specified in a static budget, then the variable manufacturing cost will be adjusted upward in the flexible budget.

Accepted Answer

In a flexible budget, variable costs adjust based on the actual level of output or sales volume, not the other way around. If sales volume is lower, variable manufacturing costs would typically be adjusted downward to reflect the lower level of production or sales, not upward.

Question 9

For a recently concluded period, Davis Company reported a favorable sales volume variance. This variance implies that the cost of goods sold in Davis' flexible budget will be larger than the amount included in its static budget.

Accepted Answer

A favorable sales volume variance means that actual sales were higher than budgeted sales. This would lead to a higher cost of goods sold in the flexible budget, as more units were produced and sold.

Question 10

The sales price variance is computed based on the actual number of units sold, not the number of units forecast in the static budget.

Accepted Answer

The sales price variance is calculated by comparing the actual sales revenue to what the sales revenue would have been if the actual number of units sold had been sold at the budgeted price. This focuses on the difference due to the selling price, not the quantity sold, hence it's based on the actual number of units sold.

Question 11

The industry volume variance is useful if management lacks the authority to reallocate resources from one industry to another.

Accepted Answer

The industry volume variance measures the impact of changes in industry-wide demand on a company's sales, which is useful for management to understand external factors affecting performance when they cannot control resource allocation across industries.

Question 12

Calculation of the market share variance is based on the budgeted volume for the industry in which the firm operates.

Accepted Answer

Market share variance is calculated based on the actual total market volume rather than the budgeted volume, as it measures the effect of the change in a firm's market share on its sales volume.

Question 13

In an organization that values cooperation and synergies among divisional managers, relative performance evaluations may prove to be harmful.

Accepted Answer

Relative performance evaluations can foster competition rather than cooperation among managers, potentially undermining the collaborative culture the organization aims to promote.

Question 14

The potential for favoritism bias is a serious limitation of relative performance evaluations.

Accepted Answer

The answer of The potential for favoritism bias is a...

Question 15

Performance/reward functions that feature upper and lower limits often encourage gamesmanship on the part of managers.

Accepted Answer

When performance/reward functions have upper and lower limits, managers might manipulate results or focus on short-term gains to meet these thresholds, rather than aiming for genuine long-term value creation.

Question 16

K-Lane Industries, Inc., reported an unfavorable profit variance for its most recently concluded quarter. This implies that the company's:

Accepted Answer

An unfavorable profit variance occurs when actual profits are less than budgeted profits. This can happen when the actual sales volume is less than the static budgeted sales volume, as lower sales volumes typically lead to lower revenues and profits, assuming costs are as planned or higher.

Question 17

A difference between a static budget amount for income and flexible budget amount is termed:

Accepted Answer

A sales volume variance occurs when there is a difference between the expected sales in the static budget and the actual sales volume, which is reflected in the flexible budget. This variance helps in understanding the impact of the actual sales volume on the budgeted income.

Question 18

In the "check" and "adjust" phases of the business planning and analysis process, managers must evaluate measured performance and decide on what changes need to be made. The evaluation process cannot begin until:

Accepted Answer

Useful performance standards are established because they provide a clear basis for comparison, allowing managers to evaluate whether actual performance meets, exceeds, or falls short of these standards, which is essential for the "check" phase.

Question 19

"Management by exception" is an approach to the "check" and "adjust" phases of the business planning analysis process that is most often focused on:

Accepted Answer

Management by exception primarily focuses on identifying and addressing unfavorable variances from planned performance, allowing managers to concentrate on significant deviations that could indicate problems needing corrective actions.

Question 20

A profit variance disaggregated by income statement line item is of limited value in a responsibility accounting system because:

Accepted Answer

The resulting variances lack detail, making it difficult to pinpoint specific areas of responsibility or to take corrective action. In a responsibility accounting system, more detailed information is needed to effectively manage and evaluate the performance of different departments or units.

Quiz 12: Evaluating and Improving Entity Performance