## Easy to Medium Practice Test

1. Management uses a flexible budget when they need to determine

a. the difference in last years cost and this year’s budget
b. the amount of expected profit from an estimated volume of sales
c. the amount of expected profit given fixed overhead changes
d. the variance between this month and last month actual costs

B. A flexible budget is used to project income at different volume levels of sales or units produced. Variable costs change with changes in sales volume and fixed costs do not change (c). It is a projection for the future and has no prior year information on it (a). The budget is compared to actual only for the same volume and the same period of time (d.).

2. A static budget

a. changes each time the volume of sales changes
b. is prepared for one volume of sales
c. is prepared for many different sales levels
d. shows different variable costs for different volumes of sales

B. A static budget does not change and shows budgeted income for one volume of sales only.

3. A flexible budget

a. shows different volumes of units produced and different variable costs
b. is done to show one volume level, but changes based on actual results
c. shows fixed costs that change as volume changes
d. is prepared for one volume of sales

A. The flexible budget shows more than one volume of sales or units produced. (d.) Each different volume level has its own column. As the volume changes, total variable costs do change and fixed costs do not change (c.) It is a budget and the budget is compared to actual results, but not changed to meet actual results. (b.)

4. In preparing a flexible budget, total variable costs are determined by:

a. estimating an amount for the year that won’t change
b. multiplying the cost per unit by the number of estimated units
c. multiplying the cost per unit for fixed overhead by the number of units
d. looking at last years actual costs and using the same number

B. Variable costs change in total as volume changes. (a.) The fixed cost per unit will be different for different volume levels, so you can’t do (c.). The flexible budget focuses on projecting for this year only and uses this year standard costs.(d.)

5. A flexible budget cannot be used by management to predict

a. total variable costs at different production levels
b. total contribution margin at different sales levels
c. the change in fixed costs as sales change
d. operating income at different sales levels

C Fixed costs do not change as volume changes, so it will not predict the change. All of the other answers are shown on the flexible budget

6. A flexible budget is

a. one that can be changed whenever a manager so desires
b. reflects expected costs at various levels of activity
c. one that used the formula total cost = cost per unit x units produced
d. the same as a continuous budget

B. The purpose is to show management costs at different levels of activity. It is calculated at the beginning of the year and is used as a baseline to compare actual costs, it is not changed. (a.) Fixed costs do not change, so (c.) is not correct. There is no such thing as a continuous budget. (d.)

7. When using a flexible budget, if the volume increases

a. total fixed costs will decrease
b. total fixed costs will increase
c. variable cost per unit will increase
d. total costs will increase

D. Fixed costs do not change with changes in volume. (a. & b.) Variable costs per unit do not change, it is the total variable cost that will change.(c.) Since total variable costs increase, total costs will increase also.(d.)

8. A static budget

a. is compared to last years actual costs
b. is valid for one volume level
c. is the best way to set an estimated sales commission budget
d. shows how fixed costs change as sales volumes change

B. By definition, b. is the answer. Budgets are compared to this years actual costs. (a.) Sales commission costs will change as volume changes, so you need more than one volume which is a flexible budget. (c.) Fixed cost do not change with volume.

9. The company budgets utility costs at \$22,000 fixed plus \$0.80 for every machine hour. The company budget is for 25,000 machine hours and \$130,000 direct labor costs. The budget for utilities is

a. 22,000
b. 42,000
c. 172,000
d. 150,000

B. Use the formula \$22,000 fixed + (25,000 activity x \$0.80 variable cost) = \$42,000 Direct labor costs do not have anything to do with estimated utility costs.

10. The following income statement was prepared at a sales level of 50,000 units

```Sales			     \$300,000
- Variable Costs   	   \$150,000
Contribution Margin	   \$150,000
- Fixed Costs		   \$100,000
= Profit before tax	   \$50,000
```

Prepare a flexible budget for sales volumes of 60,000 and 80,000 units.