[F5/Sep 2025] Budgeting and Control - Part 2

When the budget for the three months to 30 April was prepared, the expected level of production was 20,000 units and the budgeted production overhead was $178,400. This included $42,000 of fixed costs, with the remainder estimated to vary with the level of production.

Actual production in the three months to 30 April was 21,220 units.

What is the flexed production overhead budget for the three months to 30 April?

• $144,720.40

• $186,720.40

• $189,282.40

• $231,282.40

Answer explanation

Total overheads = 178,400
Fixed costs = 42,000
Variable costs = 136,400 or $6.82 per unit produced
At production level of 21,220, variable costs are $144,720.40

Therefore total costs are $186,720.40

Which of the following is an assumption of learning curve theory?

• The reduction in unit time will follow a predictable pattern

• Unit time will decrease at an increasing rate

• The time required to do a task will vary randomly each time the task is repeated

• Learning will not be transferred from one worker to the next

Answer explanation

The decrease in time per unit decreases, not increases, as production increases.

Which TWO of the following statements about the use of linear regression analysis in cost estimation are true?

• It provides more accurate estimates than the high-low technique

• It can only be used to estimate variable cost

• It assumes that cost behaviour is linear

• It only takes into account two observations of cost and output

Answer explanation

The fixed cost will be estimated also (at the point of intercept on the y axis). It is the high-low method that uses only two observations.

Which TWO of the following statements about forecasting based on simple linear regression are correct?

• It can account for the effect of multiple independent variables

• It assumes that historical data is a reliable guide to the future

• It is not suitable when the variables show strong negative correlation

• Cost forecasts using extrapolation are less accurate than those using interpolation

Answer explanation

One assumption of simple linear regression is that the dependent variable is only affected by one independent variable; it cannot deal with multiple independent variables. Another assumption is that what happened in the past (as reflected in historical data) will continue in the future.

Simple linear regression is suitable when there is correlation between two variables; this can be positive or negative correlation. Interpolation (i.e. forecasting within the range of the original data) is more reliable than extrapolation (i.e. forecasting outside the range of the original data).

Which of the following do ideal standards allow for?

• Machine breakdowns

• Idle time

• Schedule interruptions

• None of the above

Answer explanation

Ideal standards can only be achieved under ideal operating circumstances and so make no allowance for anything that is not ideal.

Overto Co budgeted to sell 100,000 units of product Liz. The budgeted selling price was $14 per unit. 110,000 units of the Liz were sold and sales revenue was $1,528,000. Using a flexed budget approach, what were the sales variances?

• Sales volume $140,000 favourable, Sales price $12,000 adverse

• Sales volume $128,000 favourable, Sales price $0

• Sales volume $0, Sales price $128,000 favourable

• Sales volume $0, Sales price $12,000 adverse

Answer explanation

Flexing the budget means that expected revenue = 110,000 units × $14 = $1,540,000

Actual sales revenue was $1,528,000, an adverse variance of $12,000

Since the budget has been flexed to the sales volume of 110,000 units, the adverse variance must be solely due to sales price.

Which of the following best describes “management by exception”?

• Using management reports to highlight exceptionally good performance, so that favourable results can be built upon to improve future outcomes

• Sending management reports only to those managers who are able to act on the information contained within the reports

• Focusing management reports on areas which require attention and ignoring those which appear to be performing within acceptable limits

• Appointing and promoting only exceptional managers to areas of responsibility within the organisation

Answer explanation

Focusing management reports on areas which require attention and ignoring those which appear to be performing within acceptable limits

The following statements have been made about different types of standards in standard costing systems:

1. Basic standards provide the best basis for budgeting because they represent an achievable level of productivity

2. Ideal standards are short-term targets and useful for day-to-day control purposes

Which of the above statements is/are true?

• 1 only

• 2 only

• Neither 1 nor 2

• Both 1 and 2

Answer explanation

Basic standards are long run underlying averages. They may be useful for comparing performance over time, but will not be useful for budgeting as they are likely to be too easy to achieve, therefore not stretching the managers.

An ideal standard assumes perfect operating conditions. As these are not likely to occur the standard will not be achievable, therefore not useful for monitoring day to day performance.

A company operates a standard marginal costing system. Last month actual fixed overhead expenditure was 2% below budget and the fixed overhead expenditure variance was $1,250. What was the actual fixed overhead expenditure for last month?

• $61,250

• $62,475

• $62,500

• $63,750

Answer explanation

Budgeted overhead − actual overhead = $1,250 (this is the fixed overhead expenditure variance)

Budgeted overhead = $1,250 ÷ 0.02 = $62,500 (because actual overhead was $1,250 below budget, and 2% below budget)

Actual overhead = $62,500 − $1,250 = $61,250

Which of the following is unlikely to be an explanation for an adverse materials usage variance?

• Stricter quality control

• Bulk discount

• Cheaper material being purchased

• Change in mix of materials

Answer explanation

Bulk discount is most likely to result in a favourable materials price variance, not the usage variance.