D774 Introduction to Business Accounting - Set 4 - Part 3

Correct Answer: Price variance

A price variance is the portion of a gap caused by the actual price differing from the standard budgeted price, holding quantity constant. With the quantity unchanged and only the per-pound price moving, this is precisely a price variance. Option a is incorrect because a volume variance comes from using or selling a different number of units than planned. Here the quantity was exactly as budgeted; only the price moved, which makes it a price variance instead. Option c is incorrect because a mix variance arises when the proportion of different products shifts. This scenario involves a single input whose price changed, not a blend of products, so it isolates a price variance. Option d is incorrect because target income is the planned profit goal, not a variance caused by a changed price. The gap here, driven entirely by a higher per-pound price at constant quantity, is a price variance.

Correct Answer: Volume variance

A volume variance arises from a difference between actual sales volume and expected volume, holding price constant. With the price unchanged and only the number of units differing, the entire gap is a volume variance. Option a is incorrect because a price variance comes from the per-unit price differing from standard. Here the price was exactly as planned; what changed was the number of units sold, which makes this a volume variance. Option b is incorrect because a mix variance involves the proportion among several products shifting. This scenario concerns one product selling in a different quantity at the same price, so it isolates a volume variance. Option d is incorrect because target income is the planned profit goal, not a variance from selling fewer units. The shortfall here, driven entirely by units differing at a constant price, is a volume variance.

Correct Answer: Mix variance

A mix variance is caused by a change in the sales blend from what was expected, selling a different proportion of products. Total units and individual prices held steady, so the revenue shortfall came purely from the shifted mix. Option b is incorrect because a volume variance requires total units to differ from plan, yet the total unit count was hit exactly. The blend shifting toward cheaper items, not any change in quantity, drove the gap. Option c is incorrect because a price variance needs a per-unit price to move away from standard, but here every individual price held firm. What changed was the proportion of products sold, the hallmark of a mix variance. Option d is incorrect because a real revenue shortfall genuinely occurred, so a variance clearly exists. With total volume and prices both unchanged and only the product blend moving, this difference is specifically a mix variance.

Correct Answer: A static budget

A static budget is prepared for a single, fixed level of activity and remains unchanged regardless of the actual volume achieved. Locking the plan to one assumed sales level and leaving it fixed is exactly a static budget. Option a is incorrect because a flexible budget is built for multiple activity levels and flexes to the volume actually achieved. This plan stays locked at one fixed volume, which makes it static rather than flexible. Option b is incorrect because a cash budget tracks the timing of money in and out for liquidity, not a single fixed activity level for a sales plan. A plan locked to one volume is a static budget. Option c is incorrect because zero-based budgeting describes a construction method that justifies every dollar from scratch, not a budget fixed to one activity level. The single-volume, unchanging plan here is a static budget.

Correct Answer: A flexible budget

A flexible budget is prepared for multiple levels of activity and changes, or flexes, based on the actual sales or production volume achieved. Showing the plan at several volumes and adjusting to the real one defines a flexible budget. Option a is incorrect because a static budget is locked to a single fixed activity level and never moves. The owner specifically wants a plan that adjusts to the volume actually reached, which is a flexible budget. Option c is incorrect because a capital budget plans large long-term asset purchases, not a sales plan that flexes across activity levels. The multi-volume, adjusting plan described here is a flexible budget. Option d is incorrect because an exception report flags unusual transactions for review and is not a budget that scales to activity. A plan built for several volumes that adjusts to actual is a flexible budget.

Correct Answer: It flexes the plan to actual volume

A flexible budget first rebuilds the plan at the actual volume, then compares, separating the volume effect from true cost efficiency. That strips out the distortion where lower output automatically lowers variable costs, giving an honest read. Option a is incorrect because flexing a budget does not manufacture favorable variances; it reveals the true ones. Recalculating at actual volume can expose costs that were actually unfavorable, which a static comparison had masked. Option b is incorrect because flexing holds fixed costs steady rather than ignoring them, while scaling only the variable lines to actual volume. Its fairness comes from matching the plan to real activity, not from dropping any costs. Option d is incorrect because the flexible budget's value is the fairer comparison it provides, not a rule mandating it. It helps by recalculating the plan at the actual volume so remaining variances reflect genuine efficiency.

Correct Answer: Variable costs scale down; fixed costs stay

When flexing to a lower volume, variable costs scale down because they are per-unit and move with volume, while fixed costs stay the same because by definition they do not change with output. That selective flexing matches actual activity. Option b is incorrect because it reverses the behavior: fixed costs are the ones that stay constant, and variable costs are the ones that scale with volume. Flexing lowers the variable lines while leaving fixed costs unchanged. Option c is incorrect because fixed costs do not scale with volume; only variable costs do. Treating both as moving equally would misstate the flexed plan, since the fixed portion must remain steady as output falls. Option d is incorrect because flexing the budget specifically changes the variable costs to match the new volume. Saying nothing changes ignores the whole point of flexing, where variable lines drop while fixed costs hold steady.

Correct Answer: It indicates steady growth

A smooth, repeating rise of the same small percentage each quarter is the signature of steady growth at a stable, predictable rate. Trend analysis uses such historical patterns to predict future performance, here expecting a similar rise ahead. Option a is incorrect because seasonality shows up as a repeating up-and-down cycle tied to the calendar, like high summers and low winters. A consistent rise every quarter is steady growth, not a seasonal swing. Option b is incorrect because unpredictability looks erratic and random, whereas this pattern is smooth and consistent every quarter. A steady, repeating climb signals dependable growth, the opposite of randomness. Option c is incorrect because a consistent revenue climb is a normal growth pattern, not evidence of wrongdoing. Detecting fraud is the job of exception reporting; trend analysis here simply reads the steady growth in the history.

Correct Answer: Exception reporting

Exception reporting focuses attention on the significant variances by flagging transactions that fall outside normal ranges for further review. Letting routine items pass while flagging outliers like odd-hour activity is exactly management by exception. Option a is incorrect because trend analysis studies patterns across many periods to predict the future, rather than flagging individual outlier transactions for review. Singling out unusual items as they occur is exception reporting. Option b is incorrect because static budgeting refers to building a plan at one fixed activity level, not to screening transactions for anomalies. Filtering routine items and flagging outliers is exception reporting. Option d is incorrect because incremental budgeting is a method for constructing budgets from prior figures, unrelated to flagging unusual transactions. Catching outliers like odd-hour payments for review is the role of exception reporting.

Correct Answer: It flagged a suspicious item for review

Exception reporting flags unusual or suspicious activity for further review by a person. It does not prove fraud, cancel transactions, or eliminate risk; the flagged payment is merely suspicious, and a human must still investigate and decide. Option a is incorrect because a flag marks a transaction as suspicious, not guilty. There may be an innocent explanation, like a genuine large order, so the report points investigators to look closer rather than proving fraud. Option b is incorrect because exception reporting never blocks or reverses anything on its own; it only raises a flag. The decision to act on the suspicious payment stays with people who must review it first. Option c is incorrect because exception reporting catches signs of trouble but cannot make fraud impossible. It is an early-warning flag, not a permanent shield, so claiming it eliminates all risk badly overstates its power.