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Chapter 9

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Chapter 9

    Garrison 13e Practice Exam Chapter 10

    Print these pages. Answer each of the following questions, explaining your answers or showing your work, as appropriate, and then compare your solutions to those provided at the end of the practice exam.

1. What are the major weaknesses of static budgets?

2. What are the characteristics of a planning budget?

3. What are the characteristics of a flexible budget?

    4. Ricky’s Fiesta Diner is a family-owned restaurant that serves pizza and Italian dishes.

    Data concerning the restaurant’s monthly revenues and costs appear below (q refers to the

    number of meals served):

     Formula

    Revenue $12q

    Cost of ingredients $3.50q

    Wages $7,500

    Utilities $600 + $0.20q

    Rent $2,500

    Part (a) Prepare the diner’s planning budget for January assuming that 1,500 meals are served.

    Part (b) Assume that 1,600 meals were served in January. Prepare a flexible budget for this level of activity.

    Part (c) Actual results for January appear below. Prepare a flexible budget performance report for the diner for January.

    Revenue $18,800

    Cost of ingredients 5,200

    Wages 7,200

    Utilities 928

    Rent 2,500

GNB 13e Practice Exam Solutions Chapter 10

    1. Solution (Learning Objective 1):

    The major weaknesses of static budgets include the following:

    ; Static budgets are geared only to a single level of activity.

    ; Static budgets cannot be used to assess whether variable costs are under control.

    ; Static budgets force the manager to compare actual costs at one level of activity to

    budgeted costs at a different level of activity.

    2. Solution (Learning Objective 1):

    The characteristics of a planning budget include the following:

    ; A planning budget is prepared before the period begins but is valid for only the

    planned level of activity.

    ; A static planning budget is suitable for planning but is inappropriate for evaluating

    how well costs are controlled.

    3. Solution (Learning Objective 1):

    The characteristics of a planning budget include the following:

    ; A flexible budget takes into account how changes in activity affect costs.

    ; It is an estimate of what revenues and costs should have been, given the actual

    level of activity for the period.

    ; When used in performance evaluation, actual costs are compared to what the costs

    should have been for the actual level of activity during the period rather than to the

    static planning budget.

    4. Part (a) Solution (Learning Objective 1):

    Ricky’s Fiesta Diner

    Planning Budget

    For the Month Ended January 31

Budgeted meals served (q) 1,500

Revenue ($12q) $18,000

    Expenses:

     Cost of ingredients ($3.50q) 5,250

     Wages ($7,500) 7,500

     Utilities ($600 + $0.20q) 900

     Rent ($2,500) 2,500

    Total expense 16,150

    Net operating income $ 1,850

    Part (b) Solution (Learning Objective 1):

    Ricky’s Fiesta Diner

    Flexible Budget

    For the Month Ended January 31

Budgeted meals served (q) 1,600

Revenue ($12q) $19,200

    Expenses:

     Cost of ingredients ($3.50q) 5,600

     Wages ($7,500) 7,500

     Utilities ($600 + $0.20q) 920

     Rent ($2,500) 2,500

    Total expense 16,520

    Net operating income $ 2,680

Part (c) Solution (Learning Objectives 2, 3, and 4):

    Ricky’s Fiesta Diner

    Flexible Budget Performance Report

    For the Month Ended January 31

     Revenue

     and

    (1) Activity (2) Spending (3)

    Planning Variances Flexible Variances Actual

    Budget (2) (1) Budget (3) (2) Results Budgeted meals 1,500 1,600 1,600 served (q)

    Revenue ($12q) $18,000 $1,200 F $19,200 $400 U $18,800 Expenses:

     Cost of ingredients 5,250 350 U 5,600 400 F 5,200

     ($3.50q)

     Wages ($7,500) 7,500 0 7,500 300 F 7,200

     Utilities ($600 + 900 20 U 920 8 U 928

     $0.20q)

     Rent ($2,500) 2,500 0 2,500 0 2,500 Total expense 16,150 370 U 16,520 692 F 15,828 Net operating income $ 1,850 $ 830 F $ 2,680 $292 F $2,972

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