Lecture 2 GNB14eCh09Exam

Data concerning the pizzeria’s monthly revenues and costs appear below q refers to the number of pizzas served: Formula Cost of ingredients $3.50q Utilities $600 + $0.20q Part a Prepare

Garrison 14e Practice Exam – Chapter 9

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

1 Pie Guys Pizzeria is owned and operated by three brothers Data concerning the pizzeria’s monthly revenues and costs appear below (q refers to the number of pizzas served):

Formula

Cost of ingredients $3.50q

Utilities $600 + $0.20q

Part (a)

Prepare the pizzeria’s planning budget for February assuming that 1,500 pizzas are served

Part (b)

Assume that 1,600 pizzas were served in February Prepare a flexible budget for this level of

activity

Part (c)

Actual results for February appear below Prepare a flexible budget performance report for the pizzeria for February

Cost of ingredients 5,200

2 What are the characteristics of a planning budget?

3 What are the major weaknesses of a static planning budget?

4 What are the characteristics of a flexible budget?

GNB 14e Practice Exam Solutions – Chapter 9

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

Pie Guys Pizzeria Planning Budget For the Month Ended February 28 Budgeted pizzas served (q) 1,500

Expenses:

Cost of ingredients ($3.50q) 5,250

Utilities ($600 + $0.20q) 900

Part (b) Solution (Learning Objective 1):

Pie Guys Pizzeria Flexible Budget For the Month Ended February 28 Budgeted pizzas served (q) 1,60

0

Expenses:

Cost of ingredients ($3.50q) 5,600

Utilities ($600 + $0.20q) 920

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

Pie Guys Pizzeria Flexible Budget Performance Report For the Month Ended February 28

(1) Planning Budget

Activity Variances (2) – (1)

(2) Flexible Budget

Revenue and Spending Variances (3) – (2)

(3) Actual Results Budgeted pizzas

Expenses:

Cost of ingredients

($3.50q)

Utilities

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

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 major weaknesses of a static planning budget 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

4 Solution (Learning Objective 1):

The characteristics of a flexible 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