2. Your company spends lots of time budgeting every year. The company has budgeted out its expected sales for the coming year, month by month. Lets say for March the budget was to sell 15,000 bumblepuppies. In March you actually sold and produced 12,000 bumblepuppies. Obviously you had an unfavorable sales variance of 3,000 units. On the cost side the production staff prepared a report showing favorable cost variances in all categories, comparing original budgeted costs to actual costs. What can you conclude on the production side?

a) To make reasonable judgments on their actual production performance you would first have to re-do the budget at the actual production level.

b) If their costs were less than budgeted, they did in fact perform favorably.

c) Their costs may be less than budgeted, but if ALL costs were less than the original budget, it is likely that the budget was overcosted and inflated.

d) None of the above. Budgets are cost objects. They are not valuable for performance valuations.