BUSN7031 · Management Accounting and Cost Analysis
Budgets & Flexible Budgets
Budgets & Flexible Budgets is the Week 7 planning-and-control core of BUSN7031 Management Accounting and Cost Analysis at the Australian National University. You build the plan — the master budget, whose operating half runs sales → production → materials/labour/overhead → the budgeted income statement, and whose financial half covers the capital-expenditure, cash and budgeted-balance-sheet schedules — then you grade actual results against it fairly. The pivotal idea is the flexible budget: recompute budgeted revenues and costs at the actual output achieved, so the static-budget variance splits cleanly into a sales-volume variance (a pure output effect) and a flexible-budget variance (a pure price/cost-per-unit effect), which then breaks further into direct-cost price and efficiency variances. Because the BUSN7031 final is closed-book with no formulae sheet, every schedule and variance identity has to be rebuilt from memory.
What this chapter covers
- 011. What a budget is — the four jobs it does: plan, coordinate, allocate resources, evaluate & motivate
- 022. The budgeting cycle — plan → frame → investigate variances → correct → re-plan with feedback
- 033. The master budget — operating budget vs financial budget, built as one interlocking sequence
- 044. The cash budget — receipts and disbursements on cash timing, not accrual (≠ budgeted income statement)
- 055. Responsibility accounting — cost, revenue, profit and investment centres; controllability; budgetary slack
- 066. Production & direct-materials purchases budgets — the two nested input–output identities
- 077. Static vs flexible budgets — flex to actual output first; static-budget variance = sales-volume + flexible-budget
- 088. Standards & the three-column model — direct-cost price and efficiency variances for materials and labour
Worked example: split the static-budget variance (sales-volume + flexible-budget)
- +1Static budget (at the planned 3,000 units). Contribution margin = (120 − 70) × 3,000 = $150,000; operating income = 150,000 − 90,000 fixed = $60,000.
- +1Flexible budget flexes to actual output (3,200 units) at budgeted rates. Revenue = 120 × 3,200 = $384,000; variable costs = 70 × 3,200 = $224,000; contribution margin = $160,000.
- +1Flexible-budget operating income. Fixed cost stays at the budgeted lump sum, so 160,000 − 90,000 = $70,000. (Only revenue and variable cost moved with units — never the fixed cost.)
- +1Sales-volume variance = flexible − static. 70,000 − 60,000 = $10,000 F, driven purely by selling 200 units above plan.
- +1Actual operating income, then flexible-budget variance = actual − flexible. Actual = 377,600 − 232,000 − 92,000 = $53,600; flexible-budget variance = 53,600 − 70,000 = $16,400 U (prices/costs per unit were worse than budget).
- +1Tie out. Static-budget variance = actual − static = 53,600 − 60,000 = $6,400 U = $10,000 F + $16,400 U ✓. The two components explain the whole gap.
Key terms
- Master budget
- The comprehensive expression of management's operating and financial plans for a period, summarised in budgeted financial statements. Its operating half ends in the budgeted income statement; its financial half (capital expenditure, cash budget, budgeted balance sheet) shows how the plan is funded.
- Static (master) budget
- A budget fixed at the output level management planned. Comparing actuals to it mixes a volume effect with a price/cost effect, which is why the flexible budget is needed.
- Flexible budget
- The budget recomputed at the actual output achieved, using the master budget's per-unit revenue and variable-cost patterns and its total fixed cost. Revenue and variable costs flex with units; fixed cost does not.
- Sales-volume variance
- Flexible budget − static budget. Driven solely by the difference between actual and planned output units; it says nothing about cost control.
- Flexible-budget variance
- Actual result − flexible budget. Driven solely by per-unit price/cost differences at the actual output level; for direct costs it splits further into price and efficiency variances.
- Price (rate) variance
- (Actual price − standard price) × actual quantity of input. Weighted by the ACTUAL quantity used — the multiplier students most often swap.
- Efficiency (usage) variance
- (Actual quantity used − standard quantity allowed for actual output) × standard price. Weighted by the STANDARD price; 'allowed' means the standard input for the units actually produced.
- Budgetary slack
- Deliberate padding of a budget — understating revenue or overstating cost — so the target is easy to beat. A behavioural risk when budgets drive rewards.
Budgets & Flexible Budgets FAQ
What is the difference between a static and a flexible budget?
A static (master) budget is locked at the output level management planned; a flexible budget recomputes budgeted revenues and variable costs at the actual output achieved, keeping fixed cost at the budgeted lump sum. The flexible budget matters because it lets you separate 'we produced a different number of units' from 'our prices and costs per unit were off' — two very different performance stories.
How does the static-budget variance break down?
Static-budget variance = sales-volume variance + flexible-budget variance. The sales-volume variance (flexible − static) captures the pure output-quantity effect; the flexible-budget variance (actual − flexible) captures the pure price/cost-per-unit effect. For direct costs the flexible-budget variance splits again into price and efficiency variances.
What is the classic price-vs-efficiency variance trap?
Swapping the multipliers. The price (rate) variance is weighted by the ACTUAL quantity of input; the efficiency (usage) variance is weighted by the STANDARD price. Also remember that 'standard quantity allowed' is flexed to the units actually produced, not the static-budget units — and always tag each variance F (favourable) or U (unfavourable).
Is the cash budget the same as the budgeted income statement?
No. The cash budget schedules expected cash receipts and disbursements on cash timing — when money actually moves — and flags months of shortage or excess. The budgeted income statement uses accrual recognition. A profitable budgeted month can still be a cash-shortage month if customers pay late or a large bill lands, so the two are prepared separately.
What are the four responsibility-centre types?
Cost centres (accountable for costs only), revenue centres (revenues only), profit centres (revenues and costs), and investment centres (revenues, costs and invested capital). The fairness principle is controllability: a manager should be held to items they can actually influence, which is also what keeps a manager's performance distinct from the subunit's performance.
Can AI help me with budgets and flexible budgets?
Yes — ask Sia to walk through any budgets and flexible budgets problem or concept step by step, the way Australian National University tests it. Sia is an AI tutor that explains how to build the master-budget sequence, flex the budget to actual output, lay out the three-column price/efficiency model and label each variance F or U, so you can reproduce the reasoning yourself in the closed-book exam.
Studying with AI? Sia — free AI accounting tutor works through BUSN7031 step by step.
Exam move
Practise the mechanics in a fixed order, because BUSN7031 is closed-book with no formulae sheet. First drill the master-budget sequence — sales pulls production, production pulls materials/labour/overhead — and the two input–output identities (units produced = sales + closing − opening FG; purchases = used + closing − opening materials), watching that the closing-materials line looks at NEXT period's needs. Then make flexing automatic: flex the budget to actual output before you judge any cost, and keep fixed cost at the budgeted lump sum. For variances, write the three-column skeleton (Actual qty × Actual price | Actual qty × Std price | Std qty allowed × Std price) down the margin first so partial work still scores, remembering price uses actual quantity and efficiency uses standard price, and tag every number F or U. Close each answer with a tie-out (sales-volume + flexible-budget = static-budget variance) — it is a free method mark and it catches your own slips. If a step won't stick, ask Sia to explain that exact move on a fresh set of numbers until you can reproduce it unaided.
