ACCT20001 Chap.12 Flexible Budgets and Variance Analysis
Flexible Budgets and Variance Analysis
A static budget is prepared for one planned level of output, and the period then happens at a different level. Comparing actual results directly against that static budget mixes two separate stories: the firm sold a different quantity than it planned, and it managed prices and consumption differently than it planned.
The remedy the subject's roadmap sets for this week is to turn the static budget into a flexible budget, measure performance against it, work out where the gaps came from and close them. Flexing uses nothing but the cost behaviour established early in the semester: every variable item is recalculated at the budgeted rate times the actual number of units, and every fixed item is carried across unchanged.
Budgeted prices and budgeted rates are held throughout, because the flexible budget answers the question of what the numbers should have been at this output, so it must not absorb any actual price. Placing it between the static budget and the actual result splits the total gap in two: a sales volume variance caused by quantity alone, and a flexible budget variance caused by prices and consumption.
Each input can then be split again into a price variance and a quantity variance, and the two must reconcile to the total they claim to explain.
What this chapter covers
- 01
Why a static budget cannot judge performance at a different volume
- 02
Flexing: budgeted rates, actual volume, budgeted fixed cost
- 03
The one figure that becomes actual, and why everything else stays budgeted
- 04
The sales volume variance, and what it does not say
- 05
The flexible budget variance, and why it belongs to a different manager
- 06
Walking the bridge from static budget to actual result
- 07
Why the order of the two steps is fixed
- 08
Splitting an input into a price variance and a quantity variance
- 09
Favourable and unfavourable, and the direction discipline they share with overhead
- 10
Reading offsetting variances as one story rather than two verdicts
Compute a sales volume variance and say what it does not explain
- 1Contribution margin is the budgeted price less the budgeted variable cost: $50 less $30, which is $20 a case.
- 1Static budget profit is 10,000 cases at $20, less fixed cost of $150,000, which is $50,000.
- 2Flexible budget profit re-costs the plan at the actual volume: 11,200 cases at the budgeted $20, less the unchanged $150,000, which is $74,000.
- 1The sales volume variance is the difference between them: $24,000 favourable, being 1,200 extra cases at the budgeted contribution margin.
Key terms
- Flexible budget
- The plan recalculated at the actual level of output, using budgeted rates for every variable item and unchanged budgeted fixed cost.
- Sales volume variance
- The difference between the static budget and the flexible budget, caused entirely by output differing from plan and valued at budgeted contribution.
- Flexible budget variance
- The difference between the flexible budget and the actual result, caused by prices, consumption and spending at the volume actually run.
- Static budget variance
- The total difference between the actual result and the original plan, containing both the volume half and the price and consumption half.
- Price variance
- The part of an input variance caused by paying a different rate, computed as the rate difference multiplied by the actual quantity.
- Quantity variance
- The part of an input variance caused by using a different amount, computed as the quantity difference multiplied by the standard rate.
- Standard quantity allowed
- The input quantity the actual output should have required at standard, and the benchmark against which actual usage is measured.
- Favourable variance
- A difference that raises profit against the standard, meaning cost below the allowance or revenue above the plan.
- Unfavourable variance
- A difference that lowers profit against the standard, meaning cost above the allowance or revenue below the plan.
Flexible Budgets and Variance Analysis FAQ
Why not compare actual results with the original plan and be done with it?
Because that single comparison merges two effects that belong to different people and suggest different actions. A firm can sell far more than it planned and still report a small total gap because prices and consumption went the other way, and an executive reading only the total will conclude that the period went broadly as expected. Splitting the gap at the flexible budget separates the volume story from the operating story.
Which figures become actual in a flexible budget?
Only the volume. Every rate, price and fixed amount stays at its budgeted level, which is what makes the flexible budget a standard rather than a restatement of what happened. Letting an actual price in would fold part of the price effect into the volume step and leave the two halves of the bridge overlapping, so the reconciliation would still add up while explaining nothing.
A favourable price variance sits beside an unfavourable quantity variance of similar size. What should the report say?
That the two are probably one event rather than two. Buying a cheaper input and then consuming more of it is the classic signature of a substitution with a yield penalty, and reporting the halves separately invites purchasing to claim a success and production to defend a failure. The useful report names the causal link, attributes each half, and recommends a yield test before the next substitution.
Exam move
Build the bridge in the same layout every time you practise: static budget profit at the top, the volume step, the flexible budget profit in the middle, the price and consumption step, and the actual profit at the bottom. Prove the arithmetic by adding the two variances and checking they equal the total gap, because that reconciliation catches most errors instantly.
Drill the direction words separately from the calculations, writing the comparison as two numbers before choosing between favourable and unfavourable, since a reversed word turns correct work into a wrong answer.
Finally, practise the interpretation sentence, because this topic is where written marks are most available: an answer that links two variances into one plausible story beats one that reports four numbers accurately and says nothing about them.
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