ACCTG 221 Chap.8 Flexible Budgets and Variance Analysis
Flexible Budgets and Variance Analysis
A flexible budget restates standard revenue and cost for actual output, allowing fair comparison with actual results. Static-to-flexible differences describe volume, while actual-to-flexible differences describe price, rate, usage or efficiency.
Direct-input variances are easiest to understand as a three-column bridge: actual quantity at actual price, actual quantity at standard price, and standard quantity allowed at standard price. Adjacent gaps reconcile to the total variance.
What this chapter covers
- 01
Static versus flexible budgets
- 02
Standard quantity allowed for actual output
- 03
Price and rate variances
- 04
Usage and efficiency variances
- 05
Variable and fixed overhead variances
- 06
Variance reconciliation and cause investigation
Worked example · free
Southern Packs: material variance bridge
- +2Actual price = $27,030 ÷ 3,180 kg = $8.50 per kg; standard quantity = 1,200 × 2.5 = 3,000 kg.
- +2Price variance = 3,180 × ($8.50 minus $8.00) = $1,590 unfavourable.
- +2Efficiency variance = $8 × (3,180 minus 3,000) = $1,440 unfavourable.
- +1Total variance = $27,030 minus $24,000 = $3,030 unfavourable, matching the two parts.
Key terms
- Flexible budget
- Standard revenue and cost restated for actual activity.
- Price variance
- The effect of paying a different input price.
- Efficiency variance
- The effect of using a different input quantity.
- Standard quantity
- Input allowed for the actual output achieved.
- Unfavourable variance
- A difference reducing profit relative to the benchmark.
Flexible Budgets and Variance Analysis FAQ
Why not compare actual cost only with the static budget?
That comparison mixes the cost effect of producing a different volume with the effect of paying or using inputs differently. A flexible budget first restates the benchmark for actual output.
Why does the price variance use actual quantity?
The bridge changes one factor at a time. Holding actual quantity constant isolates the effect of actual price differing from standard price without importing the separate usage difference.
Is a favourable variance always good?
No. Cheaper material can create waste or quality problems, and extra skilled labour can prevent defects. Report the arithmetic direction, investigate causes and examine connected operational measures before judging performance.
Exam move
Draw the three-column bridge before using a memorised formula. Label actual quantity at actual price, actual quantity at standard price and standard quantity at standard price. Compute standard quantity from actual output, not planned output. For a cost, an actual amount above standard is unfavourable; for revenue the direction reverses.
Reconcile price plus efficiency to total input variance and static variance to volume plus flexible-budget variance. If the proof fails, inspect signs and denominators before writing a narrative. Pair every variance with a plausible operational cause and a related measure, such as defect rate, delivery performance or downtime. Avoid assigning blame from one number because purchasing and production decisions interact.
Practise building the bridge from amounts rather than recalling isolated abbreviations. Write actual quantity at actual price, actual quantity at standard price and standard quantity at standard price in adjacent columns. The first gap changes price while holding actual quantity; the second changes quantity while holding standard price.
Repeat the structure for labour rate and efficiency and for variable overhead using its stated allocation base. Compute the standard quantity allowed from actual output and the standard input relationship, never from budgeted output. For fixed overhead, separate spending from production-volume effects and explain why a fixed pool can have an allocation variance even though it does not vary with short-run output.
Use signs consistently by first deciding whether the item is a cost or revenue. Reconcile component variances to the total before attaching favourable or unfavourable labels. Then investigate linked causes: cheaper material may increase usage, overtime may alter both labour rate and efficiency, and downtime may affect overhead absorption.
Assigning responsibility from one variance is unsafe when purchasing and production choices interact. In revision, pair every arithmetic result with one evidence request and one balancing operational measure. This makes the analysis useful for control instead of treating favourable as praise and unfavourable as blame. Build a brief investigation note only after the reconciliation is complete.
State the size and direction, the operational hypothesis, the related variance or non-financial measure, and the evidence needed. This format discourages stories based on one number and makes clear that variance analysis identifies questions for management rather than proving a cause by itself.
Compare variance size with the relevant cost or revenue base; materiality and recurrence help prioritise investigation better than the absolute sign alone.
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