The Flexible Budget Variance Is The Difference Between The

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budget variances

The $31,200 direct labor efficiency variance is favorable because laborers worked fewer hours than budgeted to produce 52,000 batches of crayons. Typically, static budgets considered a fixed cost and set targets to achieve those results within the available resources. However, budgets are planned before actual production begins. Management may decide to increase or decrease production levels depending on sales targets and a variety of other factors. At that point, the static budget acts as a starting point for the flexible budgeting approach. The revised budget can be compared with actual results to analyze realistic variances.


For example, if Cheerful Colors sells more than the relevant range, it will have to buy or rent additional equipment, which will increase total fixed costs. Cheerful Colors may also have to pay workers for overtime pay, so the variable cost of direct labor may be more than $3.00 per batch. Profit measurements that can be analyzed include manufacturing margin, contribution margin, gross profit, throughput and net income. Measurements based on the ABC cost hierarchy could also be used such the contributions at the unit, batch, product and facility levels. An overall view of profit analysis appears in the graphic illustration presented in Exhibit 13-1 below. Flexible budget variances are the differences between line items on actual financial statements and those that are on flexible budgets.

Financial Performance

A flexible budget and the resulting variance can be calculated based on revenue or units sold. When actual revenues are incorporated into a flexible budget model, any resulting variance arises from the difference between budgeted and actual expenses, not revenues. When the calculation is based on units sold, however, it may reveal differences in revenue and expenses per unit. If there is a large flexible budget variance, it may mean that the formulas inserted into the budget model should be adjusted to more accurately reflect actual results. Cheerful Colors’s top management needs to know about the company’s cost variances.

budget variances

It provides managers more useful information for planning and better basis for comparing performance than, a static or fixed budget. In addition, variable costs increased by $57,600 overall because of some slight increases in actual variable manufacturing costs. Even though that is a positive number in our calculation, it is an unfavorable variance because it hurt the bottom line. Same with fixed costs, which appear to be our main culprit here. The follow-up to this analysis would be to examine expense categories in more detail, using budget versus actual. A flexible budget is a valuable tool for cost management because it allows the company to see how costs change as output changes.

What are various types of sales variances in cost accounting

In performance evaluation, a master budget is kept fixed or static to serve as a benchmark for evaluating performance. It shows revenues and costs at only the originally planned levels of activity. However, a flexible budget will be prepared at the actual activity level.

static and flexible

To set standards, companies can analyze every moment in the production process and then take steps to eliminate inefficiencies. For example, to eliminate unnecessary work, machines can be rearranged for better work flow and less materials handling. Companies can also conduct time-and-motion studies to streamline various tasks.

The four variance approach in the center of Exhibit 13-8 reveals that $109,200 of this variance was caused by sales price differences, and $292,000 was caused by sales volume differences. Also observe that there is a $229,600 unfavorable variance in variable costs. Exhibit 13-8 indicates that $57,600 of this variance was caused by unit cost differences and $172,000 was caused by sales volume differences. Remember the underlying assumptions in the master budget and conventional linear cost-volume-profit analysis, i.e., constant sales prices, constant unit variable costs, and constant sales mix.

For Example,A company has prepared a flexible budget and expects an output of 500 units. But post-production, the company produced an output of 450 units. Hence, we can conclude that there exists an unfavourable variance.

It provides flexible targets for management with achievable results. You should perform a flexible budgeting variance analysis for each activity to gain valuable information on discrepancies in planning and operations. Let’s say Green Company estimates their total production capacity to be 250,000 units. The direct material and labor costs per unit are $4.50 and $2.50 respectively. The company offers sales incentives to their sales force of 5% of sales.

Costing for the Fashion Industry

We call this an unfavorable variance and will identify it with the letter U. Differences in a company’s actual costs or earnings versus those that were projected by a static budget provide valuable information about performance. For example, a company might appear to earn more money by selling a higher number of units during a month or quarter than what was originally expected in the static budget. A flexible budget’s variance, though, might show that the amount earned per unit was lower than projected, possibly leading to the company making less net revenue off the higher number of sales. A flexible budget variance is the difference between the amount a company plans to spend or earn during a specified period of time and the amount that is actually spends or earns. Managers and investors might use flexible budget variance to measure the performance of not only the company, but also of different managers.

A flexible budget variance is any difference between the results generated by a flexible budget model and actual results. If actual revenues are inserted into a flexible budget model, this means that any variance will arise between budgeted and actual expenses, not revenues. The fixed overhead volume variance measures the difference between the budgeted fixed overhead and the amount of fixed overhead allocated to batches of crayons.

Trying to apply the standards of the static budget does not work if the expected costs or earnings differ, making evaluating the company’s profitability or performance impossible. Without an accurate way of measuring performance, management cannot know if corrections in the company or a department’s actions are necessary. A flexible budget variance is the difference between a line on the flexible budget and the corresponding information from actual business statements. Conceptually, the actual revenues are the revenues earned for the year as a result of actual sales volume. Mathmatically, actual revenue equals actual sales volume x actual price.

  • A flexible budget adjusts the master budget for your actual sales or production volume.
  • Every company needs to establish criteria for themselves to use in determining which variances to investigate and which can be safely ignored.
  • Management may decide that the fixed overhead cost variance is sufficiently small and does not warrant investigation.
  • To illustrate suppose Evergreen Company prepares a budget based on detailed expectation for the forthcoming month.
  • The budgets are usually made for one financial year during that period, and there may be several changes that affect the actual operations.

This budget can be used to predict future costs or compare actual costs to budgeted costs. This type of budget shows the business what the static budget should have been by using actual output figures from the budget period. For example, if the static budget covered the production of 1,000 units, but only 600 units were made, the flexible budget takes only 600 units into account. The flexible budget shows the budgeted items from the static budget — such as cost and expected sales — and the actual results.

A positive difference would be an variance and indicate that the cost was more than the standard. Care must be taken though, to ensure that a favorable price difference is not because cheaper quality raw materials were used. The company computes the equation for flexible-budget revenues by multiplying the budgeted sales price per unit by the number of units sold. Managers use comparisons between actual results, master budgets, and flexible budgets to evaluate organizational performance.

Both favorable and unfavorable variances should be investigated, if substantial, to determine their causes. As an example, suppose a company avoided routine maintenance on machinery in order to have a favorable cost variance in the current period. In a later period, the company could have a major breakdown that could have been avoided if the machinery had been properly maintained. The breakdown could require not only a substantial repair bill but also a halt in production that could lead to lost sales.

To illustrate suppose Evergreen Company prepares a budget based on detailed expectation for the forthcoming month. However, actual production and sales volume units turned out to be only 7, 000 units instead of the original 9,000 units. A performance report comparing the actual production costs and sales amount with the planned is given in Exhibit 2-1.

This is the variance that results from having a different sales volume than expected. It is determined by comparing the flexible budget to the static budget. Is the difference in costs of an input multiplied by the actual quantity used of the input. -measures how well the business keeps unit cost of material and labor inputs within standards.

The static budget variance is the difference between the actual amount and the amount predicted on the static budget. The static budget variance can be separated into sales activity variance and the flexible budget variance. For variable manufacturing costs, is can be further divided into price variance, efficiency variance and sales activity variance. Conceptually, actual fixed overhead costs are the total manufacturing related fixed costs incurred during the period. The difference between actual fixed overhead costs and the flexible budget fixed overhead costs is the fixed overhead spending variance.

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