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    Thursday
    Jul262012

    What is a flexible budget variance?

    A flexible budget is a budget that shows differing levels of revenue and expense, based on the amount of sales activity that actually occurs. Typically, actual revenues or actual units sold are inserted into a flexible budget model, and budgeted expense levels are automatically generated by the model, based on formulas that are set at a percentage of sales.

    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.

    If the number of actual units sold is inserted into a flexible budget model, there can then be variances between the standard revenue per unit and the actual revenue per unit, as well as between the actual and budgeted expense levels.

    For example, a flexible budget model is designed where the price per unit is expected to be $100. In the most recent month, 800 units are sold and the actual price per unit sold is $102. This means there is a favorable flexible budget variance related to revenue of $1,600 (calculated as 800 units x $2 per unit). In addition, the model contains an assumption that the cost of goods sold per unit will be $45. In the month, the actual cost per unit turns out to be $50. This means there is an unfavorable flexible budget variance related to the cost of goods sold of $4,000 (calculated as 800 units x $5 per unit). In aggregate, this works out to an unfavorable variance of $2,400.

    In general, the total flexible budget variance should be smaller than the total variance that would be generated if a fixed budget model were used, since the unit volume or revenue level in a flexible budget model is adjusted to match actual results (which is not the case in a fixed model). 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.

    Related Topics

    Flexible budget 
    What is a budget variance? 
    What is budgetary slack? 
    What is cost variance analysis? 
    What is the accounting for variances? 

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