Three columns instead of two: the static budget, the budget at actual volume, and actual. The middle one decides who explains what.
A flexible budget variance compares actual results with the budget restated at the actual volume: budgeted price and unit costs times the units actually sold, with fixed costs unchanged. In an illustrative quarter that sold 46,000 units against 50,000 budgeted, operating income was 186,000 below the static budget, but the flexible budget variance is 6,000 favourable: the whole shortfall, 192,000, is volume.
Worked in full in Financial Planning and Analysis by Julian R. Sterling, with every figure reproduced in a free workbook.See the book on Amazon →
A fictional single-product business unit. One product keeps the arithmetic visible; with several, the same steps run line by line and a mix effect appears between them.
| Input | Budget | Actual |
|---|---|---|
| Units sold | 50,000 | 46,000 |
| Price per unit | 120.00 | 123.00 |
| Variable cost per unit | 72.00 | 74.00 |
| Variable cost, total | 3,600,000 | 3,404,000 |
| Fixed costs | 1,500,000 | 1,540,000 |
Build three columns, not two. The static budget is the one the board approved. The flexible budget keeps every budgeted rate (price, variable cost per unit, fixed costs) and replaces only the volume with the actual 46,000. Actual is actual.
| Line | Static budget | Flexible budget | Actual |
|---|---|---|---|
| Units | 50,000 | 46,000 | 46,000 |
| Revenue | 6,000,000 | 5,520,000 | 5,658,000 |
| Variable costs | 3,600,000 | 3,312,000 | 3,404,000 |
| Contribution | 2,400,000 | 2,208,000 | 2,254,000 |
| Fixed costs | 1,500,000 | 1,500,000 | 1,540,000 |
| Operating income | 900,000 | 708,000 | 714,000 |
The gap between static and actual, 186,000 adverse, now splits in two at the middle column.
Sales volume variance = flexible − static = (46,000 − 50,000) × budgeted contribution of 48.00 = 192,000 adverse
Flexible budget variance = actual − flexible = 714,000 − 708,000 = 6,000 favourable, made of:
Selling price: (123.00 − 120.00) × 46,000 = 138,000 favourable
Variable cost spending: (74.00 − 72.00) × 46,000 = 92,000 adverse
Fixed cost spending: 1,540,000 − 1,500,000 = 40,000 adverse
Excel, flexible revenue: =ActualUnits*BudgetPrice; volume variance: =(ActualUnits-BudgetUnits)*(BudgetPrice-BudgetVC)
| Step | Amount | Direction |
|---|---|---|
| Static budget operating income | 900,000 | |
| Sales volume variance | 192,000 | Adverse |
| Selling price variance | 138,000 | Favourable |
| Variable cost spending variance | 92,000 | Adverse |
| Fixed cost spending variance | 40,000 | Adverse |
| Actual operating income | 714,000 |
Read against the static budget, the quarter looks like a cost success and a revenue failure: variable costs came in 196,000 below budget and revenue 342,000 below. Both statements are true and both mislead. The cost line fell only because 4,000 fewer units were made, an 8.0 per cent shortfall; per unit it rose by 2.00, or 2.8 per cent, and against the flexible budget it is 92,000 adverse. The price line rose 2.5 per cent and is worth 138,000. The management at the unit did slightly better than plan on what they controlled at the volume they got. What they did not get was the volume, and that is a different conversation with a different owner.
This changes the commentary that goes with the numbers. "Costs 196,000 under budget" invites a thank-you to the operations team; "unit cost 2.00 over standard, 92,000 adverse at actual volume" invites a question about materials or labour rates, which is the question that needs asking, and the next step splits it into price and usage, as in how to calculate material price and usage variances. The same discipline applies to revenue: the 342,000 revenue shortfall is 480,000 of volume partly offset by 138,000 of price, and those are two different decisions, one by the market and one by the sales team.
The flexible budget variance and the volume variance always sum to the static variance: 6,000 favourable plus 192,000 adverse is 186,000 adverse. If your bridge does not close, a fixed cost has been flexed or a variable one has not.
Hold the actual price of 123.00, actual unit cost of 74.00 and actual fixed costs, and change only the units sold.
| Units sold | Static variance | Volume variance | Flexible budget variance | Variable cost against static | Variable cost against flexible |
|---|---|---|---|---|---|
| 40,000 | −480,000 | −480,000 | 0 | 640,000 | −80,000 |
| 44,000 | −284,000 | −288,000 | 4,000 | 344,000 | −88,000 |
| 46,000 | −186,000 | −192,000 | 6,000 | 196,000 | −92,000 |
| 50,000 | 10,000 | 0 | 10,000 | −100,000 | −100,000 |
| 54,000 | 206,000 | 192,000 | 14,000 | −396,000 | −108,000 |
The fifth column swings from 640,000 favourable to 396,000 adverse on the same cost performance; the sixth moves only with volume times the 2.00 overrun. That is the whole case for the flexible budget: it holds the yardstick still while volume moves.
Flexing the wrong lines. A flexible budget flexes costs that genuinely vary with volume and leaves fixed costs at their budget. Flex the 1,500,000 of fixed costs in proportion to units and the flexible budget shows fixed costs of 1,380,000; the unit then reports a 160,000 adverse fixed cost variance it did not incur, and the volume variance shrinks by 120,000, the budgeted fixed cost that has been flexed away, so a sales problem is reported as a cost problem. The opposite error, treating a semi-variable cost such as overtime or freight as fixed, hides an overrun inside the volume variance. The classification has to be agreed when the budget is set, not argued when the variance arrives. And when there is more than one product, the volume variance itself splits into a quantity and a mix effect, which is worked on contribution in price-volume-mix analysis on contribution.
The book's own quarter, read against five different comparators, and its price, volume and mix bridge are in the free workbooks for this case.
The static budget variance compares actual with the original budget at budgeted volume; the flexible budget variance compares actual with the budget restated at actual volume. In the worked quarter the static variance is 186,000 adverse, of which 192,000 adverse is volume and 6,000 favourable is the flexible budget variance, the part the unit's managers controlled.
Multiply the difference between actual and budgeted units by the budgeted contribution per unit. Selling 46,000 units against 50,000 at a budgeted contribution of 48.00 gives 4,000 times 48.00, a 192,000 adverse sales volume variance. It equals the flexible budget operating income of 708,000 less the static 900,000.
Because they fell with volume, not efficiency. Variable costs of 3,404,000 are 196,000 below a static budget of 3,600,000, but at the 46,000 units actually made the budget allowed 3,312,000. Unit cost rose from 72.00 to 74.00, so the flexible budget variance on the line is 92,000 adverse.
This article is one calculation from Financial Planning and Analysis. The book takes the same case from first principles to the decision, chapter by chapter, and every figure it prints is a live formula in the free companion workbooks.
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