Flexible budgets

A static budget is prepared for one planned level of activity. Kestrel Cycles budgeted to build and sell 1,000 bikes; it actually sold 1,100. Comparing actual costs with the static budget says costs are "over budget" — but of course they are: Kestrel built 10% more bikes. That comparison mixes two different questions:

1. Did we sell more or fewer units than planned? — a volume question.
2. Given what we actually sold, did we earn the right price and spend the right amount? — a price and efficiency question.

A flexible budget answers the second question by restating the budget at the actual volume, using the budgeted cost behaviour: - Variable costs flex: budgeted cost per unit × actual units. - Fixed costs don't flex: they stay at the budgeted amount, because they shouldn't change with volume within the relevant range. - Semi-variable costs flex only their variable part: fixed element + variable rate × actual units.

The sales volume variance (flexed profit − static profit) captures the effect of volume, valued at budgeted contribution per unit. The flexible-budget variances (actual − flexed, line by line) capture price and spending. Together they explain the whole difference between static budget profit and actual profit.

Sign convention used here: favourable variances are positive, adverse are negative. Revenue above the flexed budget is favourable; a cost above the flexed budget is adverse.