Variance analysis
Flexed budgets
Re-state the budget at actual activity to separate the effect of volume from how well costs were controlled.
Learning objectives
- Flex a budget to actual activity using budget rates for variable costs and budget amounts for fixed costs
- Split a total variance into a volume variance and a flexed-budget (price and efficiency) variance
- Explain why a static budget makes variable costs look favourable when volume falls
The original (static) budget was set for one level of activity. When actual activity differs, comparing actual costs with the static budget mixes two questions: did we do more or less business than planned? and for the business we did, did we earn and spend what we should have? Managers can only answer for the second one directly.
A flexed budget answers it: it re-states the budget at the actual level of activity. You'll flex the March budget of Rawdah's home delivery and assembly unit, which earns a fee per delivery and pays crews per delivery. Rawdah Home Retail Co. is a fictional retailer; all figures are illustrative.
Included with a Formula Quest membership
The rest of this lesson is for members. Members get the full lesson, including its 3 graded exercises, and every other Finance Quest lesson.