Flexed Budgets
Evaluate the budget based upon the actual not the budgeted volume. Thereby determining if the division met its labour, material and overheads budget
| Original | Flexed | Actual | |
| Output | 1000 | 900 | 900 |
| Sales | $100,000 | $90,000 | $92,000 |
| Raw Material | $(40,000) | $(36,000)36k m | $(36,900) 37k m |
| Labor | $(20,000) | $(18,000) 2,250hr | $(17,500) 2,150hr |
| Contribution | $40,000.4/unit | $36,000.4/unit | $37,600 |
| Fixed Overhead | $(20,000) | $(20,000) | $(20,700) |
| Operating Profit | $20,000 | $16,000 | $16,900 |
Remember to Flex only those items that vary with output
Budgeted Profit + Favourable variances - Adverse variances = Actual Profit
Contents |
Sales Variances
Sales Volume variance = Difference between Original and Flexed Budget Profit or contribution e.g. 20k-16k =4k adverse (Don't Flex the Budget for Fixed Overheads)
For all other variances the Original Budget is ignored
Sales Price Variance = Difference between Actual Revenue and Flexed Revenue 92k - 90k = 2k favourable. Higher prices were obtained
Material Variances
Total Material Variance = Difference between Actual Cost and Flexed Cost, 36.9k-36 = .9 adverse. This is made up of
- Material Usage Variance = Diff between the Actual qty * Std Price and Flex qty budgeted * Budgeted Price = 37km*1-36km*1 = $1k Adverse
or (SP-AP)*qty
- Material Price Variance = Diff between the Actual Qty * Act Price and material Cost budgeted (actual qty * Budgeted cost) 36.9k - 37k*1 = .1 favour
or (SQ-AQ)*SP
Labor Vaiances
Total Material Variance Actual labour cost - Flexed labour cost 17.5k - 18k = $0.5k favourable
Labor Efficiency Variance Diff between Actual lab hrs * std lab cost/hr and Flex lab hrs * std lab cost/hr = 2150*8 (18k/2250) = 17.2-18k =.8k For (SR-AR)*AH
Labor Price Variance Diff between Act lab hrs * actual lab cost and Act hrs * std lab cost = 17,5k - (2150*8) = 0.3 adverse or (SH-AH)*SR
Fixed Overhead Variance
Total Overhead Var is Act oh - Flexed o/h = 20.7k - 20K = 0.7k adverse
If there had been Variable Overheads
O/H efficiency rate Then Actual hrs * Standard Rate - Standard Hours * Standard Rates
O/H expenditure variance Actual hours * Actual rate - Actual hours * Standard Rate
Reconciliation of Variances
| Budgeted Profit | 20,000 | |
| Less Sales Volume Variance | (4,000) | Difference between Flexed and Actual Sales |
| Plus Sales Price Variance | 2,000 | |
| Less Material Usage Variance | (1,000) | |
| Plus Material Price Variance | 100 | |
| Plus Labor Efficiency Variance | 800 | |
| Less Labor Price Variance | (300) | |
| Less Fixed Overheads | (700) | |
| Actual Profit | 16,900 |
Actual Units sold Market* Actual Market Share(this is what the actually sold)
- - Actual Units * Expected Share(This is what they should have sold given their marketkt share
- - Expected units sold
- X Expected share(THIS IS NOT THE FLEXED #)
- X Contribution 92000*10%*4=37600 diff 90000*10%*4=36000
= Market Share Variance...................................................Market Size Variance
Things to think about
- Is it significant - what is the trigger for investigation
- Investigate Favorable and Adverse variances
- Use management by exception - spend managing the problems
- Are they normal fluctuations - are you looking over a long enough time period
- Do something about it when you find them
- Is the standard unattainable - basic, ideal and attainable see Standard Costing
