Strategic Management Accounting · Module 3: Planning, budgeting and forecasting
The Variance That Hid a Good Month
Chapters
- Case
- Flex
- Split
- Recap
In short
A flexible budget restates the budget at the actual volume so variances can be separated. The sales volume variance is the flexible budget profit minus the static budget profit, and the flexible budget variance splits into price and cost variances. Here a $17,000 adverse total hides a $20,000 favorable volume variance.
- Flex the budget to actual volume at budget prices and costs.
- Static vs flexible: sales volume variance.
- Flexible vs actual: price and cost variances.
Transcript
Case
Profit came in $17,000 under budget. The manager is in trouble. Or are they?
Flex
The budget assumed 10,000 units. They actually sold 11,000. A static budget can't tell you how much of the gap came from selling more. So flex it: 11,000 units at budget prices and costs. Revenue $550,000, variable costs $330,000, fixed costs $100,000. Profit should have been $120,000. Selling more was worth $20,000: a favorable sales volume variance. The real problem is $120,000 down to $83,000: $37,000 unfavorable.
Split
Pause. Where did the $37,000 go? Both. Price was $2 under budget on every unit: $22,000. Variable cost ran $1 over per unit: $11,000. And fixed costs ran $4,000 over. $20,000 favorable, $37,000 unfavorable: there's the $17,000.
Recap
Flex first. Then split volume from price and cost. Next: the scorecard that looks past profit. Subscribe so you catch it.
Sources
- Flexible budgeting and variance analysis
Free lessons in other subjects
- Which Side Goes Up? · FoA
- What Makes Numbers Useful · FAR
- The $2,500 Overhead Gap · MA
- One WACC, Three Wrong Turns · BF
- The Ethics Toolkit · EG
- The Profit That Isn't There Yet · FR
- Outside In: PESTEL and Five Forces · GSL
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