Course Outline
Join PRO

What is a flexible budget variance?

Author:
Harold Averkamp, CPA, MBA

Definition of Flexible Budget and Flexible Budget Variance

First, a flexible budget is a budget in which some amounts will increase or decrease when the level of activity changes. A flexible budget variance is the difference between 1) an actual amount, and 2) the amount allowed by the flexible budget.

Static Budget vs. Flexible Budget

To help in understanding the flexible budget variance, let’s assume that you are the manager of a company’s shipping department. You prepared the department’s annual budget based on the company’s assumption that 50,000 items will be shipped during the budget year. If the annual budget is not changed when more or less than 50,000 items are shipped, it is referred to as a static budget. A summary of the department’s static budget based on shipping 50,000 items is:
Fixed expenses (salaries, utilities, etc.) of $350,000 + variable expenses (cartons, helpers, etc.) of $150,000 (50,000 items X $3 each) = total static budget of $500,000.

Unlike the static budget, a flexible budget for the shipping department will increase when more than 50,000 items for the year are shipped and it will decrease when fewer than 50,000 items are shipped. Let’s assume that for the year, the department actually shipped 54,000 items. Therefore, the flexible budget for the variable expenses will “flex” for shipping the additional 4,000 items. The resulting flexible budget summary is:
Fixed expenses (salaries, utilities, etc.) of $350,000 + variable expenses (cartons, helpers, etc.) of $162,000 (54,000 items X $3 each) = total flexible budget of $512,000.

Flexible Budget Variance

Now let’s assume that the shipping department’s actual expenses for the year were:
Fixed expenses of $351,000 + variable expenses of $157,000 = total actual expenses of $508,000.

The department’s total flexible budget variance is $4,000 favorable since the actual expenses of $508,000 were less than the flexible budget of $512,000.

Note that the shipping department’s total static budget variance is $8,000 unfavorable since the actual expenses of $508,000 were more than the static budget of $500,000.

The $12,000 difference between the two variances result from the flexible budget being increased by $12,000 to recognize that an additional 4,000 items had to be shipped at a budgeted shipping cost of $3 per item.

Flexible Budgets Could Flex for Various Activities

The activities that could cause flexible budgets to flex might be the amount of sales, units of output, machine hours, miles traveled, etc.

Join PRO to Track Progress

Features

Free

PRO

Lifetime Access (One-Time Fee)
Explanations
Quizzes
Q&A
Dictionary
Bookkeeping Video Training
Financial Statements Video Training
Visual Tutorials
Quick Tests
Quick Tests with Coaching
Cheat Sheets
Flashcards
Crossword Puzzles
Word Scrambles with Coaching
Bookkeeping Study Guide
Managerial and Cost Accounting Study Guide
Certificates of Achievement
Bookkeeping Certificate of Excellence
Business Forms
Printable PDF Files
Progress Tracking
Motivational Badges and Points
Motivational Medal Rankings
Motivational Activity Streaks
Public Profile Page of Achievements

About the Author

Harold Averkamp

For the past 52 years, Harold Averkamp (CPA, MBA) has
worked as an accounting supervisor, manager, consultant, university instructor, and innovator in teaching accounting online. He is the sole author of all the materials on AccountingCoach.com.

Learn More About Harold

Read 3,033 Testimonials

PRO for Teams
  • Easily onboard new users and team admins
  • Monitor individual user progress and grades
  • Monitor team progress and compare users
  • View average grades and find problem areas
  • Monitor recent activity and user achievements
PRO for Teams
Take the Tour Join Pro Upgrade to Pro