Flexible budgeting and variances
A flexible budget adjusts planned costs to the actual level of activity and separates spending and volume variances.
Formulas
- Flexed budget = fixed + variable rate × actual activity
- Absorbed cost = budgeted cost / planned activity × actual activity
- Spending variance = actual cost − flexed budget
- Volume variance = flexed budget − absorbed cost
Your turn
Three problems on this topic. Amounts with or without thousands separators, a point for pence.
Task
Flexible budgeting (full costs): planned activity 2,900 hours, budgeted cost £203,800.00, of which fixed £53,000.00. Actual activity 2,320 hours, actual cost (at standard prices) £175,540.00. Variances: positive = costs too high.
Flexed budget (allowed cost) in £
Absorbed cost in £
Spending (efficiency) variance in £
Volume variance in £
Amounts like 12,500 or 12500.50; percentages as a number (12.5). Round to the penny or 2 decimal places.
Worked example
Flexible budgeting (full costs): planned activity 3,200 hours, budgeted cost £165,300.00, of which fixed £40,500.00. Actual activity 3,840 hours, actual cost (at standard prices) £192,660.00. Variances: positive = costs too high.
Worked solution
- 1.Variable rate = (£165,300.00 − £40,500.00) / 3,200 = £39.00 per hour
- 2.Flexed budget = £40,500.00 + £39.00 × 3,840 = £190,260.00
- 3.Absorbed cost = £165,300.00 / 3,200 × 3,840 = £198,360.00
- 4.Spending variance = actual − flexed = £192,660.00 − £190,260.00 = £2,400.00
- 5.Volume variance = flexed − absorbed = £190,260.00 − £198,360.00 = -£8,100.00
Typical mistake: Comparing actual cost with absorbed cost instead of the flexed budget, which mixes the volume variance into the spending variance.
Frequently asked questions
What does the volume variance show?
The share of fixed costs not absorbed at lower activity; it is caused by the level of activity, not by overspending.