Spending and volume variances
The flexed budget separates the two variances: actual minus flexed is spending, flexed minus absorbed is volume.
Worked example
Flexible budgeting (full costs): planned activity 1,900 hours, budgeted cost £196,900.00, of which fixed £90,500.00. Actual activity 1,330 hours, actual cost (at standard prices) £163,180.00. Variances: positive = costs too high.
Worked solution
- 1.Variable rate = (£196,900.00 − £90,500.00) / 1,900 = £56.00 per hour
- 2.Flexed budget = £90,500.00 + £56.00 × 1,330 = £164,980.00
- 3.Absorbed cost = £196,900.00 / 1,900 × 1,330 = £137,830.00
- 4.Spending variance = actual − flexed = £163,180.00 − £164,980.00 = -£1,800.00
- 5.Volume variance = flexed − absorbed = £164,980.00 − £137,830.00 = £27,150.00
Typical mistake: Comparing actual cost with absorbed cost instead of the flexed budget, which mixes the volume variance into the spending variance.
Your turn
Three problems of exactly this type, each time with new numbers. Amounts with or without thousands separators.
Task
Flexible budgeting (full costs): planned activity 1,700 hours, budgeted cost £78,400.00, of which fixed £49,500.00. Actual activity 1,530 hours, actual cost (at standard prices) £73,810.00. 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.
Formulas for this topic
- 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
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 is the typical mistake in "Spending and volume variances"?
Comparing actual cost with absorbed cost instead of the flexed budget, which mixes the volume variance into the spending variance.
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.