Definition
A flexible budget restates the original budget for the level of activity actually achieved. Revenue and variable costs are recalculated at actual volume using budgeted rates, while fixed costs stay at the planned amount. Comparing actual results with it separates the effect of selling more or less than planned from the effect of prices and spending.
How it works
A static budget comparison mixes two different stories. If you sold 10% more than planned, costs will naturally be higher than budget; that is not overspending. The flexible budget asks what costs should have been at the volume you actually achieved.
The total variance from the static budget then splits in two. The sales volume variance is flexible budget profit minus static budget profit: the effect of volume alone. The flexible budget variance is actual profit minus flexible budget profit: the effect of selling prices, cost rates and spending, which can be broken down line by line.
Ledgeriano builds flexible budgets on revenue or units sold and reports sales volume and spending variances alongside budget vs actual by account, cost center and project. The management accounting guide and the budget template show the layout.
Formula
Flexible budget cost = Fixed costs + Variable cost per unit × Actual units
Sales volume variance = Flexible budget profit - Static budget profit
Flexible budget variance = Actual profit - Flexible budget profit
Example: 10,000 units planned, 11,000 sold
Budget: price 20, variable cost 12 per unit, fixed costs 50,000.
| Static budget (10,000) | Flexible budget (11,000) | Actual (11,000) | |
|---|---|---|---|
| Revenue | 200,000 | 220,000 | 216,000 |
| Variable costs | 120,000 | 132,000 | 140,000 |
| Fixed costs | 50,000 | 50,000 | 52,000 |
| Profit | 30,000 | 38,000 | 24,000 |
| Variance | 8,000 F (volume) | 14,000 U (flexible budget) |