Flexible-Budget Variances and Sales-Volume Variances

Learning Objective 3 Calculate flexible-budget variances and sales-volume variances

each flexible-budget variance is the difference between an actual result and a flexible-budget amount
each sales-volume variance is the difference between a flexible-budget amount and a static-budget amount

Exhibit 7-2 shows the flexible-budget-based variance analysis for Webb, which subdivides the $93,100 unfavorable static-budget variance for operating income into two parts: a flexible-budget variance of $29,100 U and a sales-volume variance of $64,000 U. The sales-volume variance is the difference between a flexible-budget amount and the corresponding static-budget amount. The flexible-budget variance is the difference between an actual result and the corresponding flexible-budget amount.

Sales-Volume Variances

Keep in mind that the flexible-budget amounts in column 3 of Exhibit 7-2 and the static-budget amounts in column 5 are both computed using budgeted selling prices, budgeted variable cost per jacket, and budgeted fixed costs. The difference between the static-budget and the flexible-budget amounts is called the sales-volume variance because it arises solely from the difference between the 10,000 actual quantity (or volume) of jackets sold and the 12,000 quantity of jackets expected to be sold in the static budget.

$\begin{array}{l} \begin{matrix} Sales-volume \\ variance for \\ operating income \end{matrix} & = & \begin{matrix} Flexible-budget \\ amount \end{matrix} - \begin{matrix} Static-budget \\ amount \end{matrix} \\ = & $ 44, 000 - $ 108, 000 \\ = & $ 64, 000 U \end{array}$

The sales-volume variance in operating income for Webb measures the change in the budgeted contribution margin because Webb sold 10,000 jackets rather than the budgeted 12,000.

$\begin{array}{l} \begin{matrix} Sales-volume \\ variance for \\ operating income \end{matrix} & = & (\begin{matrix} Budgeted contribution \\ margin per unit \end{matrix}) \times (\begin{matrix} \begin{matrix} Actual units \\ sold \end{matrix} & - & \begin{matrix} Static-budget \\ units sold \end{matrix} \end{matrix}) \\ = & $ 32 per jacket \times (10,000 jackets - 12,000 jackets) \\ = & $ 32 per jacket \times (- 2, 000 jackets) = $ 64, 000 U \end{array}$

Exhibit 7-2, column 4, shows the components of this overall variance by identifying the sales-volume variance for each line item in the income statement. The unfavorable sales-volume variance in operating income arises because of one or more of the following reasons:

Failure of Webb’s managers to execute the sales plans
Weaker-than-anticipated overall demand for jackets
Competitors taking away market share from Webb
Unexpected changes in customer tastes and preferences away from Webb’s designs
Quality problems leading to customer dissatisfaction with Webb’s jackets

How Webb responds to the unfavorable sales-volume variance will depend on what its managers believe caused the variance. For example, if Webb’s managers believe the unfavorable sales-volume variance was caused by market-related reasons (reasons 1, 2, 3, or 4), the sales manager would be in the best position to explain what happened and suggest corrective actions that may be needed, such as sales promotions, market studies, changes to advertising plans, or changes in design. If, however, managers believe the unfavorable sales-volume variance was caused by quality problems (reason 5), the production manager would be in the best position to analyze the causes and suggest strategies for improvement, such as changes in the manufacturing process or investments in new machines.

The static-budget variances compare actual revenues and costs for 10,000 jackets against budgeted revenues and costs for 12,000 jackets. A portion of this difference, the sales-volume variance, reflects the effects of selling fewer units or inaccurate forecasting of sales. By removing this component from the static-budget variance, managers can compare their firm’s revenues earned and costs incurred for April 2020 against the flexible budget—the revenues and costs Webb would have budgeted for the 10,000 jackets actually produced and sold. Flexible-budget variances are a better measure of sales price and cost performance than static-budget variances because they compare actual revenues to budgeted revenues and actual costs to budgeted costs for the same 10,000 jackets of output.