7.3.2: Flexible-Budget Variances

Flexible-Budget Variances

The first three columns of Exhibit 7-2 compare actual results with flexible-budget amounts. Column 2 shows the flexible-budget variances for each line item in the income statement:

$\begin{matrix} Flexible-budget \\ variance \end{matrix} = \begin{matrix} Actual \\ result \end{matrix} - \begin{matrix} Flexible-budget \\ amount \end{matrix}$

The operating income line in Exhibit 7-2 shows the flexible-budget variance is $$ 29,100 U ($ 14,900 - $ 44,000) .$ The $29,100 U arises because the actual selling price, actual variable cost per unit, and actual fixed costs differ from the budgeted amounts. The actual results and budgeted amounts for the selling price and variable cost per unit are as follows:

<p>A table shows actual results and budgeted amounts for Webb</p>

The table depicts actual result and budgeted amount for selling price and variable cost per jacket. The details of the table are as follows:

1. Selling price

Actual result: 125.00 dollars (1,250,000 dollars divided by 10,000 jackets)
Budgeted amount: 120.00 dollars (1,200,000 dollars divided by 10,000 jackets)

2. Variable cost per jacket

Actual result: 95.01 dollars (950,100 dollars divided by 10,000 jackets)
Budgeted amount: 88.00 dollars (880,000 dollars divided by 10,000 jackets)

The flexible-budget variance for revenues is called the selling-price variance because it arises solely from the difference between the actual selling price and the budgeted selling price:

$\begin{array}{l} \begin{matrix} Selling-price \\ variance \end{matrix} & = & \begin{matrix} (\begin{matrix} \begin{matrix} Actual \\ selling price \end{matrix} & - & \begin{matrix} Budgeted \\ selling price \end{matrix} \end{matrix}) & \times & \begin{matrix} Actual \\ units sold \end{matrix} \end{matrix} \\ = & ($125 per jacket - $120 per jacket) \times 10,000 jackets \\ = & $50,000 F \end{array}$

Webb has a favorable selling-price variance because the $125 actual selling price exceeds the $120 budgeted amount, which increases operating income. Marketing managers are generally in the best position to understand and explain the reason for a selling price difference. For example, was the difference due to better quality? Or was it due to an overall increase in market prices? Webb’s managers concluded it was due to a general increase in prices.

$\begin{array}{lrl} \begin{matrix} Flexible-budget variance \\ for total variable costs \end{matrix} & = & \begin{matrix} (\begin{matrix} \begin{matrix} Actual variable \\ cost per unit \end{matrix} & - & \begin{matrix} Budgeted variable \\ cost per unit \end{matrix} \end{matrix}) & \times & \begin{matrix} Actual \\ units sold \end{matrix} \end{matrix} \\ = & ($95.10 per jacket - $88 per jacket) \times 10,000 jackets \\ = & $70,100 U \end{array}$

It’s unfavorable because of one or both of the following:

Webb used greater quantities of inputs (such as direct manufacturing labor-hours) compared to the budgeted quantities of inputs.
Webb incurred higher prices per unit for the inputs (such as the wage rate per direct manufacturing labor-hour) compared to the budgeted prices per unit of the inputs.

Higher input quantities and/or higher input prices relative to the budgeted amounts could be the result of Webb deciding to produce a better product than planned or the result of inefficiencies related to Webb’s manufacturing and purchasing operations, or both. Think of variance analysis as providing suggestions for further investigation rather than as establishing conclusive evidence of good or bad performance.

The actual fixed costs of $285,000 are $9,000 more than the budgeted amount of $276,000. This unfavorable flexible-budget variance reflects unplanned increases in the cost of fixed indirect resources, such as the factory’s rent or supervisors’ salaries.

In the rest of this chapter, we will focus on variable direct-cost input variances. Chapter 8 emphasizes indirect (overhead) cost variances.