Question

What is the flexible budget? Include in your post an explanation of how sales revenue, variable costs and fixed costs are calculated for the flexible budget. Also, explain the master budget variance, volume variance and flexible budget variance.

Answer 1

A flexible budget is a variation of static budget for actual level of activity during the period. Actual activity can be sales, production, machine hours, labor hours, etc. Flexible budget is recommended for performance management since it compares budget and actual results at actual level of activity and gives meaningful results.

Calculation of components for flexible budget:

i) Sales revenue = Static budget sales revenue / static budget volume * Actual volume

ii) Variable cost = Static budget variable cost / static budget volume * Actual volume

iii) Fixed cost = Flexible budget and static budget fixed cost are same.

Variances:

Master budget variance = Difference between Master budget and actual results

Sales volume variance = Difference between Master budget and flexible budget

Flexible budget variance = Difference between Flexible budget and actual results

So Master budget variance = Sales volume variance + Flexible budget variance