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# Flexible Budget Variance

Updated on May 31, 2024
Article byPriya Choubey
Edited byAayushi Solanki
Reviewed byDheeraj Vaidya, CFA, FRM

## What Is Flexible Budget Variance?

A Flexible Budget Variance is a gap between the adjusted budget figure and the actual output. If the value of the actual revenue is entered into the budget, then it is evident that the difference is in the actual expenses incurred by the business.

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Real-world budgets often adjust for changes, reflecting their impact on company revenue and expenses. Thus, the flexible budget variance analysis indicates the pitfalls and areas for improvement to attain the desired results.

### Key Takeaways

• A flexible budget variance is the divergence of the actual outcome from that of the budget with the potential to incorporate changes in revenue or expenses at different levels of output or activities.
• There are three kinds of this variance, i.e., basic, intermediate, and advanced.
• It is an essential tool to determine the degree of deviation of the actual result from the budgeted figure and the problem area.
• It is different from the sales volume variance, which identifies the difference in sales volume over the period.

### Flexible Budget Variance Explained

A flexible budget variance is a valuable tool for companies to keep track of the changes in the actual output when estimated revenue and expenses vary over the period. Flexible budgeting is practical in businesses as they operate in dynamic environments affected by various factors beyond demand and supply. However, the static budget has no room to change the projected figure. Hence, calculating flexible budget variance requires the static budget figure, the fixed and variable costs, and the actual outcome.

The variance can be a positive, i.e., favorable, or negative, i.e., unfavorable value. It is an accurate method to determine the extent of variation of the actual output from the estimated figure. It aids in locating the key problem area for taking corrective action. It also helps frequently revise the financial data and adjust the budget. It is a challenging method since it requires a lot of forecasting and analysis. Moreover, such an analysis requires skilled employees; thus, it increases labor costs. Also, it requires complete revenue and expense data for evaluation.

### Examples

Let us understand the concept with the help of illusionary examples:

#### Example #1

Suppose the finance manager of PQ Ltd. estimated that the change in the cost of shipping the raw material and the rent increase would have the following impact on the budget:

Thus, the total cost of production will increase by \$50.

#### Example #2

Let’s say STV Pvt. Ltd. prepared a flexible budget for the year, estimating the per unit price to be \$120 while the projected sales for November were 2,000 units. However, the product’s market price increased to \$125 in November while the sales volume was 100% realized. Therefore, the company had a rise in sales revenue of \$10,000, which is a favorable variance.

In the above illustration, if the company’s cost per product also increased by \$3, there will be an unfavorable variance of \$6,000. When both conditions are evaluated together, the company derives a positive value of \$4,000, making it a favorable variance for the business.

### Flexible Budget Variance vs Sales Volume Variance

The sales volume variance (SVV) is just a part of the flexible budget variance analysis, while the latter is a broader concept. Let us understand the differences between the two in detail below:

### Frequently Asked Questions (FAQs)

How to calculate flexible budget variance?

A company can use the following steps to calculate flexible budget variance:

1. Evaluate the fixed and variable expenses.
2. Prepare a budget using these expenses and projected sales.
3. Find out the possible change in the revenue or expense.
4. Draft the flexible budget based on the new figures.
5. Compare the budgeted figure with the actual revenue or cost to know the difference between the two.

What are the three types of flexible-budget variances?

There are three kinds of flexible budgets, and so are the variances:
• Basic flexible budget
• Intermediate flexible budget
• Advanced flexible budget

Differentiate between a static-budget variance and a flexible-budget variance.

A static budget variance is a difference in the actual revenue or cost incurred from the standard budgeted revenue or expense for a single activity or output level; thus, the value remains constant.

On the contrary, the flexible variance is derived when the actual result deviates from the budgeted figure, which has room for incorporating changes at different output levels or activities.

This article has been a guide to what is Flexible Budget Variance. Here, we explain it with its examples, and differences with sales volume variance. You may also find some useful articles here –