{"id":189,"date":"2021-01-26T22:21:54","date_gmt":"2021-01-26T22:21:54","guid":{"rendered":"https:\/\/courses.lumenlearning.com\/wm-managerialaccounting\/?post_type=chapter&#038;p=189"},"modified":"2022-01-15T00:00:26","modified_gmt":"2022-01-15T00:00:26","slug":"flexible-budget-variance","status":"publish","type":"chapter","link":"https:\/\/courses.lumenlearning.com\/wm-managerialaccounting\/chapter\/flexible-budget-variance\/","title":{"raw":"Flexible Budget Variance","rendered":"Flexible Budget Variance"},"content":{"raw":"<div class=\"textbox learning-objectives\">\r\n<h3>Learning Outcomes<\/h3>\r\n<ul>\r\n \t<li>Compute price and cost variances<\/li>\r\n<\/ul>\r\n<\/div>\r\nA <strong>flexible budget<\/strong> allows volume differences to be removed from the analysis by using the same actual level of activity for both budget and actual, which would leave us with a portion of the budget variance resulting solely from price and cost differences.\r\n\r\nLet\u2019s assume actual results for the year were as follows:\r\n<div align=\"left\">\r\n<table class=\"fin-table gridded\"><caption class=\"u-clearfix\">\r\n<div>GelSoft<\/div>\r\n<div>Budget Performance Report<\/div>\r\n<\/caption>\r\n<thead>\r\n<tr>\r\n<th class=\"c\" rowspan=\"2\" scope=\"col\"><\/th>\r\n<th class=\"c highlight\" rowspan=\"2\" scope=\"col\">Actual Results<\/th>\r\n<th class=\"c\" rowspan=\"2\" scope=\"col\">Variance<\/th>\r\n<th class=\"c highlight\" rowspan=\"2\" scope=\"col\">Static Budget<\/th>\r\n<\/tr>\r\n<\/thead>\r\n<tbody>\r\n<tr>\r\n<td>Units<\/td>\r\n<td class=\"r highlight\">\u00a0 \u00a0 \u00a0 \u00a0 \u00a0 180,000<\/td>\r\n<td class=\"r\">\u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 7,595<\/td>\r\n<td class=\"r highlight\">\u00a0 \u00a0 \u00a0 \u00a0 172,405<\/td>\r\n<\/tr>\r\n<tr>\r\n<td>Sales Revenue<\/td>\r\n<td class=\"r highlight\">$ 6,030,000<\/td>\r\n<td class=\"r\">\u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 168,230<\/td>\r\n<td class=\"r highlight\">$ 5,861,770<\/td>\r\n<\/tr>\r\n<tr>\r\n<td>Variable Costs<\/td>\r\n<td class=\"r highlight\">\u00a0 \u00a0 3,420,000<\/td>\r\n<td class=\"r\">\u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 199,475<\/td>\r\n<td class=\"r highlight\">\u00a0 \u00a0 3,220,525<\/td>\r\n<\/tr>\r\n<tr>\r\n<td>Contribution Margin<\/td>\r\n<td class=\"r highlight\">\u00a0 \u00a0 2,610,000<\/td>\r\n<td class=\"r\">\u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 (31,245)<\/td>\r\n<td class=\"r highlight\">\u00a0 \u00a0 2,641,245<\/td>\r\n<\/tr>\r\n<tr>\r\n<td>Fixed Costs<\/td>\r\n<td class=\"r highlight\">\u00a0 \u00a0 2,650,000<\/td>\r\n<td class=\"r\">\u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 197,306<\/td>\r\n<td class=\"r highlight\">\u00a0 \u00a0 2,452,694<\/td>\r\n<\/tr>\r\n<tr>\r\n<td>Operating Income<\/td>\r\n<td class=\"r line-double highlight\">$ \u00a0(40,000)<span class=\"u-sr-only\">Double line<\/span><\/td>\r\n<td class=\"r\">\u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 (228,551)<\/td>\r\n<td class=\"r line-double highlight\">$\u00a0 \u00a0188,551<span class=\"u-sr-only\">Double line<\/span><\/td>\r\n<\/tr>\r\n<\/tbody>\r\n<\/table>\r\n<\/div>\r\n&nbsp;\r\n\r\nManagement is unpleasantly surprised at this point. And remember that these results would probably not be available until February or even March of the following year if this analysis was only being done on an annual basis.\r\n\r\nSales volume was 7,595 more than planned, which is 4.4% more than the budgeted volume, but operating income came in at a loss.\r\n\r\nFixed costs were certainly higher than expected, but let\u2019s break this down further by creating a flexible budget that would reflect our plan if we had known the exact volume\u2014in other words, a new static budget based on 180,000 units:\r\n<div align=\"left\">\r\n<table class=\"fin-table gridded\"><caption class=\"u-clearfix\">\r\n<div>GelSoft<\/div>\r\n<div>Flexible Budget Performance Report<\/div>\r\n<\/caption>\r\n<thead>\r\n<tr>\r\n<th class=\"c\" rowspan=\"2\" scope=\"col\"><\/th>\r\n<th class=\"c\" rowspan=\"2\" scope=\"col\">Actual Amounts per Unit<\/th>\r\n<th class=\"c highlight\" rowspan=\"2\" scope=\"col\">Actual Results<\/th>\r\n<th class=\"c\" rowspan=\"2\" scope=\"col\"><\/th>\r\n<th class=\"c highlight\" rowspan=\"2\" scope=\"col\">Flexible Budget<\/th>\r\n<th class=\"c\" rowspan=\"2\" scope=\"col\">Budgeted Amounts per Unit<\/th>\r\n<\/tr>\r\n<\/thead>\r\n<tbody>\r\n<tr>\r\n<td>Units<\/td>\r\n<td><\/td>\r\n<td class=\"r highlight\">\u00a0 \u00a0 \u00a0 \u00a0 \u00a0 180,000<\/td>\r\n<td><\/td>\r\n<td class=\"r highlight\">\u00a0 \u00a0 \u00a0 \u00a0 \u00a0 180,000<\/td>\r\n<td><\/td>\r\n<\/tr>\r\n<tr>\r\n<td>Sales Revenue<\/td>\r\n<td class=\"r highlight\">$ 33.50<\/td>\r\n<td class=\"r highlight\">$\u00a06,030,000<\/td>\r\n<td class=\"highlight\"><\/td>\r\n<td class=\"r highlight\">$\u00a0 6,120,000<\/td>\r\n<td class=\"r highlight\">$ 34.00<\/td>\r\n<\/tr>\r\n<tr>\r\n<td>Variable Costs<\/td>\r\n<td class=\"r highlight\">$\u00a019.00<\/td>\r\n<td class=\"r highlight\">3,420,000<\/td>\r\n<td class=\"highlight\"><\/td>\r\n<td class=\"r highlight\">3,362,400<\/td>\r\n<td class=\"r highlight\">$ 18.68<\/td>\r\n<\/tr>\r\n<tr>\r\n<td>Contribution Margin<\/td>\r\n<td><\/td>\r\n<td class=\"r highlight\">2,610,000<\/td>\r\n<td class=\"highlight\"><\/td>\r\n<td class=\"r highlight\">2,757,600<\/td>\r\n<td><\/td>\r\n<\/tr>\r\n<tr>\r\n<td>Fixed Costs<\/td>\r\n<td><\/td>\r\n<td class=\"r highlight\">2,650,000<\/td>\r\n<td class=\"highlight\"><\/td>\r\n<td class=\"r highlight\">2,452,694<\/td>\r\n<td><\/td>\r\n<\/tr>\r\n<tr>\r\n<td>Operating Income<\/td>\r\n<td><\/td>\r\n<td class=\"r line-double highlight\">$\u00a0 (40,000)<span class=\"u-sr-only\">Double line<\/span><\/td>\r\n<td class=\"highlight\"><\/td>\r\n<td class=\"r line-double highlight\">$\u00a0 \u00a0 304,906<span class=\"u-sr-only\">Double line<\/span><\/td>\r\n<td><\/td>\r\n<\/tr>\r\n<\/tbody>\r\n<\/table>\r\n<\/div>\r\n&nbsp;\r\n\r\nIf we had prepared the static budget based on all of our original assumptions except substituting 180,000 units for our original estimate of 172,405, we would have shown operating income of $304,906. No wonder management is upset. However, by re-calculating our static budget (now labeled as a flexible budget) we can see differences that arise solely due to cost and price differences:\r\n<div align=\"left\">\r\n<table class=\"fin-table gridded\"><caption class=\"u-clearfix\">\r\n<div>GelSoft<\/div>\r\n<div>Flexible Budget Performance Report<\/div>\r\n<\/caption>\r\n<thead>\r\n<tr>\r\n<th class=\"c\" rowspan=\"2\" scope=\"col\"><\/th>\r\n<th class=\"c\" rowspan=\"2\" scope=\"col\">Actual Amounts per Unit<\/th>\r\n<th class=\"c highlight\" rowspan=\"2\" scope=\"col\">Actual Results<\/th>\r\n<th class=\"c\" rowspan=\"2\" scope=\"col\">Flexible Budget Variance<\/th>\r\n<th class=\"c\" rowspan=\"2\" scope=\"col\"><\/th>\r\n<th class=\"c highlight\" rowspan=\"2\" scope=\"col\">Flexible Budget<\/th>\r\n<th class=\"c\" rowspan=\"2\" scope=\"col\">Budgeted Amounts per Unit<\/th>\r\n<\/tr>\r\n<\/thead>\r\n<tbody>\r\n<tr>\r\n<td>Units<\/td>\r\n<td><\/td>\r\n<td class=\"r highlight\">\u00a0 \u00a0 \u00a0 \u00a0 \u00a0 180,000<\/td>\r\n<td><\/td>\r\n<td><\/td>\r\n<td class=\"r highlight\">\u00a0 \u00a0 \u00a0 \u00a0 \u00a0 180,000<\/td>\r\n<td><\/td>\r\n<\/tr>\r\n<tr>\r\n<td>Sales Revenue<\/td>\r\n<td class=\"r highlight\">$ 33.50<\/td>\r\n<td class=\"r highlight\">$\u00a06,030,000<\/td>\r\n<td class=\"r highlight\">$ \u00a0 \u00a0(90,000)<\/td>\r\n<td class=\"r highlight\"><\/td>\r\n<td class=\"r highlight\">$\u00a0 6,120,000<\/td>\r\n<td class=\"r highlight\">$ 34.00<\/td>\r\n<\/tr>\r\n<tr>\r\n<td>Variable Costs<\/td>\r\n<td class=\"r highlight\">$\u00a019.00<\/td>\r\n<td class=\"r highlight\">3,420,000<\/td>\r\n<td class=\"r highlight\">$\u00a0 \u00a0 \u00a0 57,600<\/td>\r\n<td class=\"r highlight\"><\/td>\r\n<td class=\"r highlight\">3,362,400<\/td>\r\n<td class=\"r highlight\">$ 18.68<\/td>\r\n<\/tr>\r\n<tr>\r\n<td>Contribution Margin<\/td>\r\n<td><\/td>\r\n<td class=\"r highlight\">2,610,000<\/td>\r\n<td class=\"r highlight\">$ \u00a0 (147,600)<\/td>\r\n<td class=\"r highlight\"><\/td>\r\n<td class=\"r highlight\">2,757,600<\/td>\r\n<td><\/td>\r\n<\/tr>\r\n<tr>\r\n<td>Fixed Costs<\/td>\r\n<td><\/td>\r\n<td class=\"r highlight\">2,650,000<\/td>\r\n<td class=\"r highlight\">\u00a0 $ \u00a0 \u00a0 197,306<\/td>\r\n<td class=\"r highlight\"><\/td>\r\n<td class=\"r highlight\">2,452,694<\/td>\r\n<td><\/td>\r\n<\/tr>\r\n<tr>\r\n<td>Operating Income<\/td>\r\n<td><\/td>\r\n<td class=\"r line-double highlight\">$\u00a0\u00a0(40,000)<span class=\"u-sr-only\">Double line<\/span><\/td>\r\n<td class=\"r highlight\">$ \u00a0 (344,906)<\/td>\r\n<td class=\"r highlight\"><\/td>\r\n<td class=\"r line-double highlight\">$\u00a0\u00a0\u00a0\u00a0304,906<span class=\"u-sr-only\">Double line<\/span><\/td>\r\n<td><\/td>\r\n<\/tr>\r\n<\/tbody>\r\n<\/table>\r\n<\/div>\r\n&nbsp;\r\n\r\nEven though the company sold more units, the average price per unit came in at $33.50 instead of the planned $34.00, causing a decrease of $90,000 in total sales revenue simply due to an overall price decrease. It could be that additional sales promotions during the year increased sales volume but decreased average price. We call this an unfavorable variance and will identify it with the letter U.\r\n\r\nIn addition, variable costs increased by $57,600 overall because of some slight increases in actual variable manufacturing costs. Even though that is a positive number in our calculation, it is an unfavorable variance because it hurt the bottom line. Same with fixed costs, which appear to be our main culprit here. It\u2019s possible that during the year, since sales were robust, management chose to expand the selling, general, and administrative infrastructure (buying new equipment, doling out sales bonuses, etc.). The follow-up to this analysis would be to examine expense categories in more detail, using budget versus actual.\r\n<div align=\"left\">\r\n<table class=\"fin-table gridded\"><caption class=\"u-clearfix\">\r\n<div>GelSoft<\/div>\r\n<div>Flexible Budget Performance Report<\/div>\r\n<\/caption>\r\n<thead>\r\n<tr>\r\n<th class=\"c\" rowspan=\"2\" scope=\"col\"><\/th>\r\n<th class=\"c\" rowspan=\"2\" scope=\"col\">Actual Amounts per Unit<\/th>\r\n<th class=\"c highlight\" rowspan=\"2\" scope=\"col\">Actual Results<\/th>\r\n<th class=\"c\" rowspan=\"2\" scope=\"col\">Flexible Budget Variance<\/th>\r\n<th class=\"c\" rowspan=\"2\" scope=\"col\">F or U<\/th>\r\n<th class=\"c highlight\" rowspan=\"2\" scope=\"col\">Flexible Budget<\/th>\r\n<th class=\"c\" rowspan=\"2\" scope=\"col\">Budgeted Amounts per Unit<\/th>\r\n<\/tr>\r\n<\/thead>\r\n<tbody>\r\n<tr>\r\n<td>Units<\/td>\r\n<td><\/td>\r\n<td class=\"r highlight\">\u00a0 \u00a0 \u00a0 \u00a0 \u00a0 180,000<\/td>\r\n<td><\/td>\r\n<td><\/td>\r\n<td class=\"r highlight\">\u00a0 \u00a0 \u00a0 \u00a0 \u00a0 180,000<\/td>\r\n<td><\/td>\r\n<\/tr>\r\n<tr>\r\n<td>Sales Revenue<\/td>\r\n<td class=\"r highlight\">$ 33.50<\/td>\r\n<td class=\"r highlight\">$\u00a06,030,000<\/td>\r\n<td class=\"r highlight\">$ \u00a0 \u00a0(90,000)<\/td>\r\n<td class=\"r highlight\">U<\/td>\r\n<td class=\"r highlight\">$\u00a0 6,120,000<\/td>\r\n<td class=\"r highlight\">$ 34.00<\/td>\r\n<\/tr>\r\n<tr>\r\n<td>Variable Costs<\/td>\r\n<td class=\"r highlight\">$\u00a019.00<\/td>\r\n<td class=\"r highlight\">3,420,000<\/td>\r\n<td class=\"r highlight\">$\u00a0 \u00a0 \u00a0 57,600<\/td>\r\n<td class=\"r highlight\">U<\/td>\r\n<td class=\"r highlight\">3,362,400<\/td>\r\n<td class=\"r highlight\">$ 18.68<\/td>\r\n<\/tr>\r\n<tr>\r\n<td>Contribution Margin<\/td>\r\n<td><\/td>\r\n<td class=\"r highlight\">2,610,000<\/td>\r\n<td class=\"r highlight\">$ \u00a0 (147,600)<\/td>\r\n<td class=\"r highlight\">U<\/td>\r\n<td class=\"r highlight\">2,757,600<\/td>\r\n<td><\/td>\r\n<\/tr>\r\n<tr>\r\n<td>Fixed Costs<\/td>\r\n<td><\/td>\r\n<td class=\"r highlight\">2,650,000<\/td>\r\n<td class=\"r highlight\">\u00a0 $ \u00a0 \u00a0 197,306<\/td>\r\n<td class=\"r highlight\">U<\/td>\r\n<td class=\"r highlight\">2,452,694<\/td>\r\n<td><\/td>\r\n<\/tr>\r\n<tr>\r\n<td>Operating Income<\/td>\r\n<td><\/td>\r\n<td class=\"r line-double highlight\">$\u00a0\u00a0(40,000)<span class=\"u-sr-only\">Double line<\/span><\/td>\r\n<td class=\"r highlight\">$ \u00a0 (344,906)<\/td>\r\n<td class=\"r line-double highlight\">U<span class=\"u-sr-only\">Double line<\/span><\/td>\r\n<td class=\"r line-double highlight\">$\u00a0\u00a0\u00a0\u00a0304,906<span class=\"u-sr-only\">Double line<\/span><\/td>\r\n<td><\/td>\r\n<\/tr>\r\n<\/tbody>\r\n<\/table>\r\n<\/div>\r\n&nbsp;\r\n\r\nIn summary, the combination of increased costs and a slight decrease in the sale price per unit combined to create an overall unfavorable budget variance of $344,906, even if we had known in advance that we would sell 180,000 units and had budgeted accordingly.\r\n\r\nBefore we look at the sales volume variance, check your understanding of the flexible (cost and price) budget variance.\r\n<div class=\"textbox tryit\">\r\n<h3>Practice Question<\/h3>\r\n[ohm_question hide_question_numbers=1]220609[\/ohm_question]\r\n\r\n<\/div>","rendered":"<div class=\"textbox learning-objectives\">\n<h3>Learning Outcomes<\/h3>\n<ul>\n<li>Compute price and cost variances<\/li>\n<\/ul>\n<\/div>\n<p>A <strong>flexible budget<\/strong> allows volume differences to be removed from the analysis by using the same actual level of activity for both budget and actual, which would leave us with a portion of the budget variance resulting solely from price and cost differences.<\/p>\n<p>Let\u2019s assume actual results for the year were as follows:<\/p>\n<div style=\"text-align: left;\">\n<table class=\"fin-table gridded\">\n<caption class=\"u-clearfix\">\n<\/caption>\n<\/table>\n<\/div>\n<div>Budget Performance Report<\/div>\n<p>Actual Results<br \/>\nVariance<br \/>\nStatic Budget<\/p>\n<p>Units<br \/>\n\u00a0 \u00a0 \u00a0 \u00a0 \u00a0 180,000<br \/>\n\u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 7,595<br \/>\n\u00a0 \u00a0 \u00a0 \u00a0 172,405<\/p>\n<p>Sales Revenue<br \/>\n$ 6,030,000<br \/>\n\u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 168,230<br \/>\n$ 5,861,770<\/p>\n<p>Variable Costs<br \/>\n\u00a0 \u00a0 3,420,000<br \/>\n\u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 199,475<br \/>\n\u00a0 \u00a0 3,220,525<\/p>\n<p>Contribution Margin<br \/>\n\u00a0 \u00a0 2,610,000<br \/>\n\u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 (31,245)<br \/>\n\u00a0 \u00a0 2,641,245<\/p>\n<p>Fixed Costs<br \/>\n\u00a0 \u00a0 2,650,000<br \/>\n\u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 197,306<br \/>\n\u00a0 \u00a0 2,452,694<\/p>\n<p>Operating Income<br \/>\n$ \u00a0(40,000)<span class=\"u-sr-only\">Double line<\/span><br \/>\n\u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 (228,551)<br \/>\n$\u00a0 \u00a0188,551<span class=\"u-sr-only\">Double line<\/span><\/p>\n<p>&nbsp;<\/p>\n<p>Management is unpleasantly surprised at this point. And remember that these results would probably not be available until February or even March of the following year if this analysis was only being done on an annual basis.<\/p>\n<p>Sales volume was 7,595 more than planned, which is 4.4% more than the budgeted volume, but operating income came in at a loss.<\/p>\n<p>Fixed costs were certainly higher than expected, but let\u2019s break this down further by creating a flexible budget that would reflect our plan if we had known the exact volume\u2014in other words, a new static budget based on 180,000 units:<\/p>\n<div style=\"text-align: left;\">\n<table class=\"fin-table gridded\">\n<caption class=\"u-clearfix\">\n<\/caption>\n<\/table>\n<\/div>\n<div>Flexible Budget Performance Report<\/div>\n<p>Actual Amounts per Unit<br \/>\nActual Results<\/p>\n<p>Flexible Budget<br \/>\nBudgeted Amounts per Unit<\/p>\n<p>Units<\/p>\n<p>\u00a0 \u00a0 \u00a0 \u00a0 \u00a0 180,000<\/p>\n<p>\u00a0 \u00a0 \u00a0 \u00a0 \u00a0 180,000<\/p>\n<p>Sales Revenue<br \/>\n$ 33.50<br \/>\n$\u00a06,030,000<\/p>\n<p>$\u00a0 6,120,000<br \/>\n$ 34.00<\/p>\n<p>Variable Costs<br \/>\n$\u00a019.00<br \/>\n3,420,000<\/p>\n<p>3,362,400<br \/>\n$ 18.68<\/p>\n<p>Contribution Margin<\/p>\n<p>2,610,000<\/p>\n<p>2,757,600<\/p>\n<p>Fixed Costs<\/p>\n<p>2,650,000<\/p>\n<p>2,452,694<\/p>\n<p>Operating Income<\/p>\n<p>$\u00a0 (40,000)<span class=\"u-sr-only\">Double line<\/span><\/p>\n<p>$\u00a0 \u00a0 304,906<span class=\"u-sr-only\">Double line<\/span><\/p>\n<p>&nbsp;<\/p>\n<p>If we had prepared the static budget based on all of our original assumptions except substituting 180,000 units for our original estimate of 172,405, we would have shown operating income of $304,906. No wonder management is upset. However, by re-calculating our static budget (now labeled as a flexible budget) we can see differences that arise solely due to cost and price differences:<\/p>\n<div style=\"text-align: left;\">\n<table class=\"fin-table gridded\">\n<caption class=\"u-clearfix\">\n<\/caption>\n<\/table>\n<\/div>\n<div>Flexible Budget Performance Report<\/div>\n<p>Actual Amounts per Unit<br \/>\nActual Results<br \/>\nFlexible Budget Variance<\/p>\n<p>Flexible Budget<br \/>\nBudgeted Amounts per Unit<\/p>\n<p>Units<\/p>\n<p>\u00a0 \u00a0 \u00a0 \u00a0 \u00a0 180,000<\/p>\n<p>\u00a0 \u00a0 \u00a0 \u00a0 \u00a0 180,000<\/p>\n<p>Sales Revenue<br \/>\n$ 33.50<br \/>\n$\u00a06,030,000<br \/>\n$ \u00a0 \u00a0(90,000)<\/p>\n<p>$\u00a0 6,120,000<br \/>\n$ 34.00<\/p>\n<p>Variable Costs<br \/>\n$\u00a019.00<br \/>\n3,420,000<br \/>\n$\u00a0 \u00a0 \u00a0 57,600<\/p>\n<p>3,362,400<br \/>\n$ 18.68<\/p>\n<p>Contribution Margin<\/p>\n<p>2,610,000<br \/>\n$ \u00a0 (147,600)<\/p>\n<p>2,757,600<\/p>\n<p>Fixed Costs<\/p>\n<p>2,650,000<br \/>\n\u00a0 $ \u00a0 \u00a0 197,306<\/p>\n<p>2,452,694<\/p>\n<p>Operating Income<\/p>\n<p>$\u00a0\u00a0(40,000)<span class=\"u-sr-only\">Double line<\/span><br \/>\n$ \u00a0 (344,906)<\/p>\n<p>$\u00a0\u00a0\u00a0\u00a0304,906<span class=\"u-sr-only\">Double line<\/span><\/p>\n<p>&nbsp;<\/p>\n<p>Even though the company sold more units, the average price per unit came in at $33.50 instead of the planned $34.00, causing a decrease of $90,000 in total sales revenue simply due to an overall price decrease. It could be that additional sales promotions during the year increased sales volume but decreased average price. We call this an unfavorable variance and will identify it with the letter U.<\/p>\n<p>In addition, variable costs increased by $57,600 overall because of some slight increases in actual variable manufacturing costs. Even though that is a positive number in our calculation, it is an unfavorable variance because it hurt the bottom line. Same with fixed costs, which appear to be our main culprit here. It\u2019s possible that during the year, since sales were robust, management chose to expand the selling, general, and administrative infrastructure (buying new equipment, doling out sales bonuses, etc.). The follow-up to this analysis would be to examine expense categories in more detail, using budget versus actual.<\/p>\n<div style=\"text-align: left;\">\n<table class=\"fin-table gridded\">\n<caption class=\"u-clearfix\">\n<\/caption>\n<\/table>\n<\/div>\n<div>Flexible Budget Performance Report<\/div>\n<p>Actual Amounts per Unit<br \/>\nActual Results<br \/>\nFlexible Budget Variance<br \/>\nF or U<br \/>\nFlexible Budget<br \/>\nBudgeted Amounts per Unit<\/p>\n<p>Units<\/p>\n<p>\u00a0 \u00a0 \u00a0 \u00a0 \u00a0 180,000<\/p>\n<p>\u00a0 \u00a0 \u00a0 \u00a0 \u00a0 180,000<\/p>\n<p>Sales Revenue<br \/>\n$ 33.50<br \/>\n$\u00a06,030,000<br \/>\n$ \u00a0 \u00a0(90,000)<br \/>\nU<br \/>\n$\u00a0 6,120,000<br \/>\n$ 34.00<\/p>\n<p>Variable Costs<br \/>\n$\u00a019.00<br \/>\n3,420,000<br \/>\n$\u00a0 \u00a0 \u00a0 57,600<br \/>\nU<br \/>\n3,362,400<br \/>\n$ 18.68<\/p>\n<p>Contribution Margin<\/p>\n<p>2,610,000<br \/>\n$ \u00a0 (147,600)<br \/>\nU<br \/>\n2,757,600<\/p>\n<p>Fixed Costs<\/p>\n<p>2,650,000<br \/>\n\u00a0 $ \u00a0 \u00a0 197,306<br \/>\nU<br \/>\n2,452,694<\/p>\n<p>Operating Income<\/p>\n<p>$\u00a0\u00a0(40,000)<span class=\"u-sr-only\">Double line<\/span><br \/>\n$ \u00a0 (344,906)<br \/>\nU<span class=\"u-sr-only\">Double line<\/span><br \/>\n$\u00a0\u00a0\u00a0\u00a0304,906<span class=\"u-sr-only\">Double line<\/span><\/p>\n<p>&nbsp;<\/p>\n<p>In summary, the combination of increased costs and a slight decrease in the sale price per unit combined to create an overall unfavorable budget variance of $344,906, even if we had known in advance that we would sell 180,000 units and had budgeted accordingly.<\/p>\n<p>Before we look at the sales volume variance, check your understanding of the flexible (cost and price) budget variance.<\/p>\n<div class=\"textbox tryit\">\n<h3>Practice Question<\/h3>\n<p><iframe loading=\"lazy\" id=\"ohm220609\" class=\"resizable\" src=\"https:\/\/ohm.lumenlearning.com\/multiembedq.php?id=220609&theme=oea&iframe_resize_id=ohm220609\" width=\"100%\" height=\"150\"><\/iframe><\/p>\n<\/div>\n\n\t\t\t <section class=\"citations-section\" role=\"contentinfo\">\n\t\t\t <h3>Candela Citations<\/h3>\n\t\t\t\t\t <div>\n\t\t\t\t\t\t <div id=\"citation-list-189\">\n\t\t\t\t\t\t\t <div class=\"licensing\"><div class=\"license-attribution-dropdown-subheading\">CC licensed content, Original<\/div><ul class=\"citation-list\"><li>Flexible Budget Variance. <strong>Authored by<\/strong>: Joseph Cooke. <strong>Provided by<\/strong>: Lumen Learning. <strong>License<\/strong>: <em><a target=\"_blank\" rel=\"license\" href=\"https:\/\/creativecommons.org\/licenses\/by\/4.0\/\">CC BY: Attribution<\/a><\/em><\/li><\/ul><\/div>\n\t\t\t\t\t\t <\/div>\n\t\t\t\t\t <\/div>\n\t\t\t <\/section>","protected":false},"author":364389,"menu_order":23,"template":"","meta":{"_candela_citation":"[{\"type\":\"original\",\"description\":\"Flexible Budget 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