CIMA BA2 Syllabus C. PLANNING AND CONTROL - Fixed, Flexible and Flexed Budgets - Notes 6 / 6
Fixed, Flexed and Flexible Budgets
There are 3 types of budgets:
Fixed - this is the original budget
Flexible - this budget is prepared before production, so it is an original budget but it is prepared for different levels volume
Flexed - this budget takes the original fixed budget and updates it for the actual sales and production.
How to flex a budget?
Consider this - you plan to make 10 products.
Each product should use 2Kg each.
Therefore the budgeted number of Kg is 20Kg
Actually 14 products were made and 25Kg used.
If the budget wasn't flexed you would compare 25Kg to the budgeted 20Kg and get an ADVERSE variance of 5Kg.
But this is not taking into account the fact that 4 more products were made than budgeted
So we need to flex this budget..
Actual Quantity of 14 should take 2kg each = 28kg
Actual Kg used 25kg
Therefore, the usage variance is actually 3 kg FAVOURABLE
Illustration 1
The budget was for 100 items at a labour cost of $200
The actual amount produced was 120 items at a labour cost of $250
Flex the budget and compare actual to budgeted
$200 / 100 x 120 = $240 (Flexed Budget)
Compare to actual = $250
$10 over budget
Illustration 2 - Fuller example
| Budget | Flexed | Actual | Variance | |
|---|---|---|---|---|
| Units | 2,500 | 2,000 | 2,000 | |
| Revenue ($) | 250,000 | = 250,000 / 2,500 x 2,000 = 200,000 | 210,000 | 10,000 Favourable (210,000 - 200,000) More revenue is good! |
| Direct Material ($) | (25,000) | = 25,000 / 2,500 x 2,000 = (20,000) | (22,000) | (2,000) Adverse (22,000 - 20,000) More cost is bad! |
| Direct Labour ($) (Includes 20,000 fixed) | (45,000) | = 25,000 / 2,500 x 2,000 = (20,000 + 20,000 ) | (46,000) | (6,000) Adverse (46,000 - 40,000) More cost is bad! |
| Production overhead | (30,000) | = 30,000 / 2,500 x 2,000 = (24,000) | (28,000) | (4,000) Adverse (28,000 - 24,000) More cost is bad! |
| Profit | 150,000 | 116,000 | 114,000 | (2,000) Adverse (114,000 - 116,000) |
Note, if we are using marginal costing, we will not flex the fixed part of a cost, as we saw above, the fixed part of the labour cost was not flexed, only the variable part was flexed.
Overall Variances
The overall volume variance is the difference in total expense between the original budget and flexed budget profit.
The overall expenditure variance is the difference in total expense between the flexed budget and actual budget profit.
Illustration - overall volume and expenditure variance
| Budget | Flexed | Actual | |
|---|---|---|---|
| Output | 2,000 | 1,000 | 1,000 |
| Prime cost ($) | 10,000 | = 10,000 / 2,000 x 1,000 = 5,000 | 6,000 |
| Fixed cost ($) | 5,000 | 5,000 | 3,000 |
| Total expense ($) | 15,000 | 10,000 | 9,000 |
The volume variance will be the difference in total expense between the fixed and the flexed budget, therefore 15,000 - 10,000 = 5,000 Favourable
The expenditure variance will be the difference in total expense between the flexed budget and actual budget, therefore 10,000 - 9,000 = 1,000 Favourable