CAT / FIA FMA Syllabus D. Budgeting - Flexed Budgets - Notes ^{3 / 3}

is a budget prepared to show the revenues, costs and profits that should have been expected from the actual level of production and sales.

If the flexed budget is compared with the actual results for a period, variances will be much more meaningful.

The high-low method may have to be used in order to determine the fixed and variable elements of semi-variable costs.

However, please note that fixed costs remain unchanged regardless of the level of activity and should not be flexed.

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

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