flexible budget vs static budget

GUESS WHO JEANS

STATIC BUDGET VARIANCE

FOR THE MONTH JUST ENDED

Income

Statement

line-item Budgeted amount per unit Static

Budget

(A)

10,000 units Actual

Results

(B)

16,000 units Static

Budget

Variance

(A) – (B)

Revenue

Variable costs:

Materials

Labor

Overhead

Total

Contribution margin

Fixed costs:

Manufacturing Overhead

Marketing costs

Total fixed costs

Operating income $40

15

10

5

30

$10 $400,000

150,000

100,000

50,000

300,000

100,000

100,000

50,000

150,000

($50,000)

$670,000

230,000

167,000

84,000

481,000

189,000

105,000

49,000

154,000

$35,000

$270,000

(80,000)

(67,000)

(34,000)

(181,000)

89,000

(5,000)

1,000.

(4,000)

$85,000

In the variance column, positive numbers are favorable variances (good news), and negative numbers are unfavorable (bad news).

The static budget variance shows a large favorable variance for revenue, and large unfavorable variances for variable costs. These large variances are due primarily to the fact that the static budget was built on an output level of 10,000 units, while the company actually made and sold 16,000 units. The revenue variance might also be due to an average unit sales price that differed from budget. The variable cost variances might also be due to input prices that differed from budget (e.g., the price of fabric), or input quantities that differed from the per-unit budgeted amounts (e.g., yards of fabric per pair of pants).

There are also small variances for fixed costs. These costs should not vary with the level of output (at least within the relevant range). However, many factors can cause actual fixed costs to differ