CACI-U9-L23 · Canadian Accounting Common Core I
Flexible budgets and basic variances
Learning goals
- Distinguish static, flexible, and actual results.
- Separate activity effects from revenue/spending effects.
- Compute basic direct-material price/quantity and labour rate/efficiency variances.
- Reconcile variances to total cost differences.
- Investigate causes without assuming every unfavourable variance is poor performance.
Prerequisite check
- Why is comparing actual cost at 5,600 units with a budget for 5,000 units unfair?
- In Y = a + bX, which budget amounts change when actual activity changes?
Vocabulary
- Static budget: plan for one original activity level.
- Flexible budget: expected revenue/cost at actual activity using budgeted rates.
- Activity variance: flexible-budget result minus static-budget result.
- Revenue/spending variance: actual result minus flexible-budget result, interpreted with revenue/cost sign logic.
- Standard quantity/hours allowed: input expected for actual good output.
- Price/rate variance: effect of paying a different input price or wage rate.
- Quantity/efficiency variance: effect of using a different input quantity/hours.
- Favourable/unfavourable: mathematical effect on profit, not a moral judgment.
Core idea
Use three columns:
Static plan at planned activity → Flexible expectation at actual activity → Actual.
The first gap shows volume/activity impact. The second asks about price, rate, usage, mix, quality, and fixed spending at comparable activity. Variance analysis is a starting signal; it does not identify root cause or responsibility by itself.
Why this treatment makes sense
More output normally requires more variable input. A static comparison may call the resulting cost “unfavourable” even when unit efficiency is perfect. Flexing creates a fair benchmark. Breaking input variances helps target investigation, but purchasing, operations, design, scheduling, quality, and market conditions interact.
A repeatable method
Use FLEX–SPLIT–RECONCILE–INVESTIGATE–RESPOND:
- Flex budgeted selling price, unit variable inputs, and fixed amounts to actual good output/activity.
- Split total gaps into useful price/rate and quantity/efficiency components.
- Reconcile components to the total actual-versus-standard difference.
- Investigate material, recurring, controllable, risky, or surprising variances using operational evidence.
- Respond to root cause; update standards when process/economics genuinely change.
Worked example
A lab planned 5,000 tests at $50 revenue each, $12 variable cost per test, and $60,000 fixed cost. Actual output is 5,600 tests; actual revenue $274,400, variable cost $70,000, and fixed cost $62,000.
| Contribution report | Static 5,000 | Flexible 5,600 | Actual 5,600 |
|---|---|---|---|
| Revenue | $250,000 | $280,000 | $274,400 |
| Variable costs | (60,000) | (67,200) | (70,000) |
| Fixed costs | (60,000) | (60,000) | (62,000) |
| Profit | $130,000 | $152,800 | $142,400 |
Activity increased expected profit by $22,800 favourable. At actual volume, revenue is $5,600 unfavourable, variable spending $2,800 unfavourable, and fixed spending $2,000 unfavourable; total performance gap is $10,400 unfavourable. Actual profit is still $12,400 above static plan because volume benefit exceeds the other gaps.
Material detail for 1,000 actual good units: standard 3 kg at $4/kg; actual 3,200 kg at $4.10.
- Price variance = AQ(AP − SP) = 3,200($0.10) = $320 U.
- Quantity variance = SP(AQ − SQ) = $4(3,200 − 3,000) = $800 U.
- Total = $1,120 U, agreeing actual $13,120 − standard $12,000.
Journal, ledger, and statement connection
Actual invoices, payroll, and usage enter the ledger. Standards and flexible budgets live in the management system; some standard-cost systems also record variance accounts, but entries vary and are beyond this foundation. Reconcile reports to ledger totals and operational quantities before explaining performance.
Common mistakes
- Flexing fixed cost per unit as though fixed total were variable.
- Using planned output instead of actual good output for standard quantity allowed.
- Calling lower revenue “favourable” because the actual number is smaller.
- Calculating a price variance on one quantity and a quantity variance on another so they do not reconcile.
- Blaming purchasing for cheap material that creates waste, or production for poor-quality input.
- Investigating every tiny variance while ignoring safety, defects, and customer delays.
- Changing standards just to erase recurring unfavourable results.
Guided practice
Static budget: 4,000 units, revenue $30/unit, variable cost $18/unit, fixed cost $32,000. Actual: 4,500 units, revenue $132,750, variable cost $83,700, fixed $31,500. Build the three-column report and label activity and actual-versus-flexible variances.
Independent practice
Actual output is 2,000 units. Material standard is 2.5 kg at $6; actual usage is 5,300 kg at $5.80. Labour standard is 1.5 hours at $24; actual is 3,200 hours at $25. Compute material price/quantity variances and labour rate/efficiency variances. Reconcile each total. Give two plausible linked operational causes and two evidence sources before assigning responsibility.
Self-check and solutions
Guided: Static profit = $120,000 − $72,000 − $32,000 = $16,000. Flexible at 4,500: revenue $135,000; variable $81,000; fixed $32,000; profit $22,000. Activity variance $6,000 F. Actual profit = $132,750 − $83,700 − $31,500 = $17,550, which is $4,450 U to flexible: revenue $2,250 U, variable cost $2,700 U, fixed cost $500 F.
Independent materials: SQ = 5,000 kg. Price = 5,300($5.80 − $6) = $1,060 F. Quantity = $6(5,300 − 5,000) = $1,800 U. Net $740 U, agreeing actual $30,740 versus standard $30,000.
Labour: SH = 3,000. Rate = 3,200($25 − $24) = $3,200 U. Efficiency = $24(3,200 − 3,000) = $4,800 U. Total $8,000 U, agreeing actual $80,000 versus standard $72,000. Higher-grade material could cost more but reduce hours/ waste, or cheaper material could create the opposite. Inspect purchase invoices, specifications, issue/scrap records, time/production logs, downtime, training, and quality data.
Retrieval practice
- Explain static → flexible → actual in one sentence.
- Write four basic input-variance formulas.
- Why is standard quantity based on actual good output?
- What does favourable not necessarily mean?
Exam-style application
Standard labour is 2 hours at $30 for each of 900 actual units. Actual labour is 1,950 hours costing $56,550. Compute rate and efficiency variances and reconcile.
Target: Actual rate $29. Rate variance = 1,950($29 − $30) = $1,950 F. SH 1,800; efficiency = $30(150) = $4,500 U. Net $2,550 U, agreeing actual $56,550 versus standard $54,000. Lower rate did not offset extra hours.
Lesson summary
Flex first, then explain. Variances become useful when they reconcile, connect to operations, and prompt fair root-cause action rather than automatic blame.