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Flexible budget variance measures the difference between planned and actual spending or earnings. It helps control costs and assess business performance, but requires a fixed budget as a basis. Evaluating individual managers’ performance requires using relevant budget information.
A flexible budget variance is the difference between the amount a company plans to spend or earn during a specified period of time and the amount it actually spends or earns. The variance or difference can be a positive number, meaning costs exceed budget or revenue exceeds expectations, or a negative number with lower-than-expected costs or lower-than-planned revenue. Managers and investors can use a flexible budget variance to measure performance not only of the company, but also of different managers.
When a company’s or department’s actual performance differs from what was planned for a month, quarter, or even year, measuring flexible budget variance helps control costs. Attempting to apply static budget standards does not work if expected costs or profits differ, making it impossible to assess the profitability or performance of the business. Without an accurate way to measure performance, management cannot know whether company corrections or departmental actions are necessary.
For a flexible budget variance to work, a company must first have a static or fixed budget. The static budget plans a certain amount of income and a certain amount of expenses, based on management’s predictions about market conditions and company performance. When looking at the variance, managers or investors still use the same fixed costs and revenue values established in the static budget. If the cost or revenue values were variable in the static budget, then the flexible budget must also use variable figures for those cost or revenue values.
Differences in a company’s actual costs or profits versus those projected by a static budget provide valuable insight into performance. For example, a company might appear to make more money by selling a greater number of units during a month or quarter than originally expected in the static budget. However, a flexible budget variance could show that the amount earned per unit was less than projected, possibly leading to the company earning less net income from the higher number of sales.
Evaluating the performance of an individual manager using a flexible budget variance only works well if the proper information is used for the evaluation. Any budget information, whether from static or flexible budgets, should be under the scope of responsibility of the manager being evaluated. The higher the level or authority of the manager in a company, the more variances from the general budget of the company must be used to measure the performance of the company.
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