Accounting Share · Worked practice
Was the variance caused by volume—or spending?
Compare a static budget with a flexible budget using a short, fully worked cost exercise.
Try each question before opening its solution. Keep your calculations in your own notes; this page does not save your progress.
Your scenario
A workshop budgets to produce 1,000 units. Budgeted variable production cost is $8 per unit, and budgeted fixed cost is $3,000. Actual production is 1,200 units. Actual variable cost is $10,200 and actual fixed cost is $3,100.
Assume the $8 variable cost rate applies to the actual activity level and fixed costs should remain $3,000 within this relevant range. Use cost variances only; there is no sales information in this exercise.
1. Prepare the original static budget
Show the static budget
Variable cost = 1,000 × $8 = $8,000. Fixed cost = $3,000. Total static budget cost = $11,000.
A static budget stays at the original planned activity level.
2. Compare actual cost with the static budget
Show the static-budget comparison
Actual total cost = $10,200 + $3,100 = $13,300.
Actual cost − Static budget cost = $13,300 − $11,000 = $2,300 unfavorable.
This comparison mixes the effect of producing more units with the effect of spending differently. It does not isolate spending performance.
3. Flex the budget to 1,200 units
Use budgeted cost behavior and actual activity. Do not use the actual variable cost per unit to build this budget.
Show the flexible budget
Budgeted variable cost at actual activity = 1,200 × $8 = $9,600. Fixed cost remains $3,000. Flexible budget total = $12,600.
The flexible budget answers: what cost would we expect at the actual output, under the budget assumptions?
4. Calculate the spending difference
Show spending variances
Variable cost spending variance = $10,200 − $9,600 = $600 unfavorable.
Fixed cost spending variance = $3,100 − $3,000 = $100 unfavorable.
Total spending variance = $13,300 − $12,600 = $700 unfavorable.
5. Reconcile the $2,300 total difference
Show the reconciliation
Activity-related cost increase = Flexible budget $12,600 − Static budget $11,000 = $1,600. This reflects the extra 200 units at the budgeted $8 variable rate.
Spending difference = $700 unfavorable.
$1,600 + $700 = $2,300, the difference between actual cost and the static budget. The activity effect should be interpreted in context rather than automatically treated as poor performance.
Challenge: Actual variable cost was $9,300 instead
Show the alternative answer
The flexible budget variable cost remains $9,600. The variance is $9,300 − $9,600 = −$300, or $300 favorable. With actual fixed cost still $3,100, total actual cost would be $12,400, which is $200 favorable against the $12,600 flexible budget.
What the numbers do not tell you
A favorable cost variance alone does not prove good performance: lower spending might affect quality or future output. An unfavorable variance needs investigation; it does not identify a cause by itself. This exercise does not split the variable-cost variance into price and efficiency components because quantities and input prices were not supplied.
Review budgeting questions · Continue with variance analysis