Standard Costing

Flexed Budgets

Flexed Budgets

The examples in Sections 2 and 3 assumed actual output = budgeted output. When these differ, a flexed budget is needed to make a fair like-for-like comparison.

Why flex? If 600 units were actually produced instead of 500 budgeted, you would naturally expect to use more materials and more labour. Comparing actual costs against the original (fixed) budget would unfairly show large adverse variances simply because output was higher.

What gets flexed

Variances affected by flexing: total material, material usage, total labour, labour efficiency. Variances not affected: material price, labour rate.

Flexing formula

Flexed SQ = (Standard quantity ÷ Budgeted production) × Actual production

Flexed SH = (Standard hours ÷ Budgeted production) × Actual production

Worked example — flexed materials

ABC Ltd for August:

Flexed SQ = 7 000 / 500 × 600 = 8 400 kg

Total variance:   (8 400 × 2.50) − (6 900 × 2.70) = 21 000 − 18 630 = £2 370 F
Price variance:   (6 900 × 2.50) − (6 900 × 2.70) = 17 250 − 18 630 = £1 380 A
                  (price variance unchanged — no SQ involved)
Usage variance:   (8 400 × 2.50) − (6 900 × 2.50) = 21 000 − 17 250 = £3 750 F
                  or: 2.50 × (8 400 − 6 900) = 2.50 × 1 500 = £3 750 F

Worked example — flexed labour

ABC Ltd for August (same data, production 500 → 600):

Flexed SH = 1 400 / 500 × 600 = 1 680 hours

Total variance:      (1 680 × 9.50) − (1 350 × 9.60) = 15 960 − 12 960 = £3 000 F
Rate variance:       (1 350 × 9.50) − (1 350 × 9.60) = 12 825 − 12 960 = £135 A
                     (rate variance unchanged — no SH involved)
Efficiency variance: (1 680 × 9.50) − (1 350 × 9.50) = 15 960 − 12 825 = £3 135 F
                     or: 9.50 × (1 680 − 1 350) = 9.50 × 330 = £3 135 F