A flexible budget demonstrates different levels of income and expenses, depending on the number of sales that actually take place. Usually, actual earnings of the sold units are included in the flexible budget model, and the levels of budget spending are automatically counted by the model that is based on certain formulas that are usually set as a percentage of sales.
Explanation:
A flexible budget variance, or difference, is any possible difference that appears between the results obtained using the flexible budget model, and the real results. If the actual incomes are included in the flexible budget model, it means that there will be any variance between the budget and actual expenses, rather than incomes. If the number of items or units actually sold is interposed in the flexible budget model, then there may be differences between the regular and the actual incomes per unit. The same is for the differences between the actual and planned level of expenses.
For instance, a flexible budget model is developed where the unit price should be $100. Over the past month, eight hundred units have been sold out, and the real unit price was $102. This means that there is a conducive flexible budget difference associated with the income of $1,600. Besides, the model assumes that the cost of items sold per one unit will be forty-five dollars. The actual price per unit after a month is fifty dollars. It means that there is an unfavorable flexible budget difference that is connected with the price of the sold items in the four thousand dollars amount. Together, this leads to an unfavorable difference in the amount of $2,400.
Generally, the overall flexible budget difference should not be more than the total difference that would have to be determined if a fixed-budget model was used, that is, volumes or level of income, taking into account flexible budgets, are adjusted based on actual results. If there is an unusual and huge flexible budgetary difference, this should mean that the formulas need to be regulated so that they may more carefully and correctly reflect actual results.