Budgets and Variance Analysis

Types of Budget

• Rolling budgets

• Fixed budget

• Flexed budgets

Cost behaviours

• variable - increases in proportion with the level of activity and is constant per unit

• fixed - remains constant in total at all levels of activity

• stepped - remains constant to a certain level of activity and then the cost steps to a new higher constant

• semi-variable - fixed and variable element to the cost, separable using the high low method

Adverse Variance

• Actual revenue less than the flexed revenue or the actual costs are greater than the flexed costs

• Decreases the budgeted profit so subtracted from the budgeted profit

Favourable Variance

• Actual revenue is greater than the flexed revenue or actual costs are less than flexed costs

• Increase the budgeted profit so added to the budgeted profit

Types of Variance

• Sales

• Material

• Labour

• Fixed Overhead