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Flexible budgets

Edexcel IAL Accounting · WAC12 Corporate and Management Accounting

Comparing actual costs with a budget set for a different level of output is misleading. A flexible budget restates the budget for the actual activity level, so that like is compared with like.

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Fixed and flexible budgets

A fixed budget is set for one planned level of activity. If actual output is higher, costs will naturally be higher and look 'adverse'.

A flexible budget recalculates the budget for the actual level of activity:

variable costs change in proportion to output
fixed costs stay the same
semi-variable costs: fixed part + variable rate x units
semi-fixed (stepped) costs: the step that applies at that output

Splitting a semi-variable cost (high-low method)

Production overhead is £26,000 at 8,000 units and £34,000 at 12,000 units.

Variable rate = (34,000 - 26,000) / (12,000 - 8,000) = £2.00 per unit

Fixed part = 34,000 - 12,000 x 2.00 = £10,000

Flexed budget and variances

Original budget 10,000 units; actual output 11,500 units. Supervision is £12,000 up to 11,000 units and £18,000 above.

£	Fixed budget (10,000)	Flexed budget (11,500)	Actual	Variance
Direct materials	60,000	69,000	70,500	1,500 A
Direct labour	40,000	46,000	44,900	1,100 F
Production overhead (semi-variable)	30,000	33,000	34,200	1,200 A
Supervision (semi-fixed)	12,000	18,000	18,000	0
Administration (fixed)	25,000	25,000	26,100	1,100 A
Total	167,000	191,000	193,700	2,700 A

Flexible budget statement (F favourable, A adverse)

Why flexible budgets help

Fair comparison: only differences caused by efficiency or prices remain.
Managers are judged on things they control, which motivates.
Better control information for management by exception.

Limits: needs costs split accurately into fixed and variable, takes time, and revenue variances caused by lower volume are hidden if only costs are flexed. Examiners want answers about flexible budgets specifically, applied to the company, not budgets in general.

Worked example

Compare actual total cost of £193,700 with the fixed and flexed budgets and comment.

Against the fixed budget of £167,000, costs look £26,700 adverse
But output was 1,500 units higher; the flexed budget is £191,000
The true variance is £2,700 adverse, much smaller

Answer: Most of the apparent overspend was caused by higher output; the controllable overspend is £2,700

Key idea: Flex the budget to actual output: variable costs per unit x actual units, fixed costs unchanged, semi-variable split by high-low, semi-fixed at the right step; then compare with actual.

Check yourself

Direct materials are budgeted at £45,000 for 9,000 units. Actual output is 10,200 units. What is the flexed budget for materials?
Show answer
£51000. £5 per unit x 10,200 = £51,000.
A semi-variable cost is £14,000 at 4,000 units and £20,000 at 7,000 units. What is the variable cost per unit?
Show answer
£2.00. 6,000 / 3,000 = £2 per unit.
For the same cost (£14,000 at 4,000 units, £20,000 at 7,000 units), what is the fixed element?
Show answer
£6000. 14,000 - 4,000 x 2 = £6,000.
Using that cost (£6,000 fixed plus £2 per unit), what is the flexed budget at 5,500 units?
Show answer
£17000. 6,000 + 11,000 = £17,000.
Supervision costs £9,000 for up to 6,000 units and £15,000 for 6,001 to 9,000 units. Labour is £3 per unit and rent is £8,000. Calculate the flexed total of these costs at 7,500 units.
Show answer
£45500. 15,000 + 22,500 + 8,000 = £45,500.
Why is a flexible budget more useful for control than a fixed budget when output differs from the plan?
- It compares actual costs with what costs should have been at the actual output
- It ignores fixed costs
- It always shows favourable variances
- It is prepared before the year starts
Show answer
It compares actual costs with what costs should have been at the actual output. Volume differences are removed, so remaining variances reflect efficiency and prices.
Which cost is semi-fixed (stepped)?
- Raw materials per unit
- Factory rent on a fixed lease
- Supervisors' salaries, which rise when an extra supervisor is needed at higher output
- A telephone bill with a line rental and call charges
Show answer
Supervisors' salaries, which rise when an extra supervisor is needed at higher output. A stepped cost is fixed over a range, then jumps.

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Last updated 8 November 2026. Spotted a mistake? Tell us.