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Memo and Essay Explaining the Flexible Budget Variances

Variances can be described as the difference between budgeted performance as planned and expected and the actual performance for the budgeted period. The organization had forecasted a sale of $1,400,000 but actual sales were $1,325,000. The cost of goods sold, which is the main component of the expense part of the company, was projected to be $740,000 on a sale of $1,325,000 when converted in a flexible budget. However, the actual cost of goods sold is $790,000, which is $50,000 more than the projected, which means the organization has an unfavorable variance of the cost of offered products and services. Unfavorable variance means that the company may have to purchase raw material at a price more than expected. Another reason may be that the production process was not as efficient as expected, which is why the firm used a higher amount of raw material than expected. Thus, the company must ensure that from the next period there should be proper planning regarding the price and quantity of raw material required.

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Variation in Management Expenses

Another main component of the cost is management expenses. Management expenses are also exceeded by $22,000. In other words, the organization has an unfavorable variance of management expenses. The reason behind the variation of this expense may be a lack of proper planning and control of the day-to-day management and administration of the company. At the present time, the organization should tighten its management and exercise more control on daily administration.

Variation in Shop Assistant Expenses

The next main expense that the company has to incur is related to the Shop Assistant. However, in this case, the company has a favorable variance of $38,000. The company planned for $268,000 expenses, but the actual expenses were only $230,000. It is essential to note that the firm uses its human resources efficiently in order to generate a vast amount of productivity. Subsequently, this organization is already working efficiently, and there is no need for any corrective action. In order to achieve organizational success, it is crucial to follow the same tactic in the future.

Variation in Other Expenses

Another expense, which the company has to incur, is related to rent and utilities. Both expenses have a nominal share in total expenses in this case. Utilities have a favorable variance while rent has an unfavorable variance. In fact, both the variances are of the nominal amount (Edspira, 2014). Accordingly, the company is working according to the plan in spending on rent and utilities. But rent is higher than planned, which means that the firm is required to pay rent more than planned, but the company has little option to control this variance.


In case the company charges 5% of marketing expenses, all the profit of the store will be washed out and the store will go in loss. Taking into consideration that the store has a little margin of profit, it is unable to control its cost of goods sold and management expenses. Hence, if 5% of marketing expenses are charged, it would be difficult for the store to be profitable.

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Essay Portion

Variances are differences between the budgeted and actual performances. At the beginning of the period, the management team usually plans the activities for the coming period and sets the desired course of action and the results that it is likely to achieve. Currently, the process of planning activities and desired results is known as a budget (Edspira, 2014). But despite all the efforts and precautions taken at the time of budgeting, there are high chances that the actual results are differing from the budgeted. This difference between actual and desired results is known as variances.

Flexible Budget

The budget planned by the management may be static or flexible. A static budget can be characterized as a kind of fixed budget determined at the beginning of the period. Therefore, there is no opportunity to change this budget according to changing conditions. On the other hand, a flexible budget can be described as the budget that adjusts itself according to changes in the volume of activities. Consequently, it is more useful than a static budget because it makes comparison possible on common ground and makes it is possible to do variance analysis.

Use of Variance Analysis

Variance analysis is a part of the control function of management, in which management compares actual results with the budgeted ones. The differences between the actual and budgeted results are compared and then the reasons for variations are sort out and management ensures that next time these differences would not occur. Variance analysis is helpful in determining the loopholes of budget and the reasons for which actual and desired performances did not match. So, that management can ensure that next time when it set budget all the reasons which cause variances during last time will not occur future.


Even though variance analysis provides comprehensive information in terms of the variation between the actual and desired results, precaution should be taken while analyzing variances. Otherwise, it can be associated with negative consequences for the management. Standards are based on assumptions and past results, which may not be true in the future. Sometimes, the budget is based on many unrealistic assumptions which may not hold true in reality. Subsequently, if the comparison is made between real results and unrealistic assumptions, variations could not be proved of any use for the management. Rather than it can be proved misleading for the management. So, variance analysis should be used with utmost care.


Edspira. (2014). Introduction to budgeting [Video]. Youtube. Web.

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