Cost variance: volume or efficiency
Spending more than budgeted is not always bad: if you sold more, it was to be expected. Separate the part of the overspend due to volume from the part due to spending more on each unit.
How to analyse a cost variance with a flexible budget
Enter the units and variable cost per unit you budgeted, the units you actually sold and the actual cost. The calculator splits the variance into two parts: the part due to selling more or less (volume) and the part due to spending more or less per unit (efficiency).
Example: you budgeted 100 units at 8 (800) and sold 120 at an actual cost of 1,020. At actual volume, the flexible budget is 960. Of the extra 220, 160 is explained by selling more and only 60 by a higher cost per unit (8.50 against 8).
How it is calculated
- Flexible budget = actual units × budgeted variable cost per unit.
- Volume variance = flexible budget − original budget.
- Efficiency variance = actual cost − flexible budget. Fixed costs are compared separately.
Assumptions
- The budgeted variable cost is per unit and does not change with volume.
- A positive figure means more spending than budgeted.
Frequently asked questions
What is a flexible budget?
The budget adjusted to the volume you actually sold: actual units × budgeted cost per unit. It tells you how much you should have spent at that volume.
What is the volume variance?
The difference between the flexible budget and the original one. If you sell more, spending more on variable costs is normal: it is not a management problem.
What is the efficiency variance?
The difference between actual cost and the flexible budget: how much more (or less) you spent on each unit. It is the part worth investigating: purchase prices, waste, overtime or mistakes.
Why are fixed costs separate?
Because they do not depend on units sold. If they change, the cause is something else (a rent increase, a new hire), so they are compared separately.
What does the sign mean?
Positive means more spending than budgeted; negative, less. For efficiency, a negative figure is good news.