The flexed budget
Northwind's cost of revenue against a budget restated at the revenue actually earned: a favorable total hiding an unfavorable cost per sale.
Revenue missed budget by $2,500. Cost of revenue came in $680 under budget, which reads favorable, but Northwind sold less, so of course it cost less. A flexed budget asks what cost of revenue should have been at the sales actually made: $16,380. Against that, the actual $17,000 is $620 over, an unfavorable price or mix variance hiding inside a favorable total.
Where this lesson's rules come from
The sources behind this lesson's requirements, by kind. Background reading explains; it is never the authority for a rule. Anything marked as a convention is ours, not the rule-maker's.
- Background reading — not an authority
- Wikipedia, “Variance (accounting)” (opens in a new tab)Favorable and unfavorable variances — backgroundFree to read
The words this page teaches
Each links to its glossary definition, which also names the authority behind it and the components that render it.
- Flexed budgetThe budget restated at the volume actually achieved, so a variable cost is judged against what it should have been at actual sales. Separates "we sold less" from "each sale cost more"Convention
- VarianceActual less budget (or forecast) for one line, labeled favorable or unfavorable by the line's polarity: revenue above plan is favorable, a cost above plan is not. The sign is arithmetic; the label is the findingConvention
- Cost of revenueThe direct costs of producing the goods or delivering the services sold in the period — the line gross profit is measured after
- BudgetThe plan for a period, line by line, approved before the period starts and held fixed while it runs, so actual results can be measured against it. Built on the same basis as the books — an accrual budget for accrual books — or every variance is partly a basis differenceConvention