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Actual against budget line by line, favorable or adverse, a variable cost flexed to the real volume, and each variance split into the part volume caused and the part spending or price caused.
Paper packet. Every task here also exists on screen, where it is checked automatically; answers written on paper are not assessed by Nydus. When you are back at a device, enter your answers there.
You will compare a month's actual figures with its budget line by line and say which variances are favorable and which adverse. You will also flex a variable cost's budget to the volume that actually happened, split its variance into a volume part and a spending part, and find how far the year to date is behind its plan.
You can read a profit and loss, build a cash forecast and run a monthly review that compares this month with the last. This lesson adds the comparison that makes a review sharper: this month against what you planned for it. The plan is a budget, the differences are variances, and the one new technique — flexing the budget to the volume that actually happened — is what stops a busy month being mistaken for a wasteful one.
| Term | What it means |
|---|---|
| Budget | A plan in figures for a period: the revenue, costs and profit the business intends. |
| Variance | The difference between an actual figure and its budget. |
| Favorable | A variance that makes profit higher than budgeted. |
| Adverse | A variance that makes profit lower than budgeted. |
| Flexed budget | The budget reworked for the volume that actually happened, at the planned rates. |
| Volume variance | The part of a variance caused by selling or making more or fewer units than planned. |
| Spending variance | The part of a cost variance caused by paying more or less per unit than planned. |
| Year to date | Every month of the year so far, added together. |
A budget is the plan for a period written as figures: the revenue expected, each cost, and the profit they leave. It is built from what you already know — last year's figures, the break-even and the cash forecast — with each line adjusted for what will change.
At the end of the period, each line's variance is its actual less its budget. Whether that helps depends on the kind of line. On a revenue line, more than budget is favorable; on a cost line, more than budget is adverse. The words say which way profit moved, not whether anyone did well.
Many costs grow with volume. A café that serves more covers than planned will spend more on ingredients than budgeted, and nobody has overspent. So before judging a variable cost, flex the budget: the budgeted cost per unit times the units actually made or sold. Then the variance splits in two:
$$\underbrace{\text{actual} - \text{budget}}_{\text{total}} = \underbrace{\text{flexed} - \text{budget}}_{\text{volume}} + \underbrace{\text{actual} - \text{flexed}}_{\text{spending}}$$
The volume part is what the extra or missing units explain. The spending part is what was paid per unit above or below the plan, and it is the part someone can act on. Revenue splits the same way, into the part more or fewer sales caused and the part a different price caused.
Revenue, profit and cash are three answers to three different questions, and a business can be strong on one and failing on another in the same month.
| The number | The question it answers | What it does not say |
|---|---|---|
| Revenue | how much did people buy? | nothing about what any of it cost |
| Profit | was what I sold worth selling? | nothing about whether the money has arrived |
| Cash | can I pay what is due on Friday? | nothing about whether the month was worth trading |
A month can show a profit and end with less money in the account than it started with. That is not an error in the arithmetic: it is a sale that has been made and not yet paid for.
Another way: steps
Another way: table
A café's March, in dollars.
| Line | Budget | Actual | Variance | Reading |
|---|---|---|---|---|
| Takings | 12000 | 13200 | 1200 | favorable |
| Ingredients | 3600 | 4150 | 550 | adverse |
| Wages | 4000 | 3900 | 100 | favorable |
| Rent | 1500 | 1500 | 0 | on budget |
| Profit | 2900 | 3650 | 750 | favorable |
Ingredients look 550 over. Flexed to the ten percent more covers served, the budget is 3,960, so only 190 is spending; 360 came from the extra covers.
Build the budget from known figures. Start from last year's months or, for a new business, from the break-even and the cash forecast. Adjust each line for what will change: a rent rise, a new price, a quieter August. Write down the volume the budget assumes, because every variable line depends on it.
Set it before the period, and leave it alone. A budget changed during the month to match what happened cannot show what happened differently.
At the end, take budget from actual on every line. Mark each variance favorable or adverse by its effect on profit, not by its sign.
Flex the variable lines. Multiply the budgeted cost per unit by the real volume. The flexed budget is what the plan would have allowed if the volume had been known.
Split, and look at the spending part. Volume explains itself; spending is the part to ask about. A spending variance on ingredients is waste, a price rise from a supplier, or a recipe drifting; each has a different fix.
Check the split by adding it back: the volume part plus the spending part must equal the total variance. Check the profit line the same way: the revenue variance, less the adverse cost variances, plus the favorable ones, equals actual profit less budgeted profit.
A report with twenty variances invites twenty explanations and gets none of them. Look first at the ones that are large, either in dollars or as a share of their budget; at the ones that repeat, month after month in the same direction; and at the ones on lines the owner controls.
A small variance on a large line — 2 percent on ingredients — can matter more than a large one on a small line, because it runs every month. A variance that repeats is not bad luck; it is a budget line set wrongly or a cost that has changed for good, and the budget should be corrected for the next period.
Favorable variances deserve questions too. Wages under budget because a shift went unfilled may mean customers were turned away; a marketing line under budget may be next quarter's quiet month. A favorable figure is a reason to look, not a reason to stop looking.
Write one line for each variance you act on: its size, its cause, and what will change. Next month's review starts from those lines.
Keep the budget and the cash forecast apart while you do this. The budget asks whether the month earned what was planned; the forecast asks whether the money will be there when bills fall due. A month can be on budget and short of cash, because customers paid late or stock was bought ahead, and a variance report will not show it. Read both, and let each answer its own question.
One month's variance is noisy; the year so far is steadier. Add the budgets for every month so far and the actuals for the same months, and compare the totals. A year-to-date shortfall tells you how far behind the plan the business is, whatever order the good and bad months came in.
If the year must still finish on plan, the shortfall has to be made up in the months left. Divided by those months, it is what each must beat its budget by. If that figure is larger than any month has ever beaten budget by, the honest conclusion is that the budget for the year needs revising, and the cash forecast with it.
A budget is not a promise and not a target to be met at any cost. It is the yardstick that makes a month's figures mean something: without it, a profit of 3,000 is just a number; with it, it is 750 better than planned, with the reasons written beside it.
A bakery set its first monthly budget from its break-even: 3,000 loaves at 2.40 of ingredients each, 7,200, with wages of 5,000 and takings of 16,500. In October it baked 3,400 loaves, took 18,360, and spent 8,500 on ingredients and 5,300 on wages.
Ingredients look 1,300 over budget, and the owner's first thought is waste. Flexed to 3,400 loaves, the budget allows 3,400 × 2.40 = 8,160. So 960 of the 1,300 came from the extra loaves, and only 340 is spending — about 4 percent over the plan's rate. The flour invoices show the supplier raised its price by 4 percent in September. Nothing in the kitchen changed; the budget's rate is out of date.
Wages are 300 over because of an extra early shift for the larger bake, which the owner decided on. Takings are 1,860 over, of which 400 × 5.50 = 2,200 would be expected from the extra loaves at the planned price of 5.50 — so the average price was slightly lower, because more of the extra loaves went to a café at a trade price.
The review ends with three lines: update the flour rate to 2.50 in the next budget; keep the early shift while volume holds above 3,200; and cost the café's trade price separately, since it now matters.
Larger organizations run the same process at scale: an annual budget split by month and department, a monthly report of actual against budget, and flexed budgets for production. Managers are usually asked to explain only variances above a set size, which is the same rule of looking at the large, the repeated and the controllable.
Reading every over-budget cost as overspending. A cost that grows with volume will be over budget in every busy month. Flex it before judging it.
Reading the sign instead of the effect. A positive difference on a cost line is adverse; on a revenue line it is favorable.
Changing the budget to fit the month. A budget rewritten after the event cannot show anything went differently.
Explaining every variance. Pick the large, the repeated and the controllable, and act on those.
Treating favorable as good. Wages under budget because nobody was there to serve is a favorable variance and a lost day's trade.
Find the takings variance: budget 12,000, actual 13,200.
$13200 - 12000 = 1200$
Revenue above budget, so favorable.
Find the ingredients variance: budget 3,600, actual 4,150.
$4150 - 3600 = 550$
A cost above budget, so adverse.
Find the wages variance: budget 4,000, actual 3,900.
$4000 - 3900 = 100$
A cost below budget, so favorable.
Combine them into the profit variance.
$1200 - 550 + 100 = 750$
Rent was on budget and adds nothing.
Check against the profit lines.
$3650 - 2900 = 750$
Actual profit less budgeted profit agrees.
Find the budgeted cost per cover: 3,600 for 1,200 covers.
$3600 \div 1200 = 3$
The rate the budget assumed.
Flex it to the 1,320 covers served.
$3 \times 1320 = 3960$
What the plan allows for this many covers.
Find the volume part.
$3960 - 3600 = 360$
Extra covers at the budgeted rate; nobody overspent.
Find the spending part.
$4150 - 3960 = 190$
Paid above the plan for the covers served.
Check that the parts add to the total.
$360 + 190 = 550$
The split accounts for every dollar.
Say what to ask about.
$190 \div 3960 \approx 4.8\%$
Nearly five percent over on every cover: a supplier's price or a portion size to check.
Work out the budget: 400 cuts at 25.
$400 \times 25 = 10000$
Budgeted price times budgeted volume.
Work out the actual: 380 cuts at 28.
$380 \times 28 = 10640$
A price rise, and a few customers lost.
Find the total variance.
$10640 - 10000 = 640$
Favorable overall.
Price the lost cuts at the budgeted price.
$(380 - 400) \times 25 = -500$
The volume part: twenty cuts fewer cost 500.
Put the price rise on every cut done.
$(28 - 25) \times 380 = 1140$
The price part.
Check that the parts add to the total.
$-500 + 1140 = 640$
Both causes accounted for.
Read the result.
$\text{the rise earned } 1140 \text{ and lost } 500$
On revenue the rise paid; whether it paid on profit depends on the contribution of the lost cuts.
Flex the budget to 600 units.
$2 \times 600 = 1200$
The plan's rate at the real volume.
Find the volume part.
$1200 - 1000 = 200$
The extra units.
Find the spending part.
Four lines from a café's monthly budget report, in dollars. Match each line to how it should be read.
| Favorable, because sales beat the plan | Adverse, because costs overshot the plan | Favorable, because costs came in under the plan | Adverse, because sales fell short of the plan | |
|---|---|---|---|---|
| Takings: budget $5900$, actual $6200$ | ||||
| Milk and coffee: budget $2300$, actual $2700$ | ||||
| Wages: budget $2100$, actual $1880$ | ||||
| Catering orders: budget $430$, actual $210$ |
Complete the worked solution: a salon budgeted $187$ haircuts at $20$ dollars. It raised the price to $22$ dollars and still did $236$ haircuts. Split the revenue variance into the part volume caused and the part price caused.
Work out the budgeted revenue.
$20 \times 187 =$ b
Budgeted price times budgeted volume.
Work out the actual revenue.
$22 \times 236 =$ a
Actual price times actual volume.
Price the extra haircuts at the budgeted price.
$(\text{extra haircuts}) \times 20 =$ v
The part of the variance volume caused.
Put the price rise on every haircut done.
$(\text{rise}) \times 236 =$ r
The part of the variance price caused.
Check that the parts add to the whole.
$(\text{volume part}) + (\text{price part}) = (\text{actual}) - (\text{budget})$
Two causes, and nothing left over.
A café's budget for March, in hundreds of dollars: takings $126$, ingredients $40$, wages $30$. What happened: takings $135$, ingredients $42$, wages $26$. Fill in by how much each line helped or cost profit, in hundreds of dollars.
| Amount | |
|---|---|
| Takings: helps profit by | |
| Ingredients: costs profit | |
| Wages: helps profit by | |
| Profit: better than budget by |
A café budgeted $2700$ dollars of ingredients for $900$ covers. It served $13$ percent more covers than budgeted, and ingredients came in over budget. What does the ingredients variance show so far?
A print shop budgets $3$ dollars of paper and ink an order. It planned $1157$ orders and took $1448$, and spent $4614$ dollars on paper and ink. By how many dollars did spending exceed what the budget allowed for the orders actually taken?
Answer:
A bakery budgeted $5$ dollars of ingredients a loaf for $638$ loaves this month, a budget of $3190$ dollars. It baked $886$ loaves and spent $4515$ dollars on ingredients. Fill in the variance analysis, with every variance as dollars over budget.
| Amount | |
|---|---|
| Flexed budget, dollars | |
| Total variance: actual less original budget | |
| Volume part: flexed less original budget | |
| Spending part: actual less flexed budget |
A hair salon budgets $4900$ dollars of profit a month. Its first three months made $4000$, $4500$ and $5300$ dollars. Fill in the year-to-date sheet, in dollars.
| Amount | |
|---|---|
| Budget for the three months | |
| Actual profit for the three months | |
| Shortfall against budget | |
| What each remaining month must beat budget by |
Lesson test: one question per skill, one attempt each, no hints. Your answers are checked when you submit.
A bakery budgeted $4$ dollars of ingredients a loaf for $759$ loaves this month, a budget of $3036$ dollars. It baked $1054$ loaves and spent $4436$ dollars on ingredients. Fill in the variance analysis, with every variance as dollars over budget.
| Amount | |
|---|---|
| Flexed budget, dollars | |
| Total variance: actual less original budget | |
| Volume part: flexed less original budget | |
| Spending part: actual less flexed budget |
You can read a budget report, flex a variable cost to the real volume, and split a variance into the part volume caused and the part someone can act on. Tell someone why a café's ingredients can be over budget in a month when nobody wasted anything. Next: explaining what your offer does for the person listening, and asking for the sale.
14. Your turn: 2 a unit budgeted for 500 units; 600 made for 1,290, step 3
$1290 - 1200 = 90$
Paid above the plan's rate.