Imran runs a successful mobile car wash business. He goes to busy client's homes to wash their cars.

His plan for 2022 was to do 260 car washes charging clients $100 per wash. He has also planned that each car wash takes 2 hours. He uses a team of casual workers and he plans to pays them $20 per hour.

At the end of 2022 Imran goes through his accounting records to evaluate his business and make plans for the next year. He has done 300 car washes and earned total sales revenue of $27,000. He has spent $13,500 on labour costs.

What is the flexible budget variance for the labour costs?

Question

Imran runs a successful mobile car wash business. He goes to busy client's homes to wash their cars.

His plan for 2022 was to do 260 car washes charging clients $100 per wash. He has also planned that each car wash takes 2 hours. He uses a team of casual workers and he plans to pays them $20 per hour.

At the end of 2022 Imran goes through his accounting records to evaluate his business and make plans for the next year. He has done 300 car washes and earned total sales revenue of $27,000. He has spent $13,500 on labour costs.

What is the flexible budget variance for the labour costs?

BlackTom AI · Accepted Answer

We need to determine the flexible budget variance for labour costs.

First, identify the actual activity level. Imran completed 300 car washes in 2022, so the flexible budget should be prepared for 300 washes (not the original plan of 260).

Next, calculate the flexible budgeted labour costs based on actual activity:
- Each car wash takes 2 hours, so total labour hours for 300 washes = 300 × 2 = 600 hours.
- The wage rate is $20 per hour, so flexible budget labour cost = 600 hours × $20/hour = $12,000.

Now compare actual labour costs to the flexible budget:
- Actual labour costs = $13,500.
- Flexible budget labour costs for actual activity = $12,000.

Flexible budget variance is the difference between actual and flexible budget amounts:
- Variance = Actual labour costs − Flexible budget labour costs
- Variance = $13,500 − $12,000 = $1,500.

Interpretation: The labour costs were $1,500 higher than what would be expected for the actual level of activity (300 washes). This is an unfavourable variance because costs exceeded the flexible budget.

Key distinctions to avoid common pitfalls:
- Do not use the original plan of 260 washes when computing the flexible budget variance for the actual period; the flexible budget should reflect actual activity (300 washes).
- The variance is driven by differences between actual costs and what costs should have been at the actual activity level, not by the original plan alone.
- Ensure to multiply the total number of washes by the per-wash hours to derive total budgeted hours, then apply the hourly wage to get the total flexible budget.

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