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.

Is flexible budget variance for sales revenue favourable or unfavourable?

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.

Is flexible budget variance for sales revenue favourable or unfavourable?

BlackTom AI · Accepted Answer

First, restate the scenario briefly to set the context: Imran planned 260 car washes at $100 each, so the planned revenue was 260 × 100 = 26,000. He actually performed 300 car washes, with total sales revenue of 27,000. To assess a flexible budget variance for sales revenue, we compare actual revenue to the revenue that would be expected given actual activity (i.e., actual volume) at the planned selling price.

Option A: Favourable. This would imply that the actual revenue exceeded the flexible budget. However, the flexible budget revenue, based on the actual volume of 300 washes at $100 each, would be 300 × 100 = 30,000. The actual revenue is 27,000, which is 3,000 less than 30,000. Therefore, the variance is not favourable; it is unfavourable because revenue fell short of what would be expected at the actual level of activity.

Option B: Unfavourable. This aligns with the calculation above: actual revenue (27,000) is 3,000 below the flexible-budget revenue (30,000) for the actual volume. The shortfall indicates a negative, or unfavourable, variance in revenue when comparing actual results to the flexible budget.

To further clarify common misconceptions: some might compare actual revenue to the original static plan of 26,000, which would show actual revenue being 1,000 higher than the plan, potentially suggesting a favourable outcome. But for a flexible budget variance, we adjust for the actual level of activity, so the relevant comparison is to 30,000, not 26,000. That yields the unfavourable result.

In summary, once we align the budget to the actual activity level and compare, the revenue variance is negative, indicating an unfavourable variance for sales revenue in this scenario.

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