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 start by restating the scenario to ensure clarity: Imran planned for 260 car washes at $100 each, with each wash taking 2 hours and labor paid at $20 per hour. The question asks for the flexible budget variance for labour costs, using actual activity.
First, determine the planned labour cost from the original plan. The plan was 260 washes, each requiring 2 hours of labour, at $20 per hour. So planned labour cost = 260 washes × 2 hours/wash × $20/hour = 520 hours × $20 = $10,400. This is the budgeted amount at the original plan, not the flexible one.
Next, establish the flexible budget based on actual output. The actual number of washes was 300. With the same labour rate and time per wash, flexible budget labour cost = 300 washes × 2 hours/wash × $20/hour = 600 hours × $20 = $12,000. The flexible budget adjusts for the actual level of activity while keeping price and time assumptions constant.
Now compare actual labour costs to the flexible budget. The actual labour cost reported is $13,500. The flexible budget amount based on actual activity is $12,000. The variance is actual minus flexible budget: $13,500 − $12,000 = $1,500.
Interpreting the sign, since actual labour costs exceed the flexible budget, this variance is unfavourable (adverse) for labour cost control. If a common convention in this context uses a negative sign to indicate an underspend or favourable outcome and a positive sign for overspend or unfavourable, the variance would be presented as −$1,500 under that convention.
Therefore, the flexible budget variance for labour costs is −$1,500, reflecting an unfavorable cost outcome relative to the flexible (activity-based) budget.

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