Part 1 — Performance Management

Static-budget variance = flexible-budget variance + sales-volume variance. The flexible-budget variance isolates price/efficiency effects at the actual activity level; the sales-volume variance isolates the effect of selling a different quantity than planned.

A budget adjusted (flexed) to the actual level of output achieved, using budgeted prices and budgeted variable rates. It answers: what should costs and revenues have been for the volume actually attained?

Flexible-budget cost = (budgeted variable rate per unit × actual units) + budgeted total fixed cost. Fixed costs stay constant within the relevant range; only the variable component flexes with volume.

The difference between actual results and the flexible budget at the actual output level. Because volume is held constant, it captures only price and efficiency (input usage) effects, not volume effects.

The difference between the flexible budget and the static (master) budget, caused solely by selling a quantity different from the planned quantity. It values that unit difference at the budgeted contribution margin (or budgeted price/cost) per unit.

A control philosophy in which managers focus attention only on significant or material variances from plan, rather than investigating every deviation. It directs scarce attention to where corrective action is most warranted.