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c.Flexible Budget Variance and Sales-Volume Variance1)The static budget variance consists of a flexible budget variance and a sales-volumevariance.2)The flexible budget varianceis the difference between the actual results and thebudgeted amount for the actual activity level. It may be analyzed in terms ofvariances related to selling prices, input costs, and input quantities.a)A flexible budgetmust be based on per-unit variable costs (costs that vary withactivity) and total fixed costs (costs incurred regardless of activity). Thus, itconsists of the costs that should have been incurred given the actual level ofproduction.i)Actual production is actual output, but variable costs are measured usingthe standard level of inputs (e.g., direct labor hours, machine hours, etc.).b)Standard costsalert management to cost problems, permit managementby exception, and may increase the efficiency of employees who participatein setting standards. Standards costs also facilitate flexible budgeting,performance evaluation, and setting employee goals.c)Standard costs should be established for direct materials, direct labor, andoverhead. These standards can then be used to calculate variances.i)Standard costs exclude inefficiencies and reflect expected changes. Theiremphasis is on current performance and potential improvement.3)The sales-volume varianceis the difference between the flexible budget and staticbudget amounts if selling prices and costs are constant.4)These concepts are explained more fully in Study Unit 5, Subunit 4, item 4.Figure 11-2d.Components of the Flexible Budget Variance1)The flexible budget varianceconsists of the followingvariances, which are depictedin Figure 11-3.Figure 11-3