Explain budget variances through volume, price and cost
Use a flexed budget to understand volume, net price, variable cost and fixed expense effects on profit.
Sales are above budget, yet profit is well below plan. Did the business sell too cheaply, spend too much, or simply sell a different volume? Comparing each actual expense with the original budget is not enough: costs that vary with sales can rise when more units are sold. First restate the budget at actual volume, then examine price, unit cost and fixed expenses separately.
This approach helps owners, operating teams and finance staff discuss a period using the same facts. A variance explains the arithmetic difference; identifying its business cause still requires the underlying orders, pricing, costs and decisions.
Align the comparison first
Use the same period, entity, business scope, currency and tax basis for the budget and actuals. Treat returns and discounts consistently. Gross merchandise value, marketplace settlements and bank receipts are different measures and cannot simply replace net revenue. Identify refunds that remain unresolved and how they might change the comparison.
For the example below, assume one homogeneous product during a quarter, amounts excluding recoverable VAT, and returns treated consistently. One set of costs varies with units sold; fixed expenses remain fixed within the example's activity range. Real businesses may face tiered fees, capacity limits or a changing product mix and should adapt the model accordingly.
| Measure | Original budget | Actual | Change |
|---|---|---|---|
| Units sold | 120,000 | 135,000 | +15,000 |
| Average net price | RMB 120 per unit | RMB 110 per unit | −RMB 10 per unit |
| Revenue | RMB 14.40 million | RMB 14.85 million | +RMB 0.45 million |
| Variable cost | RMB 72 per unit | RMB 76 per unit | +RMB 4 per unit |
| Total variable cost | RMB 8.64 million | RMB 10.26 million | +RMB 1.62 million |
| Fixed expenses | RMB 2.40 million | RMB 2.55 million | +RMB 0.15 million |
| Profit in this example | RMB 3.36 million | RMB 2.04 million | −RMB 1.32 million |
Here profit means revenue less the variable and fixed costs listed. Other income, expenses or taxes must be considered separately; this is not automatically a complete statutory profit figure.
Restate the budget at actual volume
At 135,000 units, the budgeted price and unit variable cost imply revenue of RMB 16.20 million and variable costs of RMB 9.72 million. Keeping fixed expenses at the assumed RMB 2.40 million gives a flexed-budget profit of RMB 4.08 million.
This is a comparison point, not a revision that erases the original budget. The increase from the original budget profit of RMB 3.36 million is RMB 0.72 million: 15,000 additional units multiplied by the budgeted RMB 48 contribution per unit. It does not establish which campaign or decision caused the additional sales.
Actual profit of RMB 2.04 million is RMB 2.04 million below the flexed amount. The lower net price accounts for RMB 1.35 million, the higher unit variable cost for RMB 0.54 million, and higher fixed expenses for RMB 0.15 million. Add the RMB 0.72 million volume effect and the total is the RMB 1.32 million decline from the original budget.
| Profit effect | Calculation | Result |
|---|---|---|
| Volume | (135,000 − 120,000) × (120 − 72) | +RMB 0.72 million |
| Net selling price | 135,000 × (110 − 120) | −RMB 1.35 million |
| Unit variable cost | 135,000 × (76 − 72) | −RMB 0.54 million |
| Fixed expenses | RMB 2.55m − RMB 2.40m | −RMB 0.15 million |
| Total | 0.72 − 1.35 − 0.54 − 0.15 | −RMB 1.32 million |
Revenue alone offers a useful cross-check: extra units at the budgeted price contribute RMB 1.80 million of revenue, while the price effect is negative RMB 1.35 million. The net increase is RMB 0.45 million. Do not call the RMB 1.80 million a profit increase: the extra units also carry variable costs.
ACCA's explanation of flexible and flexed budgets describes using actual activity to make comparisons more meaningful and notes the difficulty of separating mixed costs.
Turn each variance into a question
- Lower net price: examine promotions, discounts, customer and channel mix, refunds and product mix. A lower average does not mean every individual price fell.
- Higher variable cost per unit: trace purchases, advertising, commissions, fulfilment and after-sales costs. If a charge follows orders, revenue or a tier rather than units, use its actual cost driver.
- Higher fixed expenses: review hiring, premises and systems. Fixed means non-linear with the selected driver within the relevant range, not permanently unchangeable.
- Budget assumptions: planned prices, supplier costs and market conditions may have changed. Distinguish planning assumptions from execution before deciding whether to change the next budget or an operating decision.
For multiple products, calculate by comparable product or group before combining results. Mix changes and stockouts can distort an overall average. Keep incomplete refunds or fees visible rather than presenting estimates as final figures.
CaiGeek is an AI financial assistant for small and medium-sized businesses. Start with your budget, sales and cost records, explore the profit analysis example, read about promotion contribution, or contact CaiGeek about your situation.
Move the work forward with CaiGeek.
Start with your question, supported by business context, data and memory.