While some budgets can be fixed, IE, they don't change. The flexible budget is designed to change as volume of activity changes. So if we produce more units or employ more employees, here's an example. We've got number of new employees and the original budget, the company is going to hire 100 new employees. There are two costs attached to each employee. There's a recruitment cost per employee of six and a training cost per employee of five. Add them together. The cost per employee is 11 times that by the number of employees gets us the new employee cost 1,100.

It's important to point out that in the original budget, the 100 new employees, it's just an estimated number and it's that figure that might change. We might end up only hiring 99 or maybe hire more 101. It'd be more useful if we could flex the budget, and this is a flexible budget that we have now flexed. The number of new employees hired was actually 105, so we now change that number. We update it for the actual employees, but we keep the costs the same. The standard costs remain in the flex budget, so our updated new employee cost at the bottom is 1,155. It's that number that we could now compare to an actual set of figures and gives us a more meaningful budget cost. If we go back up to the sentence at the top, it can also aid planning by taking into account different scenarios. We could ask what if the number of employees was 110 or 130 or 200. We can start to plan for different scenarios that might happen this year or even the year after.

This takes us onto variances. Variances, explain the difference between actual and expected results and provide information for control purposes. Here we have the same table with the same figures in what we now add to it are the actual figures. The number of new employees is still 105, but we noticed the recruitment costs and the training costs per employee have now changed. If we take the number of new employees, 105, multiply it by the 6.1 and the 4.8, we get a new employee. Actual costs of 1144.5.

My question is, what do I compare that figure with? Well, if I was to compare it with the original budget, that would be a meaningless comparison 'cause the number of new employees, which drives the cost was different. We actually hired 105 rather than a hundred. So a more meaningful variance would be to look at the flexed budget costs and compare that to the actual cost, and we can see that the cost was lower. The flex budget was 1,155. The actual figure was 1144.5 variances can be favorable or adverse because we're looking at costs here and the actual cost was lower, then that gives us a favorable variance. Now for control purposes, we can then ask why were we able to do that? Well, the main reason is that the training cost per employee has been lower. Instead of being five, it actually came in up 4.8. Maybe we could use that for planning next year. Maybe 4.8 is a more realistic figure and could be used again and again. But it also hides another variance, an adverse variance. The recruitment cost should have been six and was actually 6.1. We could now go and talk to the people involved there, ask them why the costs were higher, and maybe create some new controls to try and bring that cost under control.