Management
Accounting:
Concepts, Techniques & Controversial Issues
James R. Martin
Summary & Example From Chapter 13
Profit Analysis: An Overall Performance Evaluation
Introduction
Comparing master budget performance with actual
performance produces a total variance in gross profit, contribution margin,
operating income, or other profitability measure chosen for analysis.
Profit analysis involves separating the total variance to isolate the various
components that include both revenue differences and cost differences.
More specifically, differences between the master budget and actual performance
are caused by two things: 1) differences between budgeted and actual sales
volumes, and 2) price and cost differences, i.e., differences between budgeted
and actual sales prices and differences between budgeted and actual unit cost.
Profit analysis separates the total variance to isolate these effects. The
graphic view below shows the overall idea. Graphic View of Profit Analysis As indicated above, profit analysis can
concentrate on any profitability measurement. Contribution margin analysis
involving a single product is perhaps the easiest type of analysis to
understand. The exhibit below summarizes the calculations involved. EXHIBIT 13-1 One Variance Two Variance Four Variance Total Variance in Contribution Margin (BCM)(BU) - (ACM)(AU) Price-Cost or Sales Price Variance AU = Actual units sold.
EXAMPLE - PROBLEM 13-1 Assume the Riley Company manufactures and sells a single product. Budgeted
and actual unit sales are indicated below as well as comparative income
statements. Data Budget Actual Variance Unit Sales 10,000 11,000 1,000 F Sales $200,000 $209,000 $9,000 F Variable costs 120,000 137,500 17,500 U Contribution margin $80,000 $71,500 $8,500 U Calculate the following variances and indicate if each variance is favorable
or unfavorable. 1. Sales price variance. Solution to
Problem 13-1 in Equation Format 1.) Sales Price variance = (20-19)(11,000) = $11,000 U 2.) Unit Cost variance = (12.50-12)(11,000) = $5,500 U 3.) Price-cost variance = (8-6.5)(11,000) = $16,500 U 4.) Sales volume variance = (11,000-10,000)(8) = $8,000 F 5.) Revenue part of the sales volume variance = (11,000-10,000)(20) = $20,000
F 6.) Cost part of the sales volume variance = (11,000-10,000)(12) = $12,000 U 7.) Total variance in sales dollars = Revenue part of
sales volume variance + Sales price variance = Total variance in sales dollars
= $20,000F + 11,000U = $9,000 F 8.) Total variance in variable costs = Unit Cost
variance + Cost part of sales volume variance = Total variance in variable cost
= $ 5,500U + 12,000U = $17,500 U
Solution to Problem 13-1 in Income Statement Form Flexible Budget: Actual units at standard* Unit sales 10,000 11,000 - 11,000 - - Sales $200,000 $209,000 $9,000 F $11,000 U $20,000 F Variable costs 120,000 137,500 17,500 U 132,000 5,500 U 12,000 U Contribution margin $80,000 $71,500 $8,500 U $88,000 $16,500 U $8,000 F * Column 4: Sales row: (11,000)(20), Cost row:
(11,000)(12). Note that the price-cost column (5) contains the sales price variance and the
unit cost variance. These are the differences between columns 2 and 4. The total
price cost (or flexible budget) variance is in the contribution margin row of column 5 (i.e., $16,500
unfavorable). The sales volume column (6) contains the revenue part of the sales
volume variance (in the sales dollar row) and the cost part of the sales volume
variance (in the cost row). Note that these variances are the differences
between columns 1 and 4. Also note that the total sales volume variance is
$8,000 favorable. See the contribution margin row of column 6. The variances in
the sales row explain the total variance in revenue (i.e., the sales volume
effect of 20,000F and sales price effect of 11,000U), while the variances in the
variable cost row explain the variances in costs (i.e., the sales volume effect
of 12,000U and the unit cost effect of 5,500U). Alternative Income Statement Approach Some analyst prefer the following alternative approach where the master
budget and actual results are placed on each end of the table with the flexible
budget in the middle of the table. Then the differences between columns 1 and 3
provide the sales volume variances and differences between columns 3 and 5
provide the price and cost variances. A disadvantage of this approach is that
the total variance column is not presented.
Sales Volume (Planning) Variance
Flexible Budget: Actual units at standard*
Price-Cost (Flexible Budget) Variance
4 =3
vs 5 Unit sales 10,000 11,000 - 11,000 Sales $200,000 $20,000F $220,000 $209,000 Variable costs 120,000 12,000U 132,000
5,500U 137,500 Contribution margin $80,000 $8,000F $88,000 $16,500U
$71,500 * Column 3: Sales row: (11,000)(20), Cost row:
(11,000)(12).
Summary of Variances
Profit Analysis based on Contribution Margin
Data in Units
Flexible budget Variance
(ACM-BCM)(AU)
(AP-BP)(AU)
Unit Cost Variance
(AV-BV)(AU)
Sales Volume or
Planning Variance
(AU-BU)(BCM)
Revenue part of Sales Volume Variance
(AU-BU)(BP)
Cost part of Sales Volume Variance
(AU-BU)(BV)
BU = Budgeted units sold.
AP = Actual average sales price.
BP = Budgeted sales price.
AV = Actual unit variable cost.
BV = Budgeted unit variable cost.
ACM = Actual contribution margin per unit.
BCM = Budgeted contribution margin per unit.
TAU = Total actual units sold.
Profit Analysis based on Contribution Margin
Single Product
Data in Units
2. Unit cost variance.
3. Price-cost variance or flexible budget variance.
4. Sales volume variance or planning variance.
5. Revenue part of the sales volume variance.
6. Cost part of the sales volume variance.
7. Show how two of the variances explain the total variance in sales dollars.
8. Show how two of the variances explain the total variance in variable cost.
Direct (Variable) Costing Performance Report
Comparative Income Statements
Data
Master Budget
1
Actual
2
Total Variance
3
4
Price-Cost (Flexible Budget) Variance
Sales Volume
$220,000
Data
Master Budget
1
3
Actual
5
$11,000U
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