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Chapter 13 Exhibit and Example

James R. Martin, Ph.D., CMA
Professor Emeritus, University of South Florida

Chapter 13 | MAAW's Textbook Table of Contents

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.

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.

Summary of Variances
Profit Analysis based on Contribution Margin
Data in Units
One Variance Two Variance Four Variance
Total Variance in
Contribution Margin
(BCM)(BU) - (ACM)(AU)
Price-Cost or
Flexible budget Variance
(ACM-BCM)(AU)
Sales Price Variance
(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)
AU = Actual units sold. 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.

Problem 13-1
Profit Analysis based on Contribution Margin
Single Product
Data in Units

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.
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.

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 Format

Direct (Variable) Costing Performance Report
Comparative Income Statements
Data Master Budget
1
Actual
2
Total Variance
3
Flexible Budget: Actual units at standard*
4
Price-Cost (Flexible Budget) Variance 5 =
2 vs 4
Sales Volume (Planning) Variance 6 =
1 vs 4
Unit sales 10,000 11,000 - 11,000 - -
Sales $200,000 $209,000 $9,000F $220,000 $11,000U $20,000F
Variable costs 120,000 137,500 17,500U 132,000 5,500U 12,000U
Contribution margin $80,000 $71,500 $8,500U $88,000 $16,500U $8,000F

* 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).

Solution using the 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.

Data Master Budget
1
Sales Volume (Planning) Variance 2 =
1 vs 3
Flexible Budget: Actual units at standard*
3
Price-Cost (Flexible Budget) Variance 4 =
3 vs 5
Actual
5
Unit sales 10,000 - 11,000 - 11,000
Sales $200,000 $20,000F $220,000 $11,000U $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).