ACCA Applied Knowledge · Management Accounting

Budgetary control and reporting: formula sheet

Full chapter guide

Key formulas

Variance: Variance = Flexed budget − Actual (for costs); Actual − Flexed budget (for revenue and profit); A positive result is favourable, a negative result is adverse. Check the sign by asking: did profit go up or down?
Flexed budget – variable cost: Flexed variable cost = Budget cost per unit × Actual activity; Use the budgeted unit cost, not the actual unit cost.
Flexed budget – fixed cost: Flexed fixed cost = Original budgeted fixed cost; Fixed costs are not flexed within the relevant range. Semi-variable costs must be split into fixed and variable parts first.
Sales volume effect on profit: Volume variance in profit = (Actual units − Budget units) × Budget profit or contribution per unit; This is the gap between the fixed budget and the flexed budget. It is not a cost control failure.
Variance as a percentage: Variance % = Variance ÷ Flexed budget × 100; Used to decide whether a variance is big enough to investigate.
Budgeted variable cost per unit: Budgeted variable cost per unit = Budgeted variable cost ÷ Budgeted activity; Use the original budget and its original activity level.
Flexed variable cost: Flexed variable cost = Budgeted variable cost per unit × Actual activity; Activity can be units, hours or sales volume, whichever the cost depends on.
Flexed fixed cost: Flexed fixed cost = Original budgeted fixed cost; Fixed costs are not flexed, assuming activity stays in the relevant range.
Flexed semi-variable cost: Fixed element + (variable rate per unit × Actual activity); Split the cost first, for example using the high-low method.
Variance against flexed budget: Variance = Flexed budget figure − Actual figure (for costs); A cost lower than flexed budget is favourable (F). A higher cost is adverse (A). For revenue, actual above flexed budget is favourable.
Basic variance: Variance = Actual − Budget (or flexed budget); Then decide F or A by the effect on profit, not by the sign.
Revenue or profit variance rule: Actual revenue or profit higher than budget = F; lower = A; Higher income increases profit.
Cost variance rule: Actual cost higher than budget = A; lower = F; Higher cost reduces profit.
Flexed budget cost: Flexed variable cost = Budget variable cost per unit × actual units; fixed cost unchanged; Flex only variable costs. Fixed costs stay at the original budget.
Sales volume profit variance: (Actual units − Budget units) × standard profit per unit; Use standard contribution per unit if marginal costing is used. Use standard profit per unit if absorption costing is used. More units than budget is F.
Sales price variance: Actual revenue − (Actual units × budget price); Positive result is F.
Controllability test: Controllable cost = a cost the named manager can influence in the stated period; Always ask: which manager, and which time period?
Controllable profit of a centre: Controllable profit = Revenue − Controllable costs; Excludes allocated head office costs and other items the manager cannot influence.
Reporting rule: Manager's performance report = Controllable items only; Uncontrollable items may be shown separately for information, below the controllable result.
Budgetary slack: Slack = budgeted cost agreed − realistic cost estimate; Slack is the deliberate overstatement of costs or understatement of revenues. It is a behavioural concept, not a required calculation.
Variance: Variance = actual − budget (or budget − actual), then label as favourable (F) or adverse (A); Higher revenue or lower cost than budget is favourable. Always compare against a flexed budget where activity differs.
Qualities of a good budget report: Timely, accurate, clear, relevant, controllable items, exception-based; Use as a checklist when asked to assess or improve a report.
Responsibility centre scope: Cost centre = costs; revenue centre = revenue; profit centre = revenue and costs; investment centre = profit and capital invested; Match the centre to the manager's control.

Quick revision

Budgetary control: compare actual with budget, investigate variances, take action.
A fixed budget is set for one activity level. A flexed budget is restated for actual activity.
Flexed variable cost = budgeted variable cost per unit × actual units.
Fixed costs stay the same in a flexed budget as long as activity stays within the relevant range.
Variance = flexed budget − actual for costs: a positive result is favourable.
For revenue and profit, actual above the flexed budget is favourable.
Favourable (F) means profit is higher than budgeted. Adverse (A) means it is lower.
A variance is a prompt to investigate, not proof of poor performance.
A controllable cost can be significantly influenced by the manager being assessed. Hold managers responsible for these.
Uncontrollable costs should be reported separately or excluded when judging a manager.
Budgets motivate when targets are challenging but achievable and managers take part in setting them.
Budget slack is deliberate padding of budgeted costs or understating of revenue.

Common mistakes

Comparing actual cost with the original fixed budget Fix: Always check whether actual activity equals budget activity. If not, flex first.
Flexing fixed costs Fix: Only variable costs move with activity. Keep fixed costs at the budgeted total.
Flexing fixed costs along with variable costs. Fix: Classify each line first. Only variable costs and revenue change with activity. Fixed costs stay at the original budget.
Comparing actual results with the original fixed budget and calling the variance performance. Fix: Flex the budget to actual activity first. Compare actual with flexed budget to judge cost control.
Comparing actual costs with the original budget when activity level differs. Fix: Flex the variable costs to actual output first. Then compare.
Labelling variances by size instead of effect on profit. Fix: For revenue, higher is F. For costs, higher is A. Ask what happens to profit.
Treating all fixed costs as uncontrollable. Fix: Fixed costs are uncontrollable only if the manager has no say. A manager who decides on staffing or advertising controls those fixed costs.
Treating all variable costs as controllable. Fix: Check who sets the price or rate. A supplier price rise in the market is outside the manager's control, even though the cost is variable.
Saying participation always improves motivation. Fix: State that participation tends to help but can cause slack, delay or pseudo-participation.
Confusing budgetary slack with a contingency or prudent estimate. Fix: Slack is deliberate, hidden and for the manager's benefit. A contingency is open and justified.

Exam tips

Look for the words flexed or flexible in the question. If activity differs, a fixed budget comparison is wrong.
In multiple response questions about reports, expect statements on timeliness, controllability and management by exception. Pick the ones that match those ideas.
In number entry, check whether the answer needs a sign, F or A, or is just a magnitude. Follow the instruction exactly.
Do a quick sense check: more units at a fixed price should raise revenue, and extra costs should reduce profit.
Section B questions on budgeting often ask you to comment as well as calculate. Name a likely cause and a sensible action in one sentence each.
In Section A, read whether the question asks for a flexed figure or a variance. Many wrong answers come from stopping one step early.
For multiple response questions, check each statement separately. Remember fixed costs do not change in a flexed budget and a fixed budget cannot show a true performance variance.
Write the rate per unit on your scratch paper before multiplying. It prevents slips in number entry questions.