Monitoring performance and reporting: formula sheet

Key formulas

Variance

Variance = Actual result − Standard (or flexed budget) result

Then label it F if profit is higher than standard, A if profit is lower.

Standard cost per unit

Standard cost = Standard quantity × Standard price (summed over materials, labour and overheads)

Taken from the standard cost card.

Flexed budget (variable items)

Flexed budget = Budgeted cost per unit × Actual units

Fixed costs are not flexed; they stay at the budgeted total.

Direction rule for costs

Actual cost < Standard cost = F; Actual cost > Standard cost = A

Use the opposite test for revenue: actual revenue > standard = F.

Total variance check

Total cost variance = Flexed standard cost − Actual cost

Sub-variances (price, usage) should add up to this total.

Material price variance

(Standard price − Actual price) × Actual quantity purchased

Positive = favourable. If purchases differ from usage, use quantity purchased (when stock is held at standard price).

Material usage variance

(Standard quantity for actual output − Actual quantity used) × Standard price

Positive = favourable. Value at standard price, not actual price.

Labour rate variance

(Standard rate − Actual rate) × Actual hours paid

Equivalent: (Standard rate × Actual hours) − Actual labour cost.

Labour efficiency variance

(Standard hours for actual output − Actual hours worked) × Standard rate

Positive = favourable. Use hours worked if idle time is separated.

Variable overhead expenditure variance

(Standard rate × Actual hours) − Actual variable overhead

Positive = favourable.

Variable overhead efficiency variance

(Standard hours for actual output − Actual hours) × Standard variable overhead rate

Same hours difference as labour efficiency.

Fixed overhead expenditure variance

Budgeted fixed overhead − Actual fixed overhead

Positive = favourable (spent less than budget).

Total check

Standard cost of actual output − Actual cost = Sum of the variances

Use to check your answers add up.

Sales price variance

(Actual selling price − Standard selling price) × Actual units sold

Positive result is favourable. A higher price than standard increases profit.

Sales volume variance (absorption costing)

(Actual units sold − Budgeted units) × Standard profit per unit

Selling more than budget is favourable. Standard profit = standard price − standard full cost.

Sales volume variance (marginal costing)

(Actual units sold − Budgeted units) × Standard contribution per unit

Standard contribution = standard price − standard variable cost.

Operating statement layout

Budgeted profit ± sales variances ± cost variances = Actual profit

Add favourable variances and subtract adverse ones.

Alternative price check

Actual revenue − (Actual units × Standard price)

Gives the same sales price variance. Useful as a quick cross-check.

Variance sign

Favourable (F) = profit higher than standard; Adverse (A) = profit lower than standard

Always state F or A. A bigger cost than flexed standard is adverse; higher revenue than standard is favourable.

Variance as a percentage

Variance % = Variance ÷ Standard (or flexed budget) cost × 100

Used to judge significance against a set threshold, for example a fixed percentage or dollar amount set by the business.

Investigation rule of thumb

Investigate if expected benefit of correction > cost of investigation

Also consider controllability and trend. This is a guide, not a fixed rule.

Common interrelationships

Price (F) ↔ Usage/Quality (A); Rate (A) ↔ Efficiency (F); Sales price (A) ↔ Sales volume (F)

These are typical links, not guaranteed. Check the scenario facts before claiming a link.

Return on capital employed (ROCE)

ROCE = Profit before interest and tax ÷ Capital employed × 100%

Capital employed = total assets less current liabilities, or equity plus long-term debt. Use the definition given in the question.

Gross profit margin

Gross profit ÷ Revenue × 100%

Shows profit after direct costs only.

Operating profit margin

Operating profit ÷ Revenue × 100%

Operating profit is profit before interest and tax.

ROCE breakdown

ROCE = Operating margin × Asset turnover

Asset turnover = Revenue ÷ Capital employed. Helps explain why ROCE changed.

Current ratio

Current assets ÷ Current liabilities

Expressed as a ratio, such as 1.5 : 1.

Quick ratio

(Current assets − Inventory) ÷ Current liabilities

Removes inventory because it is the least liquid current asset.

Inventory days

Inventory ÷ Cost of sales × 365

Average days stock is held.

Receivables days

Trade receivables ÷ Credit sales × 365

Use revenue if credit sales are not given.

Payables days

Trade payables ÷ Credit purchases × 365

Use cost of sales if purchases are not given.

Value for money

Economy + Efficiency + Effectiveness (the 3Es)

Economy = inputs at lowest cost; efficiency = output per unit of input; effectiveness = objectives achieved.

Cost centre performance

Variance = Budget cost − Actual cost

Positive means favourable (spent less than budget). Use flexed budget if activity differs.

Profit centre performance

Profit = Revenue − Controllable costs

Controllable profit excludes allocated costs the manager cannot influence.

Return on investment (ROI)

ROI = Profit ÷ Capital employed × 100%

Used for investment centres. Use the profit and capital measure the question gives.

Residual income (RI)

RI = Profit − (Capital employed × Cost of capital)

Positive RI means the division earns more than the required return.

Controllability rule

Manager is accountable only for items they can influence

Report uncontrollable items separately or leave them out of the manager's assessment.

Qualities of a good report

Timely, accurate, relevant, clear, concise, cost-effective, right audience

Useful as a checklist for report questions.

Quick revision

• A variance is the difference between actual and standard or budget. It is favourable if profit rises and adverse if profit falls.
• Material price variance = (standard price − actual price) × actual quantity. Use the actual quantity purchased when stock is held at standard cost. Use the actual quantity used if the variance is calculated at the point of usage.
• Material usage variance = (standard quantity for actual output − actual quantity used) × standard price.
• Labour rate variance = (standard rate − actual rate) × actual hours paid.
• Labour efficiency variance = (standard hours for actual output − actual hours worked) × standard rate. When idle time is recorded, the efficiency variance uses hours worked only, so idle hours are excluded.
• Idle time variance = (hours paid − hours worked) × standard rate. It is always adverse. When idle time is recorded, the rate variance uses hours paid, the idle time variance uses hours paid minus hours worked, and the efficiency variance uses hours worked.
• Sales price variance = (actual price − standard price) × actual units sold.
• Sales volume variance = (actual units − budgeted units) × standard profit per unit under absorption costing, or × standard contribution per unit under marginal costing.
• An operating statement starts with budget profit, adds favourable and subtracts adverse variances, and ends at actual profit.
• Variances can be linked: cheap material may be favourable on price but adverse on usage.
• Financial measures include profit margin and return on capital employed. Non-financial measures include quality, delivery time and customer satisfaction.
• Responsibility accounting holds a manager accountable only for costs and revenues they can control.

Common mistakes

• Comparing actual cost with an unflexed budget when output differs. Fix: Always check if actual units equal budgeted units. If not, flex variable costs to actual output first.
• Labelling an adverse cost variance as favourable because the number is positive. Fix: For costs: actual above standard is A. For revenue: actual above standard is F. Say it aloud before choosing.
• Using budgeted output instead of actual output to find the standard quantity. Fix: Always compute standard input as actual units produced × standard per unit before any usage or efficiency calculation.
• Valuing usage or efficiency variances at the actual price or rate. Fix: Quantity variances use standard price or rate. The price effect is already captured in the price variance.
• Using budgeted units in the sales price variance. Fix: Price variance always uses actual units sold. Price is about what you actually sold, not what you planned.
• Valuing the volume variance at selling price instead of profit per unit. Fix: Use standard profit (absorption) or standard contribution (marginal). Costs of extra units are picked up elsewhere.
• Giving a cause that matches the wrong variance, such as poor labour skill for a material price variance. Fix: Decide first if the variance is about price, quantity or time. Then choose a cause from that area.
• Assuming a favourable variance is always good news. Fix: Ask how it was achieved. A favourable price from poor-quality material may cause adverse usage and unhappy customers.
• Using profit after interest, or net profit, in ROCE. Fix: Use profit before interest and tax unless the question states otherwise.
• Forgetting to deduct current liabilities when calculating capital employed from total assets. Fix: Capital employed = total assets − current liabilities, or equity + long-term debt. Check both routes if data allows.

Exam tips

• In objective tests, the F or A label is often where marks are lost. Check it last, every time.
• Flex the budget before comparing whenever actual and budgeted output differ.
• In multiple response questions, select exactly the stated number of options. Read each statement about variances as true or false on its own.
• For number entry, follow the required format. Enter the amount, not the F or A letter, unless the question asks for it.
• Know the types of standard. Questions often ask which type motivates best (attainable) or which is unrealistic (ideal).
• In Section A, read whether the question asks for the amount or the label. Number entry questions often need the sign or the words favourable or adverse.
• Write the standard input allowed for actual output first. Most wrong answers start with this figure.
• Watch the units: kg purchased versus used, hours paid versus worked. Underline them in the question.