Reconciliation of budgeted and actual profit: formula sheet

Key formulas

Basic variance rule

Variance = Standard (or budget) figure − Actual figure, judged by effect on profit

For costs, actual below standard is F and actual above standard is A.

Revenue variance rule

Actual revenue above standard or budget = F; below = A

The direction is opposite to costs.

Standard cost per unit

Standard cost = Σ (standard quantity × standard price) for each cost element

Covers materials, labour and overheads.

Profit reconciliation

Budgeted profit + Σ F variances − Σ A variances = Actual profit

Check that the closing figure agrees to the actual profit given.

Sales price variance

(Actual price − Standard price) × Actual units sold

Or: Actual revenue − (Actual units × Standard price). Higher actual price is favourable. Same under absorption and marginal costing.

Sales volume profit variance (absorption costing)

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

More units than budget is favourable. Standard profit per unit = standard price − standard full absorption cost.

Sales volume contribution variance (marginal costing)

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

Standard contribution per unit = standard price − standard variable cost.

Reconciliation to budget

Budgeted profit + Sales volume variance + Sales price variance + cost variances = Actual profit

Adverse variances are subtracted. Use the profit or contribution basis consistently.

Material price variance

(Standard price × Actual quantity purchased) − Actual cost of that quantity

Positive = favourable, negative = adverse. Equivalent form: (Standard price − Actual price) × Actual quantity. If purchases equal usage, use that quantity. If stock is valued at standard, use the quantity purchased.

Material usage variance

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

Positive = favourable (used less than allowed), negative = adverse.

Standard quantity for actual output

Actual units produced × Standard quantity per unit

Use actual output, not budgeted output.

Total material cost variance

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

Equals price variance plus usage variance when purchases equal usage.

Labour rate variance

(Actual hours paid × standard rate) − (Actual hours paid × actual rate) = (SR − AR) × actual hours paid

Positive result is favourable; negative is adverse. Use hours paid, which includes idle time.

Labour efficiency variance

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

Positive is favourable; negative is adverse. Always use the standard rate.

Standard hours for actual output

Actual units produced × standard hours per unit

Use actual output, not budgeted output.

Idle time variance

Idle hours × standard rate (always adverse)

Actual hours paid − actual hours worked = idle hours.

Total labour variance check

Standard labour cost for actual output − actual labour cost = rate + idle time + efficiency variances

Use this to check that your parts add up.

Variable overhead expenditure variance

(Actual hours × standard rate per hour) − actual variable overhead cost

Positive = favourable, negative = adverse. Use hours actually worked (or actual hours for the base used).

Variable overhead efficiency variance

(Standard hours for actual output − actual hours) × standard variable overhead rate per hour

Favourable if actual hours are fewer than standard hours allowed.

Fixed overhead expenditure variance

Budgeted fixed overhead − actual fixed overhead

Favourable if actual spend is below budget. Applies in both marginal and absorption costing.

Standard hours for actual output

Actual units produced × standard hours per unit

Always based on output produced, not budgeted output.

Fixed overhead absorption rate

Budgeted fixed overhead ÷ budgeted activity (units or hours)

Used only in absorption costing. It gives the fixed overhead absorbed into each unit or hour.

Operating statement structure

Budgeted profit ± sales variances ± cost variances = Actual profit

Add favourable (F) variances. Subtract adverse (A) variances. Always check that the total equals actual profit.

Sales price variance

(Actual price − Standard price) × Actual units sold

Positive means favourable. Same under both costing methods.

Sales volume variance (absorption costing)

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

More units sold than budgeted is favourable.

Sales volume variance (marginal costing)

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

Use contribution, not profit, because fixed overheads are not in unit cost.

Material and labour variances

Price/rate = (Standard price − Actual price) × Actual quantity. Usage/efficiency = (Standard quantity for actual output − Actual quantity) × Standard price

Standard quantity is flexed to actual output (units produced). Positive is favourable.

Fixed overhead expenditure variance

Budgeted fixed overhead − Actual fixed overhead

Shown under both absorption and marginal costing. Positive is favourable.

Fixed overhead volume variance (absorption costing only)

(Actual units produced − Budgeted units) × Standard fixed overhead per unit

Equals absorbed overhead less budgeted overhead. Not used in marginal costing.

Variance

Variance = Standard (or flexed budget) figure − Actual figure, or the reverse, labelled F or A by effect on profit

Always label by the effect on profit: higher profit is F, lower profit is A.

Variance as a percentage

Variance % = Variance ÷ Standard (or budget) figure × 100

Helps decide whether a variance is significant enough to investigate. Use the same base each period.

Investigation rule of thumb

Investigate if expected benefit of finding and fixing the cause > cost of investigating

This is a guide, not a fixed rule. Also consider trends, controllability and the cost of ignoring it.

Typical linked pairs

Material price (F) ↔ usage (A); labour rate (A) ↔ efficiency (F); sales price (A) ↔ sales volume (F)

These are common patterns, not certainties. The link must be supported by the facts given.

Quick revision

• A favourable variance increases profit. An adverse variance reduces profit.
• Variance = difference between actual and standard (or flexed) result. Always compare like with like.
• Material price variance = (standard price − actual price) × actual quantity purchased or used, depending on when price is recognised.
• Material usage variance = (standard quantity for actual output − actual quantity) × 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.
• Sales price variance = (actual price − standard price) × actual units sold.
• Sales volume variance in absorption costing uses standard profit per unit. In marginal costing it uses standard contribution per unit.
• Fixed overhead expenditure variance = budgeted fixed overhead − actual fixed overhead.
• Operating statement: start with budgeted profit, adjust for each variance, end with actual profit.
• Variances can be linked. A cheap material may give a favourable price variance but an adverse usage variance.
• Always flex the budget to actual output before judging cost variances.

Common mistakes

• Labelling a variance F because the actual number is bigger. Fix: Always ask what happened to profit. Higher cost is A. Higher revenue is F.
• Adding adverse variances to budgeted profit. Fix: Write F or A beside every figure. Add F and deduct A.
• Valuing the volume variance at standard selling price. Fix: Volume variance is a profit variance. Use standard profit per unit (absorption) or standard contribution per unit (marginal).
• Using budgeted units in the price variance. Fix: Price variance always uses actual units sold, because only actual sales were made at the actual price.
• Using budgeted output instead of actual output to find standard quantity. Fix: Always multiply standard usage per unit by actual units produced.
• Valuing the usage variance at actual price. Fix: Usage variance is always at standard price. Price effects belong only in the price variance.
• Using the actual rate to value the efficiency variance. Fix: Efficiency is a quantity variance. Always value hours at the standard rate.
• Using budgeted output to find standard hours. Fix: Use actual units produced × standard hours per unit.
• Using standard hours instead of actual hours in the variable overhead expenditure variance. Fix: Expenditure = actual hours × standard rate versus actual cost. Efficiency is the only one that compares standard and actual hours.
• Using budgeted output to find standard hours. Fix: Always use actual units produced × standard hours per unit for variable overhead efficiency.

Exam tips

• In objective tests, read the question for the word cost or revenue before you choose F or A.
• In multiple response questions, select exactly the number asked. Check each option against the profit-effect test.
• In number entry, include the correct units and enter the figure without the F or A label unless asked.
• Use the final check on every reconciliation. It catches most sign errors in seconds.
• In Section B, show the reconciliation in a clear order: budget, variances, actual.
• Read the costing system in the first sentence. It decides which standard figure you use for volume.
• Under absorption costing, standard profit per unit equals price minus full standard cost, including fixed overhead.
• Section A often asks for one variance as number entry. Enter the number only, and check whether the question wants F or A.