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Management Accounting · Reconciliation of budgeted and actual profit

How to Prepare an Operating Statement from Budgeted to Actual Profit

Updated 11 October 2026 · Fact-checked

An operating statement reconciles budgeted profit to actual profit by listing every variance. Start with budgeted profit, add favourable variances, subtract adverse ones, and finish at actual profit. Under absorption costing you include fixed overhead volume variances and use standard profit per unit. Marginal costing uses standard contribution and only a fixed overhead expenditure variance.

Understand Preparing the Operating Statement

An operating statement is a table that explains why actual profit differs from budgeted profit. It starts with the profit you planned. It then lists each variance, one line at a time. It ends with the profit that was actually made.

Every variance is a favourable (F) or adverse (A) effect on profit. A favourable variance increases profit, so you add it. An adverse variance reduces profit, so you subtract it. If your list is complete and correct, the numbers must land exactly on actual profit. That is your built-in check.

The costing method decides which variances appear. Under absorption costing, budgeted profit is budgeted sales units × standard profit per unit. The sales volume variance is valued at standard profit per unit. Fixed overheads are absorbed into units, so you show a fixed overhead expenditure variance and a fixed overhead volume variance.

Under marginal costing, budgeted profit is budgeted contribution less budgeted fixed overheads. The sales volume variance is valued at standard contribution per unit. Fixed overheads are a period cost, so there is only a fixed overhead expenditure variance. There is no fixed overhead volume variance.

The cost variances are the same in both methods: material price and usage, labour rate and efficiency (and idle time if given), variable overhead expenditure and efficiency. Sales price and sales volume complete the picture on the revenue side.

Key formulas to remember

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.

How to solve Preparing the Operating Statement questions

Use this order for any operating statement question. It keeps the working tidy and the signs correct.

  1. 1Read the question to see which method is required: absorption or marginal costing. Check whether production equals sales.
  2. 2Calculate budgeted profit. Absorption: budgeted units × standard profit per unit. Marginal: budgeted contribution less budgeted fixed overheads.
  3. 3Calculate the sales price variance and the sales volume variance. Use standard profit per unit for absorption, standard contribution per unit for marginal.
  4. 4Calculate the cost variances: material price and usage, labour rate and efficiency, variable overhead expenditure and efficiency. Flex standard quantities to actual output.
  5. 5Calculate the fixed overhead variances. Absorption: expenditure and volume. Marginal: expenditure only.
  6. 6Mark each variance F or A. Lay out the statement: budgeted profit, then each variance in its column, then actual profit.
  7. 7Check the total against actual profit worked out from actual revenue and actual costs. If they differ, look for a sign error or a missing variance.

Quickest way: Net-difference shortcut for objective tests

When to use it: Use this when a number entry or multiple choice question gives you most variances and asks for one missing variance or for actual profit.

  1. Write budgeted profit and actual profit at the top. The gap between them is the net total of all variances.
  2. Put each given variance on one line as +F or −A.
  3. Add the given variances and compare the total with the gap. The difference is the missing variance.
  4. Choose the sign of the missing variance from the direction of the gap, then check it makes sense (for example, higher actual price means favourable sales price).
  5. If the question asks for actual profit, simply compute budgeted profit + F − A.

Common mistakes in Preparing the Operating Statement

  • Adding adverse variances to budgeted profit and subtracting favourable ones.

    Students think of variances as costs, where adverse means a higher number.

    Fix: Think in terms of profit. Favourable raises profit, so add. Adverse lowers profit, so subtract.

  • Including a fixed overhead volume variance in a marginal costing statement.

    Students reuse the absorption layout without checking the method.

    Fix: Under marginal costing, fixed overheads are a period cost. Show only the fixed overhead expenditure variance.

  • Valuing the sales volume variance at the wrong rate.

    Students use standard contribution or standard profit without checking the costing method.

    Fix: Absorption uses standard profit per unit. Marginal uses standard contribution per unit. State the rate in your working.

  • Using budgeted quantities instead of flexed quantities for usage and efficiency variances.

    Students compare actual with the original budget, not with what actual output should have used.

    Fix: Standard quantity = actual units produced × standard quantity per unit. Always flex first.

  • Leaving out a variance, so the statement does not reach actual profit.

    Students skip variable overhead efficiency or fixed overhead variances.

    Fix: Tick off the full list before you start. Always compute actual profit independently and compare it with your total.

  • Mixing up sales units and production units when they differ.

    Sales variances use units sold, but fixed overhead volume uses units produced, and the two are easy to swap.

    Fix: Label each calculation with the unit basis it uses. Sales variances use sold units. Production-based variances use produced units.

Worked examples

Example 1

A company budgets to make and sell 1,000 units at $50. Standard cost per unit: material 2 kg at $5 = $10; labour 1.5 hours at $8 = $12; variable overhead 1.5 hours at $2 = $3; fixed overhead $10 (budgeted fixed overhead $10,000). Actual: 900 units made and sold at $52 each. Materials: 1,900 kg cost $9,880. Labour: 1,400 hours cost $11,480. Variable overhead cost $3,000. Fixed overhead cost $10,600. Prepare an operating statement under absorption costing.

Show the solution
  1. Standard cost per unit = 10 + 12 + 3 + 10 = $35. Standard profit = 50 − 35 = $15. Budgeted profit = 1,000 × 15 = $15,000.
  2. Sales price variance = 900 × (52 − 50) = $1,800 F.
  3. Sales volume variance = (900 − 1,000) × 15 = $1,500 A.
  4. Material price: 1,900 kg should cost 1,900 × 5 = $9,500. Actual $9,880. Variance $380 A.
  5. Material usage: standard quantity = 900 × 2 = 1,800 kg. Actual 1,900 kg. Excess 100 kg × $5 = $500 A.
  6. Labour rate: 1,400 hours should cost 1,400 × 8 = $11,200. Actual $11,480. Variance $280 A.
  7. Labour efficiency: standard hours = 900 × 1.5 = 1,350. Actual 1,400. Excess 50 × $8 = $400 A.
  8. Variable overhead expenditure: 1,400 × 2 = $2,800 expected. Actual $3,000. Variance $200 A. Efficiency: 50 hours × $2 = $100 A.
  9. Fixed overhead expenditure = 10,000 − 10,600 = $600 A. Volume = (900 − 1,000) × 10 = $1,000 A.
  10. Statement: 15,000 + 1,800 − 1,500 = 15,300. Adverse cost variances total 380 + 500 + 280 + 400 + 200 + 100 + 600 + 1,000 = 3,460. 15,300 − 3,460 = 11,840.
  11. Check: actual revenue 900 × 52 = $46,800. Actual costs 9,880 + 11,480 + 3,000 + 10,600 = $34,960. Profit = $11,840. This agrees.

Answer: Budgeted profit $15,000; sales price $1,800 F; sales volume $1,500 A; cost variances $3,460 A in total (including fixed overhead expenditure $600 A and volume $1,000 A); actual profit $11,840.

Example 2

Using the same data as the first example, prepare the operating statement under marginal costing. (Standard cost per unit excluding fixed overhead is $25; budgeted fixed overhead is $10,000.)

Show the solution
  1. Standard contribution per unit = 50 − (10 + 12 + 3) = $25.
  2. Budgeted contribution = 1,000 × 25 = $25,000. Less budgeted fixed overhead $10,000. Budgeted profit = $15,000.
  3. Sales volume variance = (900 − 1,000) × 25 = $2,500 A (valued at contribution).
  4. Sales price variance = 900 × (52 − 50) = $1,800 F (unchanged).
  5. Variable cost variances are unchanged: 380 + 500 + 280 + 400 + 200 + 100 = $1,860 A.
  6. Fixed overhead expenditure variance = 10,000 − 10,600 = $600 A. There is no fixed overhead volume variance.
  7. Statement: 15,000 − 2,500 + 1,800 − 1,860 − 600 = $11,840.
  8. Check: actual profit from the first example is $11,840, because production equals sales so there is no inventory change.

Answer: Budgeted profit $15,000; sales volume $2,500 A; sales price $1,800 F; variable cost variances $1,860 A; fixed overhead expenditure $600 A; actual profit $11,840.

Exam tips

  • Write F or A next to every variance as you calculate it. Do not wait until the final layout.
  • Check the costing method before you start. It changes the sales volume rate and removes the fixed overhead volume variance under marginal costing.
  • In number entry questions, enter the profit or variance exactly as asked. Check whether the question wants the sign or just the amount with F/A.
  • For missing-variance questions, work from the gap between budgeted and actual profit rather than recalculating everything.
  • In multiple response questions, test each statement separately. Statements such as 'a fixed overhead volume variance appears under marginal costing' are common traps.

Practice questions from Reconciliation of budgeted and actual profit

Preparing the Operating Statement in other exams

The same ground in other exams, if you are preparing for more than one or want another angle on it.

Preparing the Operating Statement: frequently asked questions

What is the difference between an operating statement under absorption and marginal costing?

The cost variances are the same. The sales volume variance uses standard profit under absorption and standard contribution under marginal. Absorption also has a fixed overhead volume variance, while marginal has only a fixed overhead expenditure variance.

Do I add or subtract adverse variances in an operating statement?

You subtract adverse variances because they reduce profit. You add favourable variances because they increase profit. Always start from budgeted profit and end at actual profit.

Why does my operating statement not match actual profit?

Usually a variance is missing, a sign is wrong, or a quantity was not flexed to actual output. Recalculate actual profit from actual revenue and actual costs, then compare it line by line.

Which units do I use for the sales volume variance?

Use units sold, compared with budgeted sales units. Production units matter for variances such as fixed overhead volume under absorption costing, so label which basis each variance uses.