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Performance Management · Standard costing

How to Prepare an Operating Statement in ACCA PM

Updated 11 October 2026 · Fact-checked

An operating statement reconciles budgeted profit to actual profit. Start with budgeted profit, add favourable variances, deduct adverse variances, and end at actual profit. Under absorption costing use the sales volume profit variance. Under marginal costing use the sales volume contribution variance and show fixed overhead expenditure only.

Understand Operating Statements and Reconciling Budget to Actual Profit

A budget sets a profit target. At the end of the period the actual profit is different. The operating statement explains the gap, line by line, using variances. It is the bridge between the two profit figures.

Each variance is a part of the difference. A favourable (F) variance increases profit. An adverse (A) variance reduces profit. So you start at budgeted profit, add the F items, subtract the A items, and land on actual profit. If you do not land on actual profit, a variance is wrong or missing.

The layout depends on the costing system. Under absorption costing the sales volume variance is valued at the standard profit per unit, and fixed overhead has both an expenditure and a volume variance. Under marginal costing the sales volume variance is valued at the standard contribution per unit, and fixed overhead has only an expenditure variance, because fixed costs are not absorbed into units.

The cost variances need the actual output sold or produced and a flexed standard. Sales variances compare actual sales with budget. Group the lines clearly: sales variances first, then material, labour, variable overhead and fixed overhead. Show a subtotal for each group if you can. It helps you check and helps the marker follow your work.

Key rules to remember

Operating statement (structure)
Budgeted profit + F variances − A variances = Actual profit
Treat adverse as negative and favourable as positive, then add them all.
Sales price variance
Actual revenue − (Actual units sold × Standard price)
Positive is favourable. Same in both costing systems.
Sales volume variance (absorption)
(Actual units sold − Budgeted units) × Standard profit per unit
More units than budget is favourable.
Sales volume variance (marginal)
(Actual units sold − Budgeted units) × Standard contribution per unit
Use contribution, not profit, under marginal costing.
Material price variance
(Actual quantity × Standard price) − Actual cost
Positive is favourable. Use quantity purchased if the question values on purchase.
Material usage variance
(Standard quantity for actual output − Actual quantity used) × Standard price
Standard quantity is flexed to actual output.
Labour rate variance
(Actual hours paid × Standard rate) − Actual labour cost
Positive is favourable.
Labour efficiency variance
(Standard hours for actual output − Actual hours worked) × Standard rate
Idle time is separate if given. Use hours worked here.
Variable overhead expenditure variance
(Actual hours × Standard rate per hour) − Actual variable overhead
Efficiency variance uses the same hours difference as labour, at the variable overhead rate.
Fixed overhead expenditure variance
Budgeted fixed overhead − Actual fixed overhead
The only fixed overhead variance under marginal costing.
Fixed overhead volume variance (absorption)
(Actual output − Budgeted output) × Standard fixed overhead per unit
Absorbed minus budgeted fixed overhead. Not used under marginal costing.

How to solve Operating Statements and Reconciling Budget to Actual Profit questions

Use this order for any operating statement question. It keeps the work tidy and gives you a built-in check.

  1. 1Read the question and note the costing system: absorption or marginal. Note whether units produced equal units sold.
  2. 2Calculate budgeted profit (absorption) or budgeted contribution less budgeted fixed costs (marginal). Work out the standard cost card per unit.
  3. 3Calculate the sales variances: price first, then volume at standard profit or standard contribution per unit.
  4. 4Calculate the cost variances using actual output and the flexed standard: material, labour, variable overhead, then fixed overhead.
  5. 5Label each variance F or A. Take care with the sign convention you use in the final addition.
  6. 6Lay out the statement: budgeted profit, then each variance in a column, then actual profit as the total.
  7. 7Check against actual profit calculated directly from actual revenue and actual costs. If the two figures differ, find the missing or wrong variance.

Quickest way: Total check first, then fill the lines

When to use it: Use when time is short and the question gives full actual figures. It protects you from losing the final total.

  1. Work out actual profit directly from actual revenue less actual costs. Do this first.
  2. Work out budgeted profit. The gap between the two is the net variance you must reach.
  3. Write the standard cost card and the flexed quantities once, then reuse them for every variance.
  4. Calculate variances in the fixed order: sales, material, labour, variable overhead, fixed overhead.
  5. Add them up. If the net does not match the gap, recheck the sales volume variance and the fixed overhead lines first, as these are the usual culprits.

Common mistakes in Operating Statements and Reconciling Budget to Actual Profit

  • Using standard profit for the sales volume variance under marginal costing.

    Students learn the absorption version first and apply it everywhere.

    Fix: Ask which system the question uses. Marginal costing means standard contribution per unit. Absorption means standard profit per unit.

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

    Students copy the absorption layout.

    Fix: Under marginal costing fixed overhead is not absorbed. Show only the fixed overhead expenditure variance.

  • Flexing the standard on budgeted output instead of actual output.

    The budget figures are the first numbers in the question.

    Fix: Cost variances always use the standard quantity or hours for the actual output produced.

  • Adding adverse variances instead of deducting them.

    Students write the numbers without a sign and lose track.

    Fix: Put F or A next to every figure, then add F and subtract A. Check the total against actual profit.

  • Using the wrong sales volume variance when production and sales differ.

    Students mix up units produced and units sold.

    Fix: Sales variances use units sold. Cost variances use units produced. Check the question for inventory movements.

  • Not reconciling to actual profit.

    Students run out of time and skip the check.

    Fix: Calculate actual profit directly early. A mismatch tells you at once that a variance is missing or wrong.

Worked examples

Example 1

Absorption costing. A company budgets to make and sell 1,000 units. Standard cost per unit: material 2 kg at $5 = $10; labour 3 hours at $8 = $24; variable overhead 3 hours at $2 = $6; fixed overhead $10 (budgeted fixed overhead $10,000). Standard selling price is $70. Actual: 1,100 units made and sold for $75,900. Materials used 2,300 kg costing $11,960. Labour 3,200 hours worked and paid, costing $26,240. Variable overhead $6,720. Fixed overhead $10,600. There is no inventory. Prepare an operating statement.

Show the solution
  1. Standard profit per unit = 70 − (10 + 24 + 6 + 10) = $20. Budgeted profit = 1,000 × 20 = $20,000.
  2. Sales price: 75,900 − (1,100 × 70 = 77,000) = $1,100 A. Sales volume: (1,100 − 1,000) × 20 = $2,000 F.
  3. Material price: (2,300 × 5 = 11,500) − 11,960 = $460 A. Usage: standard 1,100 × 2 = 2,200 kg; (2,200 − 2,300) × 5 = $500 A.
  4. Labour rate: (3,200 × 8 = 25,600) − 26,240 = $640 A. Efficiency: standard 1,100 × 3 = 3,300 hours; (3,300 − 3,200) × 8 = $800 F.
  5. Variable overhead expenditure: (3,200 × 2 = 6,400) − 6,720 = $320 A. Efficiency: 100 hours × 2 = $200 F.
  6. Fixed overhead expenditure: 10,000 − 10,600 = $600 A. Volume: (1,100 − 1,000) × 10 = $1,000 F.
  7. Net variances: −1,100 + 2,000 − 460 − 500 − 640 + 800 − 320 + 200 − 600 + 1,000 = $380 F.
  8. Actual profit = 20,000 + 380 = $20,380. Check: revenue 75,900 − costs (11,960 + 26,240 + 6,720 + 10,600 = 55,520) = $20,380.

Answer: Budgeted profit $20,000; adverse variances total $3,620 (1,100 + 460 + 500 + 640 + 320 + 600); favourable variances total $4,000 (2,000 + 800 + 200 + 1,000); actual profit $20,380.

Example 2

Marginal costing. Use the same data as the previous question, but prepare the operating statement under marginal costing. Fixed overhead is not absorbed into units.

Show the solution
  1. Standard variable cost per unit = 10 + 24 + 6 = $40. Standard contribution = 70 − 40 = $30.
  2. Budgeted contribution = 1,000 × 30 = $30,000. Less budgeted fixed overhead $10,000. Budgeted profit = $20,000.
  3. Sales volume (contribution): (1,100 − 1,000) × 30 = $3,000 F. Sales price: $1,100 A.
  4. Cost variances are unchanged: material price $460 A, usage $500 A, labour rate $640 A, efficiency $800 F, variable overhead expenditure $320 A, efficiency $200 F.
  5. Fixed overhead expenditure only: 10,000 − 10,600 = $600 A. There is no volume variance.
  6. Net variances: 3,000 − 1,100 − 460 − 500 − 640 + 800 − 320 + 200 − 600 = $380 F.
  7. Actual profit = 20,000 + 380 = $20,380, the same as under absorption costing.

Answer: Budgeted profit $20,000 plus net favourable variances of $380 gives actual profit of $20,380. The sales volume variance is $3,000 F and there is no fixed overhead volume variance.

Exam tips

  • State the costing system at the top of your answer. Markers award method marks when the layout matches the system.
  • Write F or A against every variance. Many marks are lost on sign errors, not on calculations.
  • Calculate actual profit directly before you start. It gives you a target total and a quick check.
  • In Section C, set out the statement as a clear table-style list with budgeted profit at the top and actual profit at the bottom. Show workings separately and refer to them.
  • In objective test questions, the trap is often the wrong sales volume variance. Check whether the question says marginal or absorption costing, and whether it asks for contribution or profit.

Practice questions from Standard costing

Operating Statements and Reconciling Budget to Actual Profit in other exams

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

Operating Statements and Reconciling Budget to Actual Profit: frequently asked questions

What is an operating statement in ACCA PM?

It is a reconciliation of budgeted profit to actual profit using variances. You show each variance as favourable or adverse. The total effect moves you from the budget figure to the actual figure.

How does an operating statement differ under marginal costing?

The sales volume variance uses standard contribution per unit, not standard profit. Fixed overhead has only an expenditure variance, with no volume variance. The budgeted starting figure is usually shown as budgeted contribution less budgeted fixed costs.

Do I add or subtract adverse variances?

Subtract them, because they reduce profit. Add favourable variances, because they increase profit. Label each one F or A so the final sum is easy to check.

Why does my operating statement not match actual profit?

Usually a variance is missing or wrong. Check the sales volume variance, the fixed overhead lines and whether you flexed standards on actual output. Also check for inventory movements and idle time.