Strategic Cost Management · Variance Analyses

Reconciliation of Budgeted and Actual Profit Using Variances

Updated 11 October 2026 · Fact-checked

A profit reconciliation statement starts with budgeted profit, adds favourable variances, deducts adverse variances, and ends at actual profit. Compute sales, material, labour and overhead variances, label each F or A, and then check the result against actual sales less actual costs. Marginal costing starts from budgeted contribution and has no fixed overhead volume variance.

Understand Reconciliation of Budgeted and Actual Profit

Budgeted profit is what the plan promised. Actual profit is what the books show. The gap between them is fully explained by variances. A reconciliation statement lists those variances one by one so management can see why profit moved.

Every variance is a profit effect. A favourable (F) variance raises profit. An adverse (A) variance lowers it. So: Actual profit = Budgeted profit + Σ F variances − Σ A variances.

Under absorption costing, the starting point is budgeted profit, which is budgeted sales less the full standard cost, fixed overhead included. The sales volume variance is valued at standard profit per unit. You also include the fixed overhead volume variance, because actual output absorbs less or more fixed cost than the budget assumed.

Under marginal costing, the starting point is budgeted profit built from contribution less budgeted fixed cost. The sales volume variance is valued at standard contribution per unit. Fixed cost is a period cost, so only the fixed overhead expenditure variance appears. There is no fixed overhead volume variance.

Both formats must reach the same actual profit when the data is the same. If your answer differs from the profit you get from actual sales less actual costs, a variance is missing or has the wrong sign.

Key rules to remember

Reconciliation identity: Actual profit = Budgeted profit + Σ Favourable variances − Σ Adverse variances; Use this as the spine of the statement. Always check it against actual sales less actual costs.
Sales price variance: (Actual price − Standard price) × Actual quantity sold; Positive means favourable.
Sales volume variance (absorption): (Actual quantity sold − Budgeted quantity) × Standard profit per unit; Favourable if actual sales exceed budget.
Sales volume variance (marginal): (Actual quantity sold − Budgeted quantity) × Standard contribution per unit; Use contribution, not profit, in marginal costing.
Material price and usage variances: Price = (Standard price − Actual price) × Actual quantity; Usage = (Standard quantity for actual output − Actual quantity) × Standard price; Standard quantity is based on actual output, not budgeted output.
Labour rate and efficiency variances: Rate = (Standard rate − Actual rate) × Actual hours; Efficiency = (Standard hours for actual output − Actual hours) × Standard rate; Add an idle time variance if idle hours are given: Idle hours × Standard rate, adverse.
Variable overhead variances: Expenditure = (Standard rate × Actual hours) − Actual variable overhead; Efficiency = (Standard hours for actual output − Actual hours) × Standard rate; Standard rate is per hour of the chosen base.
Fixed overhead variances: Expenditure = Budgeted fixed overhead − Actual fixed overhead; Volume = (Actual output − Budgeted output) × Standard fixed overhead rate per unit; Volume variance appears only in absorption costing.

How to solve Reconciliation of Budgeted and Actual Profit questions

Use the same sequence for any reconciliation question, whether the data is in units, hours or total costs.

1Read the format asked: absorption or marginal costing. This decides the starting profit, the sales volume valuation and the fixed overhead variances.
2Write the standard per-unit sheet: selling price, material, labour, variable overhead, fixed overhead, profit and contribution.
3Compute budgeted profit from budgeted quantity. In marginal costing, show contribution less fixed cost.
4Find standard quantities and hours for actual output. Material, labour and variable overhead variances all use these.
5Compute sales variances first, then material, labour, variable overhead and fixed overhead variances. Mark each F or A.
6Build the statement: budgeted profit, then adjust by each variance, then the actual profit figure.
7Cross-check: actual sales less actual material, labour, variable overhead and fixed overhead must equal your closing profit. Fix any difference before submitting.

Quickest way: Total-difference check before and after the table

When to use it: Use when time is short, or when you want to confirm you have not missed a variance.

Work out actual profit directly first: actual sales less all actual costs.
Find the total gap: budgeted profit − actual profit. This is your target net variance.
List the variances in the usual order and total F and A separately.
If net adverse minus net favourable does not match the target gap, check the sales volume valuation, the fixed overhead volume variance and the quantity based on actual output.
Most missing amounts are exactly one variance, so compare the gap to a likely candidate.

Common mistakes in Reconciliation of Budgeted and Actual Profit

Valuing the sales volume variance at standard contribution in an absorption costing question, or at standard profit in a marginal costing question.
The two formats look alike and students use one rate for both.
Fix: Absorption: use standard profit per unit. Marginal: use standard contribution per unit. Write the format at the top of your answer.
Including the fixed overhead volume variance in a marginal costing reconciliation.
Students copy the absorption list of variances.
Fix: In marginal costing, fixed cost is not absorbed into units. Show only the fixed overhead expenditure variance.
Using budgeted output instead of actual output to find standard quantity or standard hours.
Budgeted figures are given first in the question.
Fix: Flex the standard for actual output before computing material usage, labour efficiency and variable overhead efficiency.
Adding adverse variances to budgeted profit.
Students ignore the sign convention when moving quickly.
Fix: Tag every variance F or A. Add F, deduct A. Close with the cross-check against actual profit.
Leaving out the sales price variance when the selling price differs from standard.
Students focus on cost variances because cost data is detailed.
Fix: Always check actual price against standard price first. It is often the easiest variance in the statement.
Presenting variances in a random order with no subtotals.
Students compute them as they go and list them the same way.
Fix: Group sales, material, labour, variable overhead and fixed overhead variances with clear headings. It helps you earn presentation marks and spot errors.

Worked examples

Example 1

Absorption costing. Budget: 1,000 units at a selling price of ₹100. Standard cost per unit: material 3 kg at ₹10 = ₹30; labour 2 hours at ₹10 = ₹20; variable overhead 2 hours at ₹5 = ₹10; fixed overhead ₹10 (budgeted fixed overhead ₹10,000). Actual: 900 units produced and sold at ₹98. Material used 2,800 kg costing ₹30,800. Labour 1,900 hours costing ₹20,900. Variable overhead ₹9,200. Fixed overhead ₹10,500. Prepare a statement reconciling budgeted profit with actual profit.

Show the solution

Standard profit per unit = ₹100 − ₹70 = ₹30. Budgeted profit = 1,000 × ₹30 = ₹30,000.
Standard for 900 units: material 2,700 kg; labour hours 1,800.
Sales price variance = (98 − 100) × 900 = ₹1,800 A.
Sales volume variance = (900 − 1,000) × ₹30 = ₹3,000 A.
Material price = (10 − 11) × 2,800 = ₹2,800 A (actual price = ₹30,800 ÷ 2,800 = ₹11). Material usage = (2,700 − 2,800) × 10 = ₹1,000 A.
Labour rate = (10 − 11) × 1,900 = ₹1,900 A (actual rate = ₹20,900 ÷ 1,900 = ₹11). Labour efficiency = (1,800 − 1,900) × 10 = ₹1,000 A.
Variable overhead expenditure = (5 × 1,900) − 9,200 = 9,500 − 9,200 = ₹300 F. Efficiency = (1,800 − 1,900) × 5 = ₹500 A.
Fixed overhead expenditure = 10,000 − 10,500 = ₹500 A. Volume = (900 − 1,000) × 10 = ₹1,000 A.
Total adverse = 1,800 + 3,000 + 2,800 + 1,000 + 1,900 + 1,000 + 500 + 500 + 1,000 = ₹13,500. Total favourable = ₹300. Net = ₹13,200 A.
Actual profit = 30,000 − 13,200 = ₹16,800.
Check: sales 900 × 98 = ₹88,200. Costs = 30,800 + 20,900 + 9,200 + 10,500 = ₹71,400. Profit = ₹16,800. It matches.

Answer: Budgeted profit ₹30,000 less net adverse variances ₹13,200 gives actual profit ₹16,800. Adverse: sales price 1,800, sales volume 3,000, material price 2,800, material usage 1,000, labour rate 1,900, labour efficiency 1,000, variable overhead efficiency 500, fixed overhead expenditure 500, fixed overhead volume 1,000. Favourable: variable overhead expenditure 300.

Example 2

Marginal costing. Use the same data as the previous example: budget 1,000 units at ₹100; standard variable cost per unit ₹60 (material ₹30, labour ₹20, variable overhead ₹10); budgeted fixed cost ₹10,000. Actual: 900 units sold at ₹98; material ₹30,800 for 2,800 kg; labour ₹20,900 for 1,900 hours; variable overhead ₹9,200; fixed overhead ₹10,500. Reconcile budgeted profit with actual profit under marginal costing.

Show the solution

Standard contribution per unit = 100 − 60 = ₹40. Budgeted contribution = 1,000 × 40 = ₹40,000. Budgeted profit = 40,000 − 10,000 = ₹30,000.
Sales price variance = (98 − 100) × 900 = ₹1,800 A.
Sales volume variance = (900 − 1,000) × ₹40 = ₹4,000 A.
Material price ₹2,800 A and usage ₹1,000 A (same working as before).
Labour rate ₹1,900 A and efficiency ₹1,000 A.
Variable overhead expenditure ₹300 F and efficiency ₹500 A.
Fixed overhead expenditure = 10,000 − 10,500 = ₹500 A. No volume variance is shown.
Total adverse = 1,800 + 4,000 + 2,800 + 1,000 + 1,900 + 1,000 + 500 + 500 = ₹13,500. Favourable = ₹300. Net = ₹13,200 A.
Actual profit = 30,000 − 13,200 = ₹16,800. Check: actual contribution = 88,200 − (30,800 + 20,900 + 9,200) = 27,300; less fixed cost 10,500 = ₹16,800.

Answer: Budgeted profit ₹30,000 less net adverse variances ₹13,200 gives actual profit ₹16,800, the same as under absorption costing. The differences are that the sales volume variance is ₹4,000 A (at contribution) and there is no fixed overhead volume variance.

Exam tips

Read the format line first. Many questions ask for absorption and marginal statements on the same data. Compare the two: the profit must agree when there is no opening or closing stock difference.
Show a clear working note for each variance, with the formula and numbers. Even if one number is wrong, method marks are protected.
Close the statement with a cross-check line that compares your result with actual sales less actual costs. It signals accuracy to the examiner.
Where the question gives budget and actual in a table, flex the standard first. Missing the actual-output flex is the most common source of wrong answers.
If the question asks for comments, add one line per major adverse variance with a likely cause and one action.

Practice questions from Variance Analyses

Reconciliation of Budgeted and 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.

Reconciliation of Budgeted and Actual Profit: frequently asked questions

What is a profit reconciliation statement in standard costing?

It is a statement that starts with budgeted or standard profit and adjusts it by each variance to reach actual profit. Favourable variances are added and adverse variances are deducted. It shows management where the profit difference came from.

Why is there no fixed overhead volume variance in marginal costing?

Marginal costing treats fixed cost as a period cost and does not absorb it into product units. So there is no absorbed amount to compare with the budget. Only the difference between budgeted and actual fixed cost, the expenditure variance, is shown.

Do I use standard profit or standard contribution for the sales volume variance?

Use standard profit per unit under absorption costing and standard contribution per unit under marginal costing. The choice follows how the budgeted profit was built. Using the wrong rate throws off the whole reconciliation.

How do I know my reconciliation is correct?

Compute actual profit separately as actual sales less actual costs. If your closing profit in the statement matches that number, the variances are complete and correctly signed. If not, look for a missing variance or a wrong sign.