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ACCA Applied Knowledge · Management Accounting · Variance calculations and analysis

A company prepares an operating statement from budgeted profit using absorption costing. Budgeted profit is $24,000. The variances are: sales volume profit $3,000 adverse; sales price $2,500 favourable; material price $1,800 adverse; material usage $600 favourable; labour rate $900 favourable; labour efficiency $1,200 adverse; fixed overhead expenditure $700 adverse. What is the actual profit?

Actual profit is $21,300. Deduct the $3,000 adverse sales volume variance from the $24,000 budget to get $21,000, then add the net $300 favourable from the other variances. The other options ignore or misread the signs of the variances.

  1. A$21,300Correct
  2. B$24,300
  3. C$27,300
  4. D$28,700

Explanation

Budgeted profit of $24,000 less the adverse sales volume variance of $3,000 gives $21,000. The other variances net as follows: +2,500 - 1,800 + 600 + 900 - 1,200 - 700 = +$300. Actual profit is therefore $21,300. Omitting the sales volume variance gives $24,300, adding it gives $27,300, and treating every variance as favourable gives $28,700.

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