BUDGETARY CONTROL 231
Table 15.5 Sales price variance
Actual quantity 9,000
@ actual price £175 £1,575,000Actual quantity 9,000
@ standard price £170 £1,530,000Favourable price variance £45,000Table 15.6 Sales quantity variance
Budget quantity 10,000- Actual quantity 9,000 1,000
@ standard margin £19.50
Unfavourable quantity variance £19,500£19,500. This is calculated in Table 15.6. The variance is unfavourable because
1,000 units budgeted have not been sold and the standard margin for each of those
units was £19.50 (selling price of £170 less variable costs of £150.50), resulting in a
lost contribution of £19,500.
It is important to note that the sales mix can affect the quantity and price
variances significantly. Therefore, a sales variance analysis should reflect the
budget and actual sales mix.
We have now accounted for the variance between the original budget and the
flexed budget (i.e. due to volume of units sold) and between the revenue in the
flexed budget and the actual (i.e. due to the difference in selling price). We now
have to look at the variances between the costs in the flexed budget and the actual
costs incurred.
Cost variances
Each cost variance – for materials, labour and overhead – can be split into two
types, a price variance and a usage variance. This is because each type of variance
may be the responsibility of a different manager. Price variances occur because the
cost per unit of resources is higher or lower than the standard cost. Usage variances
occur because the actual quantity of labour or materials used is higher or lower
than the routing or bill of materials (these concepts were covered in Chapter 9).
The relationship between price and usage variances is shown in Figure 15.1.
Materials variance
The total materials variance is £2,200 unfavourable, as shown in Table 15.7.
However, we need to consider the price and usage variances for each type of
material, because the reasons for the variance and the corrective action may be
different for each.