Accounting for Managers: Interpreting accounting information for decision-making

238 ACCOUNTING FOR MANAGERS

Table 15.19 Reconciliation

Original budgeted net profit 70,000

Sales variances

Favourable price variance 45,000

Unfavourable quantity variance See note −19,500 25,500

Materials variances

Total usage variance – adverse −5,000

Total price variance – favourable 2,800 −2,200

Labour variances

Total efficiency variance – adverse −7,500

Total rate variance – adverse −13,750 −21,250

Overhead variances

Adverse efficiency variance −5,000

Adverse spending variance −8,250 −13,250

Fixed cost spending variance −5,000

Total variances −16,200

Actual net profit 53,800

Note

The difference between the originalbudget and the flexed budget is £19,500 adverse

(the quantity variance). The difference between the flexed budget and the actual

is £3,300 favourable. Together, the adverse variance is £16,200. However, it is

important to remember that the individual variances for each type of material

and labour need to be investigated and corrected as the total material, labour

and overhead variances of £41,700 adverse are ‘disguised’ by the favourable price

variance of £45,000.

need for a materials price variance. Differences in the volume of activity, sales
variances, labour variances and overhead variances will constitute the difference
between actual and budgeted profit.
Once variances have been identified, managers need to investigate the reasons
that each occurred and take corrective action. This is part of the management
control cycle – the feedback loop – described in Chapter 4.

Criticism of variance analysis

Standard costing, flexible budgeting and variance analysis can be criticized as
tools of management, because these methods emphasize variable costs in a
manufacturing environment. While labour costs are typically a low proportion of
manufacturing cost, material costs are typically high and variance analysis has a
role to play in many manufacturing organizations.
However, even in manufacturing the introduction of new management tech-
niques such as just-in-time is often not reflected in the design of the management