150 ACCOUNTING FOR MANAGERS
How can the poor performance compared with budget be
interpreted?
DMC’s income has fallen across the board because of the reduced number of
transactions on all its contracts. Because it has been unable to alter its variable
labour cost significantly in the short term, the contribution towards fixed costs and
profitshasfallen.Therefore,althoughthebusinesstreatsthesecostsasvariable,
in practice they are fixed costs, especially in the short term. The fixed salary
and non-salary costs are constant despite the fall in transaction volume and so
profitability has been eroded. DMC cannot alter its floor space allocation from the
parent company or its computer lease costs despite having spare capacity.
What information can be provided to help in making a decision
about cost reductions?
Calculating the variance (or difference) between the budget and actual income and
variable costs shows how the difference between budget and actual profit of £4,675
(£4, 750 −£75) is represented by a fall in income of £6,925 offset by a reduction in
variable labour costs of £2,250 (all figures are in £’000). This is shown in Table 10.6.
Calculating the cost of unused capacity identifies the profit decline more clearly,
as can be seen in Table 10.7.
Table 10.6 DMC loss of contribution
Contract 1 Contract 2 Contract 3 TotalIncome reduction from budget 1,000 3,825 2,100 6,925
Variable labour costs reduction 250 1,000 1,000 2,250
Contribution reduction 750 2,825 1,100 4,675
Table 10.7 DMC cost of unused capacity
Contract 1 Contract 2 Contract 3 TotalBudgeted variable labour costs 4,000 6,000 9,000 19,000
Budgeted number of transactions 10,000 15,000 25,000 50,000
Budgeted cost per transaction £0.40 £0.40 £0.36
Actual number of transactions 9,000 10,500 22,000 41,500
Budgeted cost per transaction £0.40 £0.40 £0.36
Standard variable labour cost^1 3,600 4,200 7,920 15,720
Cost of unused capacity (budget variable
labour cost less standard variable labour
cost)
400 1,800 1,080 3,280(^1) The actual number of transactions multiplied by the budgetedvariable labour cost per transaction.