Cost and Profit Reconciliation (Cambridge (CIE) A Level Accounting): Revision Note
Exam code: 9706
Cost and profit reconciliation
How to prepare a cost reconciliation?
Start with the budgeted cost
Add the adverse variances
These mean the actual costs are higher than budgeted
Minus the favourable variances
These mean the actual costs are lower than budgeted
This gives you the actual cost
$ | |
Budgeted cost | xxx |
Add: Adverse variances | xxx |
Minus: Favourable variances | (xxx) |
Actual cost | xxx |
Worked Example
Tables Ltd make wooden tables. Below are the cost variances:
Variance $ | |
|---|---|
Direct material usage | 10 000 adverse |
Direct price variance | 25 000 favourable |
Direct labour efficiency | 18 000 adverse |
Direct rate variance | 8 000 favourable |
Fixed overhead expenditure | 20 000 adverse |
Fixed overhead volume | 12 000 favourable |
The budgeted cost is $960 000 based on budgeted units of 120 000 units
The actual units of production were 130 000 units
Prepare the cost reconciliation to show budgeted and actual cost.
Answer:
Adverse $ | Favourable $ | Total $ | |
|---|---|---|---|
Standard cost with actual units | 1 040 000 | ||
Direct material usage | 10 000 | ||
Direct price variance | 25 000 | ||
Direct labour efficiency | 18 000 | ||
Direct rate variance |
| 8 000 | |
Fixed overhead expenditure | 20 000 | ||
Fixed overhead volume | 12 000 | ||
Actual cost | 48 000 | (45 000) | 1 043 000 |
How to prepare a profit reconciliation?
Start with the budgeted profit
Minus the adverse variances
This means the profit is lower than budgeted
Add the favourable variances
This means the profit is higher than budgeted
This gives you the actual profit
$ | |
Budgeted Profit | xxx |
Minus: Adverse variances | (xxx) |
Add: Favourable variances | xxx |
Actual Profit | xxx |
The Sales Volume variance formula will need adjusting
The impact of the sales volume on profit is calculated by using the contribution per unit
The contribution per unit (selling price - variable cost per unit) has an impact on budgeted profit
Examiner Tips and Tricks
Always flex the budgeted cost and profit on the basis of actual output
Remember to adjust the sales volume variance when doing the profit reconciliation
Worked Example
M plc manufactures a single product and operates a system of standard costing.
The budgeted sales and production for the month of May 2025 were 2000 units. The standard cost and revenue data for one unit of the product is as follows:
$ | |
|---|---|
Selling price | 120 |
Direct material (4 kilos at $6 per kilo) | 24 |
Direct labour (3 hours at $14 per hour) | 42 |
Fixed overheads (3 labour hours at $5 per hour) | 15 |
Standard profit per unit | 39 |
Note: Budgeted fixed overheads are absorbed on the basis of direct labour hours.
When the actual results for May 2025 were known, it was found that the company had only produced and sold 1800 units.
The actual results for the month were as follows:
$ | |
|---|---|
Sales revenue | 212 400 |
Direct materials (7500 kilos used) | 44 400 |
Direct labour (5200 hours worked) | 75 400 |
Fixed overheads | 31 500 |
Actual profit | 61 100 |
(a) Prepare the flexible budget statement for the month of May 2025.
(b) Calculate the following variances for May 2025:
(i) sales price variance
(ii) total direct material variance
(iii) total direct labour variance
(iv) fixed overhead expenditure variance
(v) fixed overhead volume variance.
(c) Prepare a statement reconciling the flexible budget profit calculated in (a) with the actual profit.
Answer:
(a)
Find the figures using the budgeted rates with 1800 units
$ | |
|---|---|
Sales revenue (1800 × $120) | 216 000 |
Direct materials (1800 × $24) | (43 200) |
Direct labour (1800 × $42) | (75 600) |
Fixed overheads (1800 × $15) | (27 000) |
Flexible budget profit | 70 200 |
(b)
(i) Sales price variance
Variance: $212 400 (Actual) – $216 000 (Standard) = $3 600 Adverse
(ii) Total direct material variance
Variance: $43 200 (Standard) – $44 400 (Actual) = $1 200 Adverse
(iii) Total direct labour variance
Variance: $75 600 (Standard) – $75 400 (Actual) = $200 Favourable
(iv) Fixed overhead expenditure variance
Budgeted fixed overheads: 2000 units × $15 = $30 000
Variance: $30 000 (Budgeted) – $31 500 (Actual) = $1 500 Adverse
(v) Fixed overhead volume variance
(Actual units – Budgeted units) × Standard fixed overhead per unit
(1800 – 2000) × $15= $3 000 Adverse
(c)
$ | |||
|---|---|---|---|
Flexible budget profit | 70 200 | ||
Variances: | FAV | ADV | |
Sales price variance | 3 600 | ||
Total direct material variance | 1 200 | ||
Total direct labour variance | 200 | ||
Fixed overhead expenditure variance | 1 500 | ||
Fixed overhead volume variance |
| 3 000 | |
200 | 9 300 | ||
Actual profit | 61 100 |
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