a) Prepare a budgetary control statement that enables identification of volume and price or cost variances

This question asks for you to identify the volume and price/cost variances seperately. Prepare a budgetary control statement that shows static, volume and price variances. The following steps can be taken:

• Layout the budgetary control statement, clearly labelling each column and use a marginal costing format.
• Enter the fixed budget figures
• Calculate and enter the flexible budget figures. Remember both sales and variable costs should be the actual volume multiplied by the budgeted unit information but the fixed costs are left unchanged.
• Enter the actual figures.
• Calculate the variances.

b) Discuss the position revealed by the statement

The company budgeted to achieve a profit of €194,000. Actual profit for the period was €157,000 resulting in an overall adverse variance of €37,000. Actual profit was 19% less than budgeted. This is very significant and needs to be further investigated.

Sales variances: The company achieved a 20% increase in sales volume resulting in a favourable sales margin volume variance of €63,000. However this was achieved through a reduction in average price as indicated by the adverse sales price variance of €120,000. It is possible that by reducing the price the company hoped that volume sales would compensate for the reduced price. However this did not occur. Was the price reduction part of a strategy or was it due to increased competition. Management must also question the realism of the budget target selling price of €900. The actual average selling price amounted to €800 an 11% fall.

Purchases Variance: The purchases variance was a favourable variance of €24,000. The company expected purchases at the actual level of activity to be €600,000. Actual purchases amounted to €576,000, a reduction of 4%. Management need to assess where these saving were made and if the budget target was reasonable.

Installation Variance: This variance amounted to €1,000 adverse mainly caused by requiring more labour due to the higher volume sold. The variance amounts to 1% of budgeted installation costs and thus is not considered significant.

Delivery: There are no variances with delivery costs.

Overhead Variance: The overhead variance amounts to €3,000 adverse and relates to the fact that actual overhead was €3,000 greater than budgeted. This variance amounts to 2.5% of budgeted overhead and management should identify what actual overhead costs increased compared to budget.

Overall the main variances relate to sales and management must assess reasons why actual sales price was so out of line with the budget target.