Cost and Profit Reconciliation (Cambridge International A-Level Accounting)

Spec point — how to prepare a statement reconciling the flexible budgeted cost of production with the actual cost of production how to prepare a statement reconciling the flexible budgeted profit with the actual profit

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

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

• 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

Exam Hint 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