## **Learning Outcomes**

After reading this article, you will be able to reconcile budgeted profit with actual profit for a given period, accurately attributing the effects of price, volume, and efficiency variances. You will understand how variances arise, the reasons for their occurrence, and how to clearly present and analyse reconciliations to support management decision-making and ACCA exam success.

## **ACCA Management Accounting (MA) Syllabus**

For ACCA Management Accounting (MA), you are required to understand how management accounting information is used for control and performance monitoring, particularly how to compare budgeted and actual outcomes. This article covers:

- Recognising the structure and use of standard costing operating statements
- Reconciling budgeted and actual profit, attributing differences to price, volume, and efficiency
- Understanding and interpreting the main variance types (price, usage, efficiency, volume)
- Explaining reasons for variances and their impact on reported profit
- Preparing clear variance-based reconciliations for management reports

## **Test Your Knowledge**

_Attempt these questions before reading this article. If you find some difficult or cannot remember the answers, remember to look more closely at that area during your revision._

1. Which variance explains the impact of selling a different number of units than budgeted?  
   a) Price variance  
   b) Volume variance  
   c) Efficiency variance  
   d) Expenditure variance

2. In a standard costing reconciliation, how does a favourable material usage variance affect actual profit compared to budgeted profit?  
   a) It increases actual profit  
   b) It decreases actual profit  
   c) It has no effect  
   d) It only affects inventory valuation

3. True or false? The sum of all individual variances should fully explain the difference between budgeted profit and actual profit if all relevant costs and revenues are included.

4. List the three main factors typically reconciled in an operating statement between budgeted and actual profit.

## **Introduction**

Comparing a business’s actual results to its budgeted expectations reveals more than just whether a target has been met. Meaningful management action depends on clear analysis of the reasons for any differences. Standard costing and variance analysis provide a method to reconcile the budgeted profit (or contribution) with the actual profit achieved, by breaking down the impact of changes in price, volume, and efficiency.

Understanding how to attribute the effects of these changes is essential not only for financial control but also for ACCA exam success. This article sets out how to construct clear reconciliations and how to interpret the impact of individual variances.

> **Key Term: reconciliation of profit**
> The process of explaining the difference between budgeted and actual profit by attributing the change to price, volume, efficiency, and other variances.

## ANALYSING PROFIT RECONCILIATION

Reconciliation is usually presented as an “operating statement” which begins with budgeted profit, then adds or subtracts variances, and ends with actual profit (or vice versa). The purpose is to quantify and explain each driver of profit difference.

### Main variance categories

Three core areas typically explain the gap between actual and budgeted profit:

- **Price variances:** The effect of selling at prices different from the budgeted or incurring costs at rates other than those expected.
- **Volume variances:** The impact of producing or selling a different quantity from budget.
- **Efficiency (or usage) variances:** The effect of using more or fewer resources than the standard allowed for the actual output.

> **Key Term: price variance**  
> The difference in profit caused by having actual prices (of inputs or sales) differ from those budgeted.
>
> **Key Term: volume variance**  
> The impact on profit of the actual number of units sold or produced differing from the budgeted quantity.
>
> **Key Term: efficiency variance**  
> The effect on profit of using more or fewer resources (materials, labour hours) than the standard allowed for the actual output.

### Operating statement: structure and flow

A standard operating statement for reconciliation usually includes these lines:

1. Budgeted profit or contribution (for the period)
2. Add (Favourable) or subtract (Adverse) sales price, cost price, usage, and efficiency variances
3. Add/subtract volume or activity variances (as appropriate)
4. Other relevant variances (e.g. fixed overhead spending, capacity)
5. Arrive at actual profit or contribution

Each variance line quantifies one reason for profit deviation, ensuring management can see the root causes—not just the final outcome.

### **Worked Example 1.1**

ABC Ltd budgeted to sell 1,000 units of Product Z, expecting a standard profit of £10 per unit. Actual sales were 1,100 units at a profit of £9.50 per unit.

- **Calculate the total difference between budgeted and actual profit and reconcile it by clearly attributing price and volume effects.**

> **Answer:**  
>
> Budgeted profit = 1,000 × £10 = £10,000  
> Actual profit = 1,100 × £9.50 = £10,450  
> Difference = £10,450 – £10,000 = £450 favourable

Breakdown:

- Volume variance: (1,100 – 1,000) × £10 = £1,000 favourable
- Price variance: (£9.50 – £10.00) × 1,100 = £550 adverse
- £1,000 F – £550 A = £450 F, matching the total difference.

## VARIANCE ATTRIBUTION AND MEANING

Breaking down the profit difference is most useful when you distinguish the nature of each variance:

- **Price effects** arise from actual prices differing from budgeted prices for sales or purchases.
- **Volume effects** result from actual sales or output volume changing compared to budget.
- **Efficiency effects** measure how resource usage per unit of output compares to standard.

> **Key Term: usage variance**
> Difference between the actual quantity of input used and the standard quantity allowed for actual output, valued at standard price.

### **Worked Example 1.2**

A manufacturer budgets for 2,000 units to be produced using 4,000 kg of direct material at £3/kg (£6,000 budgeted material cost). Actual output is 2,200 units, using 4,500 kg costing £14,400.

- Calculate material price and usage variances, and show how they reconcile to explain the difference in material costs.

> **Answer:**  
>
> Standard input for actual output = 2,200 × (4,000/2,000) = 4,400 kg  
> Material price variance = (Actual price – Standard price) × Actual quantity = (£14,400/4,500 – £3) × 4,500 = (£3.20 – £3) × 4,500 = £900 adverse  
> Material usage variance = (Actual quantity – Standard quantity allowed) × Standard price = (4,500 – 4,400) × £3 = 100 × £3 = £300 adverse  
> Total variance = £900 A + £300 A = £1,200 adverse  
> Actual cost (£14,400) – standard cost for actual output (4,400 × £3 = £13,200) = £1,200 adverse

## PRESENTING THE PROFIT RECONCILIATION

Clarity is essential in your statement. Each variance should be headed and calculated clearly, with favourable (F) and adverse (A) signs shown for each. Favourable variances increase actual profit, adverse variances decrease it.

A typical reconciliation structure:

|                   | £      | Direction  |
| ----------------- | ------ | ---------- |
| Budgeted profit   | 10,000 |            |
| Sales volume var. | +1,000 | Favourable |
| Sales price var.  | –550   | Adverse    |
| ...               | ...    | ...        |
| Actual profit     | 10,450 |            |

Sum of variances = Actual – Budgeted profit (including signs).

> **Key Term: favourable variance**  
> A variance that increases actual profit relative to budgeted profit.
>
> **Key Term: adverse variance**  
> A variance that reduces actual profit compared to budgeted profit.

### **Worked Example 1.3**

XYZ Ltd’s budgeted profit is £20,000. Relevant variances for the period are:

- Sales price variance: £2,100 F
- Sales volume variance: £1,800 F
- Material price variance: £6,000 A
- Labour efficiency variance: £1,500 F
- Fixed overhead variance: £2,000 A  
  Calculate actual profit.

> **Answer:**  
>
> Budgeted profit: £20,000  
> Add: Sales price variance: +£2,100 (F)  
> Add: Sales volume variance: +£1,800 (F)  
> Subtract: Material price variance: –£6,000 (A)  
> Add: Labour efficiency variance: +£1,500 (F)  
> Subtract: Fixed overhead variance: –£2,000 (A)  
> Actual profit: £17,400

### **Exam Warning**

> Always check your signs—favourable variances add to budgeted profit, adverse variances subtract. Errors in sign can lead to incorrect reconciliation totals.

## COMMON CAUSES OF VARIANCES

Understanding why variances arise helps ensure that reconciliation is more than a mere calculation exercise:

- **External factors:** Market-driven price changes, competitor actions, or supply chain disruptions.
- **Internal factors:** Inefficient resource use, process errors, operational wastage.
- **Planning errors:** Standards or budgets set unrealistically high or low.

Management must consider whether variances are controllable when attributing responsibility.

### **Revision Tip**

> In the exam, structure your operating statement clearly, labelling each variance. Favourable (F) or adverse (A) should be shown for each amount. Practise full reconciliations with clear logic.

## **Summary**

Profit reconciliation provides essential information to management by showing how and why actual results differed from budgeted targets. The process attribute differences to changes in price, volume, and efficiency, and must be presented clearly to support effective decision-making. Full understanding and neat calculation of all variance categories is regularly tested in the ACCA exam.

## **Key Point Checklist**

_This article has covered the following key knowledge points:_

- Explain the concept and structure of profit reconciliation between budgeted and actual profit
- Identify, calculate, and interpret price, volume, efficiency, and usage variances
- Present an operating statement reconciliation clearly, with correct signs for each variance
- Understand and explain reasons for favourable and adverse variances
- Attribute and communicate the impacts of each variance on actual profit

## **Key Terms and Concepts**

- reconciliation of profit
- price variance
- volume variance
- efficiency variance
- usage variance
- favourable variance
- adverse variance


Reconciliation of budgeted and actual profit - Attributing price, volume, and efficiency effects