## **Learning Outcomes**

After reading this article, you will be able to explain the purpose and structure of reconciling budgeted and actual profit under standard marginal costing. You will identify and calculate key variances affecting contribution—including sales price, sales volume, and variable cost variances—and prepare an operating statement to reconcile budgeted with actual profit. This will strengthen your ability to analyse performance and support accurate exam answers.

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

For ACCA Management Accounting (MA), you are required to understand how and why budgeted and actual profit figures are reconciled under marginal costing. When revising this area, focus on:

- The role of profit reconciliation in marginal costing, especially at the contribution level
- Calculation and interpretation of sales price, sales volume (contribution), and variable cost variances
- Construction of reconciliation (operating) statements to explain the movement from budgeted to actual profit
- The treatment of fixed costs as period costs within marginal costing profit reconciliations

## **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. In marginal costing, profit reconciliation starts from which figure?
   a) Gross profit  
   b) Net profit  
   c) Contribution  
   d) Inventory

2. Name three main types of variance that must be analysed when reconciling profit under standard marginal costing.

3. True or false? Under marginal costing, changes in inventory levels affect the reconciliation of profit.

4. If budgeted contribution was \$20,000 and actual contribution \$21,500, with fixed costs as expected, what is the total variance? Is it favourable or adverse?

## **Introduction**

Organisations must understand why their actual results differ from planned expectations. Under standard marginal costing, the reconciliation of budgeted and actual profit allows managers to analyse how changes in prices, volumes, and costs impacted the period’s performance. The reconciliation focuses on contribution, as marginal costing recognises all fixed costs as period expenses, with variances capturing deviations in variable cost behaviour.

This systematic comparison helps management pinpoint areas—such as price, volume, or efficiency—that require investigation and corrective action.

> **Key Term: standard marginal costing**
> A costing method that charges only variable production costs to units and records fixed production overheads as period costs. All variances are calculated against standard variable costs.

## The Role of Reconciliation in Marginal Costing

Reconciling budgeted and actual profit is a key part of management control. By analysing and explaining every difference, organisations can identify which factors contributed to better or worse performance. Under marginal costing, reconciliation uses contribution as the central value, as only variable costs are charged to units and fixed costs are deducted as a lump sum.

Changes in contribution arise from differences between budgeted and actual selling prices, quantities sold, and variable costs, making this value the ideal starting point for reconciling profit.

> **Key Term: contribution**
> Sales revenue minus all variable costs. Contribution shows how much is available to cover fixed costs and generate profit.

## Structure of the Marginal Costing Profit Reconciliation

The reconciliation can be presented as a structured operating statement, showing:

1. Budgeted contribution (from budgeted sales/standard variable costs)
2. Plus/minus:
   - Sales price variance (different average selling price)
   - Sales volume contribution variance (different quantity sold, at standard contribution per unit)
   - Variable cost variance (actual vs. standard variable costs for actual sales)
3. Resulting in actual contribution
4. Less: actual fixed costs (usually as budgeted)
5. Arriving at actual profit

Each line in the reconciliation quantifies a specific area of performance.

## Main Variances in Marginal Costing Profit Reconciliation

### Sales Price Variance

The sales price variance calculates the effect of selling at a different price from standard:

> **Key Term: sales price variance**
> The difference between actual and standard selling price per unit, multiplied by actual units sold.

### Sales Volume Contribution Variance

The sales volume contribution variance explains the impact of selling more or fewer units than expected, valued at the standard contribution:

> **Key Term: sales volume contribution variance**
> The difference between actual and budgeted units sold, multiplied by standard contribution per unit.

### Variable Cost Variance

The variable cost variance captures the effect of spending more or less than standard on variable costs for actual output:

> **Key Term: variable cost variance**
> The difference between standard variable cost for actual output and actual variable cost incurred.
>
> **Key Term: operating statement**
> A statement showing the analysis of movement from budgeted to actual profit by summarising the effect of each variance.

## Constructing the Reconciliation Statement

The profit reconciliation statement is constructed as follows:

**Budgeted contribution**  
Plus/minus sales price variance  
Plus/minus sales volume contribution variance  
Plus/minus variable cost variance  
= Actual contribution  
– Fixed costs incurred  
= Actual profit

Add favourable variances, subtract adverse variances. Focus on contribution, not gross profit.

### **Worked Example 1.1**

A business budgets for sales of 3,000 units at \$40 each. The standard variable cost is \$26 per unit. Actual sales were 3,400 units at \$39.50 per unit. Actual total variable costs were \$89,000. Fixed costs were as budgeted, \$20,000.

_Calculate a full reconciliation from budgeted to actual profit under marginal costing, showing all variances._

> **Answer:**  
> **Budgeted contribution:**  
> 3,000 units × (\$40 – \$26) = \$42,000  
> **Actual contribution:**  
> 3,400 × \$39.50 = \$134,300 (actual sales revenue)  
> Less \$89,000 = \$45,300  
> **Sales price variance:**  
> (\$39.50 – \$40.00) × 3,400 = –\$1,700 (A)  
> **Sales volume contribution variance:**  
> (3,400 – 3,000) × (\$40 – \$26) = 400 × \$14 = \$5,600 (F)  
> **Variable cost variance:**  
> Standard cost for actual output = 3,400 × \$26 = \$88,400  
> Actual variable cost = \$89,000  
> \$88,400 – \$89,000 = –\$600 (A)  
> **Operating statement:**  
> Budgeted contribution: \$42,000  
> Sales price variance: –\$1,700  
> Sales volume contribution variance: +\$5,600  
> Variable cost variance: –\$600
>
> ---
>
> Actual contribution: \$45,300  
> Less fixed costs: –\$20,000  
> Actual profit: \$25,300

### **Worked Example 1.2**

M Ltd budgeted for a contribution of \$18,500 and fixed costs of \$7,000. Actual contribution was \$17,200. The following variances occurred:

- Sales price variance: \$900 adverse
- Sales volume contribution variance: \$1,600 adverse
- Variable cost variance: \$1,200 favourable

_Prepare a reconciliation statement from budgeted to actual profit._

> **Answer:**  
> Budgeted profit: \$11,500 (\$18,500 – \$7,000)  
> Sales price variance: –\$900  
> Sales volume contribution variance: –\$1,600  
> Variable cost variance: +\$1,200  
> Actual profit: \$11,500 – \$900 – \$1,600 + \$1,200 = \$10,200

## Using the Reconciliation to Analyse Performance

The reconciliation statement allows managers to see which areas led to changes in profit compared to budget. For example:

- A favourable sales volume contribution variance suggests higher sales quantity than planned.
- An adverse sales price variance indicates lower selling prices or increased discounting.
- An adverse variable cost variance may suggest inefficiency or higher input prices.

By identifying these factors, management can focus on areas needing attention.

### **Exam Warning**

> **Exam Warning**
> Only include a fixed cost variance if actual fixed costs differ from the budgeted figure. Otherwise, fixed costs in marginal costing are simply period costs and do not create a variance.

### **Revision Tip**

> **Revision Tip**
> Always base the reconciliation on contribution, not on gross or net profit when answering marginal costing questions.

## Treatment of Fixed Costs

Fixed production costs in marginal costing are not absorbed into inventory. All fixed costs are expensed in the period and remain unaffected by changes in sales or production levels, unless there is a variance between budgeted and actual fixed costs. This distinction simplifies the reconciliation.

> **Key Term: fixed cost**
> An indirect cost incurred for a period that does not vary with the level of output, and is treated as a period expense in marginal costing.

## **Summary**

Reconciling budgeted and actual profit using standard marginal costing focuses on movements in contribution. By calculating and interpreting key variances—sales price, sales volume contribution, and variable costs—managers can assess performance, identify root causes, and inform decision making. Fixed costs are treated as period charges, and only included in the reconciliation if they differ from budgeted values.

## **Key Point Checklist**

_This article has covered the following key knowledge points:_

- The purpose and structure of profit reconciliation under standard marginal costing
- Focus on contribution, not gross profit, for analysis
- Calculation and meaning of sales price, sales volume contribution, and variable cost variances
- Construction and interpretation of operating statements for exam purposes
- Treatment of fixed costs as period expenses in marginal costing

## **Key Terms and Concepts**

- standard marginal costing
- contribution
- sales price variance
- sales volume contribution variance
- variable cost variance
- operating statement
- fixed cost

Reconciliation of budgeted and actual profit - Reconciliation under standard marginal costing