Page 316 - F2 - MA Integrated Workbook STUDENT 2018-19

Chapter 13

8.3 Variances

Budgetary control is achieved by comparing the actual results with the budget. The
differences are calculated as variances and management action may be taken to
investigate and correct the variances if necessary or appropriate.

 If costs are higher or revenues are lower than the budget, then the difference is
an adverse variance.

 If costs are lower or revenues are higher than the budget, then the difference is
a favourable variance.

Example 1

A company planned to produce and sell 1,000 units and had a direct material
budget of $5,000 but they only produced and sold 900 with a direct material
cost of $4,800. It looks like the company has spent less on material than it
had budgeted,

Budget Actual Variance
$5,000 $4,800 $200 favourable

However, this is not comparing like with like, the actual cost must be
compared to the flexed budget.

Budgeted material cost per unit = $5,000/1,000 = $5 per unit

Total flexed budget material cost = $5 × 900 = $4,500

Budget Flexed budget Actual Variance

1,000 units 900 units 900 units 0 units
$5,000 $4,500 $4,800 $300 adverse

The difference between the actual and the flexed budget is known as the
budget variance.

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