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Hi, I was wondering if I can ask a question from the examiner’s report 2015.
Example 1
A company uses standard marginal costing. Its budgeted contribution for the last month was $20,000. The
actual contribution for the month was $15,000, and the following variances have been calculated:
Sales volume contribution variance $5,000 adverse
Sales price variance $9,000 favourable
Fixed overhead expenditure variance $3,000 favourableWhat was the total variable cost variance?
A $9,000 adverse
B $9,000 favourable
C $12,000 adverse
D $12,000 favourable
The correct answer is A.
This is calculated by finding the balancing figure. The total variance between budgeted contribution and actual
contribution is $5,000 adverse ($20,000 – $15,000). The sales volume and sales price variances sum to
$4,000 favourable, so to balance, the variable cost variance must be $9,000 adverse.
The most popular answer was B ($9,000 favourable), This implies they used the correct approach but made an
error on the sign of the variance.
Answers C and D included the fixed overhead expenditure variance in the reconciliation of the two contribution
figures. This is incorrect because it would be needed to reconcile profit figures, but not contribution figures.My question is why the answer is A not B. Many thanks.
If there was no variable cost variance, then the actual contribution would be 20,000 – 5,000 + 9,000 = 24,000.
Given that the actual contribution is 9,000 lower at 15,000, then the variable cost variance must be 9,000 adverse.
Thanks John, I think I understand where I made the mistake. Can I please also confirm with you in this question the formula ( or the way we think about this) should be : budgeted contribution + Sales Volume Variance + Sales Price Variance + Variable Cost Variance = Actual contribution, however we have to apply (+/-) when we know it is negative or positive. Hope this makes sense. Thank you:)
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