Profit analysis refers to the methods usedto generate an overall performance testimonial from the gaue won perspective. That is a wider level the analysisthan the standard expense variance evaluation for production costs and includes those variances as well as several others.

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There room four factors that impact any form of multi-product benefit measurement. This include:

1. Sales prices, 2. Unit costs, 3. Sales volume, and 4. Sales mix.

Remember the underlying presumptions in the master budget and conventional direct cost-volume-profit analysis, i.e., constant salesprices, continuous unit variable costs, and consistent sales mix. This thing shows just how to analyze the differences between the staticmaster budget and also actual power recognizing that prices, costs and sales mix room not constant.

Profit dimensions that deserve to be analyzed encompass manufacturing margin, contribution margin, gross profit, throughput and net income.Measurements based upon the ABC expense hierarchy could additionally be provided such the contribute at the unit, batch, product and also facility levels. See Chapter7 for a conversation of the expense hierarchy. Each form of evaluation involves explaining the difference between the really andbudgeted (or some previous period"s) profit measurements in terms of sales price, unit cost, sales volume and, when applicable, sales mix. An all at once view that profitanalysis appears in the graphics illustration presented in exhibit 13-1 below.


The method to profit evaluation is basically the very same regardless the the type of benefit measurement involved. However, theform of the data easily accessible to the analyst determines the certain calculations required. The data may be in the form of: 1) Units and dollars, or2) Dollars only. If the data are in the form of units and also dollars, i.e., unit sales, unit prices, and also unit costs, climate the results of allfour facets , i.e., sales price, unit cost, sales volume, and also sales mix have the right to be determined. However, if the data space in the form of dollars only, then only the effects of salesprices, unit costs, and sales volume have the right to be accurately determined. This is commonly not a difficulty however,since the sales mix variances are only useful when the products connected may be purchased as substitutes because that each other. This point will be defined below.

The profit analysis techniques applicable to both direct and full absorption costing are shown in this chapter. Thetechniques are nearly the very same for both perform valuation methods. As a result, the full amount to be learned is significantly less 보다 it may appearwhen one an initial skims through the chapter. Profit analysis for direct costing is illustrated first. This is described as donation margin evaluation and isdivided into two sections: I.A) contribution margin evaluation when the data are in units and dollars, and also I.B) donation margin evaluation when the accessible data areonly stated in dollars. Then profit evaluation for full absorption costing is illustrated in 2 sections including: II.A) gun profit evaluation when the data room in unitsand dollars, and also II.B) pistol profit evaluation when the data are declared only in dollars. At the finish of every section, an earnings statement technique is gift thatprovides one alternative method to calculation the variances and a an ext revealing snapshot of performance.

I. PROFIT analysis FOR direct COSTING

A. Contribution MARGIN analysis WHEN DATA room IN UNITS and DOLLARS

Profit evaluation is usually based on a compare of the yes, really data with the budget, yet the yes, really data because that thecurrent period can likewise be compared with the really data from a ahead period. The illustrations below are based on a compare of actualresults against the budget.

As suggested above, a difference between budgeted and also actual contribution margin may an outcome because the the combinedeffects of 4 related yet different factors. The objective of this type of analysis is to isolate the details cause and effect relationship by separatingthe complete variance right into various parts. The adhering to symbols are offered to show the techniques:

AU = yes, really units offered for separation, personal, instance products.BU = Budgeted units sold for individual products. AP = Actual mean sales price forindividual products. BP = Budgeted sales price because that individualproducts. AV = yes, really unit variable price forindividual products. BV = Budgeted unit variable expense forindividual products.MR = spending plan mix ratio for individualproducts, i.e., budgeted units for theproduct separated by complete units budgeted for every products.ACM = Actual donation margin per unitfor individual products.BCM = Budgeted contribution margin per unitfor separation, personal, instance products.TAU = complete actual systems sold.AUA = actual units adjusted to the budgetedmix = (TAU)(MR)

There are many different philosophies to benefit analysis. The analyst normally starts by determining the complete variance in theprofit measurement, in this case, contribution margin. This is the difference between actual full contributionmargin and budgeted full contribution margin. Then this variance may be be separated to display the effects of: 1) sales price and unit price differences, and2) sales volume differences.

Two Variance Approach

In the 2 variance technique the full variance is divided into a merged price price (or versatile budget) variance, and a sales volumevariance. This is achieved in the following manner:

Price cost or Flexible spending plan Variance = Actual full contribution margin - Flexible spending plan contribution marginbased top top actual devices = (ACM)(AU) - (BCM)(AU) or (ACM-BCM)(AU)

The price cost variance combines the results of both sales price differences and also unit expense differences. The is likewise frequentlycalled the donation margin every unit variance and also is calculated like a price variance by multiply the difference between the budgeted and actual donation marginper unit by the actual devices sold. The variance is favorable if the actual contribution margin every unit is higher than the budgeted donation per unit.

Sales Volume Variance = Flexible budget contribution margin based on actual units - understand budgetcontribution margin= (AU) (BCM) - (BU)(BCM) or (AU-BU)(BCM)

The sales volume variance combine the results that sales volume distinctions have on revenue and also costs. It likewise includes theeffects the sales mix differences. It is favorable if the yes, really units marketed are greater than budgeted unit sales. Budgeted donation margin per unit is usedin the calculation to isolation the sales volume effects, i.e., to save the price and also cost results out that the calculation.

Note that as soon as combined, the Price expense Variance and the Sales Volume Variance must be equal to the total Variance in contributionmargin. This is depicted by the linked two variance functional budget strategy illustrated in exhibit 13-2.


Four Variance Approach

The two variances above can be separated in several ways to administer a clearer picture. A useful an approach is to separate the Price cost Variance toshow the impacts of sales price and also unit price differences. This is excellent in the complying with manner:

Sales Price Variance= actual sales revenue - Flexible budget plan sales revenue because that actual units sold = (AP)(AU) - (BP)(AU) or (AP-BP)(AU)

The actual sales price in this calculations are mean prices because that the duration involved. The sales price variance actions the effectthat various prices had on sales revenue, donation margin and also net income. The is favorable if the yes, really sales price is greater than the budgeted salesprice.

Unit price Variance = yes, really variable prices - Flexible budget variable prices for actual devices sold= (AV)(AU) - (BV)(AU) or (AV-BV)(AU)

The unit cost variance measures the differences in between budgeted change cost and also actual variable price for both product expenses andselling and also administrative expenses. That is favorable if the actual variable price per unit is less than the budgeted variable price per unit. Although the isfrequently described as a expense price variance, it contains both intake price differences (i.e., for straight materials,direct labor, variable overhead and variable selling and administrative cost) and any quantity differences for the miscellaneous inputs.

Note that once combined, the sales price variance and also the unit price variance should be equal to the price cost or contribution margin perunit variance.

The Sales Volume Variance have the right to be separated to display the impacts that sales volume differences had top top revenue and also cost. This is excellent in thefollowing manner: Revenue part of Sales Volume Variance = Flexible budget Sales Revenue for actual units marketed - Master budget sales revenue= (AU)(BP) - (BU)(BP) or (AU-BU)(BP)Cost part of Sales Volume Variance = Flexible budget plan variable expenses for actual units marketed - Master budget plan variablecosts= (AU)(BV) - (BU)(BV) or (AU-BU)(BV)Notice the the full variance in sales revenue is led to bytwo factors: 1) the differences in sales prices, and also 2) the distinctions in salesvolume. This can be stated much more specifically as follows:

Total Variance in Sales Revenue = Sales price variance + Revenue part of sales volume variance

The an unified flexible budget method presented in exhibit 13-3 illustrates these relationships.


Also keep in mind that the total variance in variable costs is caused by two factors: 1) the differences in unit cost, and also 2) the distinctions in salesvolume. Specifics this is proclaimed in the adhering to manner:

Total Variance in variable Costs = Unit expense variance + Cost part of sales volume variance

The linked flexible budget approach presented in exhibit 13-4 emphasizes these cost relationships.


Alternative 4 Variance method IncludingSales Mix Variances

When commodities may be purchased together substitutes for each other, it may be helpful to measure up the impact of a difference between the budgeted andactual sales mix. The technique is similar to the calculations forced for straight material mix and also yield variances. In this case, the objective is todetermine the result that a difference in between the budgeted sales mix and the yes, really sales mix had actually on donation margin and also net income. The techniqueseparates the sales volume variance into two parts: 1) the sales mix variance, and also 2) the sales quantity variance. One means to do this is to recognize theactual systems of every product the would have been marketed if the really sales mix had been the same as the budgeted sales mix. These dimensions are described as actualunits changed to the budgeted mix (AUA). The differences between these adjusted units and the actual systems sold provides the mix sports in terms of units. Multiplyingthese distinctions by the budgeted contribution margin per unit provides the sales mix variance that reflects of the result the sales mix distinctions had on contribution margin.The calculations space as complies with for each product:

Actual Units readjusted to the Budgeted Mix or AUA= (Total Actual systems Sold)(Budgeted Mix Ratio)= (TAU)(MR)

Where the Budgeted Mix Ratios = Budgeted units sales for each product ÷ full budgeted unit sales

Sales Mix Variance= (AU-AUA)(BCM)

Sales quantity Variance = (AUA-BU)(BCM)

The sales quantity variance represents what the sales volume variance would have actually been if the budgeted sales mix and actual sales mix were thesame. It is basic to watch this since the sum of the sales mix variance and also sales quantity variance has to equal the sales volume variance. An alert also the ifthe budgeted sales mix and actual sales mix room the same, then actual units and also actual units readjusted would it is in the exact same quantity. This would cause thesales mix variance to be zero, and the sales amount variance would certainly be same to the sales volume variance.

Summary exhibition - The profit evaluation equations portrayed in part I. A aresummarized in exhibit 13-5 for easy reference.

exhibition 13-5
2 Variance 4 Variance different Four Variance
Price price Variance (ACM-BCM)(AU) Sales Price Variance (AP-BP)(AU) Sales Price Variance (AP-BP)(AU)
Unit cost Variance (AV-BV)(AU) Unit cost Variance (AV-BV)(AU)
Sales Volume Variance (AU-BU)(BCM) Revenue component of Sales Volume Variance (AU-BU)(BP) Sales Mix Variance (AU-AUA)(BCM)
Cost component of Sales Volume Variance (AU-BU)(BV) Sales quantity Variance (AUA-BU)(BCM)
Where: AU = really units offered for separation, personal, instance products. BU = Budgeted units offered for individual products. AP = Actual average sales price because that individual products. BP = Budgeted sales price for individual products. AV = actual unit variable expense for individual products. BV = Budgeted unit variable price for separation, personal, instance products. Grandfather = budget mix ratio for individual products, i.e., budgetedunits for the product split by total units budgeted for all products. ACM = Actual contribution margin every unit for individualproducts. BCM = Budgeted contribution margin every unit because that individualproducts. TAU = full actual systems sold. AUA = actual units adjusted to the budgeted mix = (TAU)(MR)
EXAMPLE 13-1The following example has three productsso that all the variances have the right to be illustrated, including the revenue mix variances.To start with a less affiliated problem, view the Examplein the chapter 13 review for a simple single product illustration.Assume the a firm produces a product line that has threeproducts, Economy, Regular and Deluxe. Budgeted and actual data space presented in Exhibit13-6 and 13-7.
Exhibit 13-6Example 13-1: Budgeted and Actual Data
Master budget Data Economy Regular Deluxe Totals
Units Sales 10,000 8,000 2,000 20,000
Sales Price every unit $100.00 $120.00 $140.00
Variable price per unit:
Manufacturing offering & administrative Total 55.00 5.00 60.00 61.00 5.00 66.00 65.00 5.00 70.00
Fixed Cost:
ManufacturingSelling & governmental Total $360,000 164,000 $524,000
actual Data Economy Regular Deluxe Totals
Units Sales 12,000 9,000 1,800 22,800
Sales Price every unit $98.00 $132.00 $154.00
Variable expense per unit:
Manufacturing marketing & administrative Total 53.80 5.00 58.80 67.60 5.00 72.60 72.00 5.00 77.00
Fixed Cost:
Manufacturing marketing & governmental Total $361,380 164,220 $525,600
exhibition 13-7Example 13-1 ContinuedDirect Costing Comparative income Statements
Data Master Budget Actual Total Variance
Economy regular Delux complete $1,000,000 960,000 280,000 2,240,000 $1,176,000 1,188,000 277,200 2,641,200 $176,000 f 228,000 f 2,800 u 401,200 f
Variable Cost:
Economy continual Delux total 600,000 528,000 140,000 1,268,000 705,600 653,400 138,600 1,497,600 105,600 u 125,400 u 1,400 f 229,600 u
Contribution Margin:
Economy regular Delux full 400,000 432,000 140,000 972,000 470,400 534,600 138,600 1,143,600 70,400 f 102,600 f 1,400 u 171,600 f
Less Fixed costs Net Income before Taxes 524,000 $448,000 525,600 $618,000 1,600 u $170,000 f

The comparative revenue statements in exhibit 13-7 indicatethat the actual performance is considerably better than the master budget. Morespecifically, actual net income before taxes to be $170,000 greater than budgetedand, after individually the variance for fixed costs, the complete variance incontribution margin was $171,600 greater than budgeted. However, the is no clearwhat caused these favorable results. What is essential is to different the totalvariance to isolate the results of sales price, cost, sales volume, and also salesmix differences.

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SOLUTION TO instance 13-1

The calculations for each variance are shown in exhibit 13-8. A discussion of the an interpretation of the variancesappears below the exhibit.