In the previous article, we looked at several things: (1) the static-budget variance, (2) sales-volume variance, and (3) the relationship between the two (remember static-budget variance = sales-volume variance + flexible budget variance).

In this article, we will focus more on the flexible-budget variance component. Flexible-budget variance shows the different between the flexible budget and actual results. It is caused by variances in selling price per unit of output, direct-material costs, direct-labor costs, variable overhead costs and fixed manufacturing overhead costs.

Let us ignore fixed manufacturing overhead costs for now and only look at the other four variances: selling price variance, direct material variance, direct labor variance and variable overhead variance.

As you can see, there is a difference in contribution margin between the actual result and the flexible budget. This difference in contribution margin is due to the four variances mentioned above.

According to the budget, we are supposed to make a contribution margin of $57.20 per unit. However, the actual results show that we are in fact only making $49 per unit.

The four variances representing the shortfall in contribution margin between actual and flexible-budget results can be shown with the following chart:

## Selling-price variance

We will now look at the selling-price variance first.

A selling-price variance is the increase or decrease in operating income due to differences in the actual and budgeted selling price. This is represented by the brown rectangle in the above diagram. To find the size of the selling-price variance (i.e. the area of the brown rectangle), we use the following formula:

Selling price variance = (Actual selling price – Budgeted selling price) x Actual units sold

Note: you can always find the selling-price variance by $1,260,000 – $1,300,000, but this is the formal formula.

Since selling price per unit is not given in our case, we have to calculate it by ourselves:

Selling price (deduced) | Sales volume (given) | Sales revenue (given) | |

Actual results | $126 | 10,000 | $1,260,000 |

Flexible budget | $130 | 10,000 | $1,300,000 |

Selling price variance = $4 x 10,000 = $40,000U

In this case, we see that there is an unfavorable selling-price variance of $40,000. It is unfavorable because we have been selling goods at a unit price level that is below our budget. We earn less revenue per unit, hence it is unfavorable.

So now, if you are the CEO of the company, you may want to know why there has been such an unfavorable selling-price variance. You will likely ask the marketing manager why there is such a variance. Maybe it was because of a fall in overall market prices? Or a poorer quality of finished goods? Or more buyers made use of a bulk discount than anticipated? This is an example of how the management in a company can utilize management accounting.

In the next article, we will look at the direct-material variance, direct-labor variance and variable manufacturing overhead. Stay tuned!

References:

Horngren, C., Datar, S., Rajan, M. (2015). Flexible Budgets, Direct-Cost Variances, and Management Control. In *Cost Accounting: A Managerial Emphasis* (Fifteenth ed.).