Page 179 - DMGT514_MANAGEMENT_CONTROL_SYSTEMS

Management Control Systems

Notes = 680 (A)
9. Fixed Cost Variance = Budgeted Fixed Cost – Actual Fixed Cost
= 3000 – 3050
= 50 (A)

10. Difference in Operating Income = 1000 – 2470
= 1470 (F)

Self Assessment

Fill in the blanks:
5. ………………… = (Budgeted Market Share Percentage) × Actual industry sales volume in
units – Budgeted industry sales volume in units) ×Budgeted Average contribution margin
Per unit.
6. Sales Margin Price Variance = (Budgeted Price – Actual Price) × ………………….. .

8.4 Summary of Variances

There are several ways in which variances can be summarized in a report.

Did u know? The different methods of calculating variances are: time period of comparison,
focus on gross margin, evaluation standards, full-cost systems and amount of detail
information.
These approaches are described below.

Time Period of Comparison

Some companies use performance for the year to date as the basis for comparison. They use the
budgeted and actual amounts for the six months ending June 30, rather than the amounts for the
month June. Other companies compare the budget for the whole year. The actual amounts are
taken for the first six months and the estimates of revenues and expenses are taken for the next
six months.
A comparison of the annual budget with current expectation of actual performance for the
whole year shows how closely the business unit manager expects to meet the annual profit
target. If the performance for the year to date is worse than the budget for the year to date, the
deficit is likely to be overcome in the remaining months. However, the forces that caused the
actual performance to be below budget for the year to date are expected to continue for the
remaining part of the year, and this is likely to make the final figure significantly different from
the budgeted amount.

Focus on Gross Margin

Though selling prices are assumed to be constant throughout the year, in practice, changes in
costs and other factors make it difficult to maintain the same selling price. So, the marketing
manager must try to achieve a budgeted gross margin, that is, a constant spread between costs
and selling prices. To do so, the ‘gross margin’ variance must be considered. The gross margin
is the difference between the actual selling prices and manufacturing costs.

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