Question

A furniture manufacturer predicts that they will sell 12,000 of product A and 8,000 of product B in the next financial period. They prepare their budget accordingly.

At the end of the financial period the actual figures are 15,000 for product A and 7,000 for product B. Costs are assigned and the wholesale margin on product A is calculated to be $450 and on product B it is $350.

Calculate the predicted and the actual sales mix, the variances that need to be examined and their impact.

Answer 1

                               Product A                   Product B

Actual                      15,000                        7,000

Budgeted                 12,000                       8,000

Difference                3,000                        (1,000)

Margin                      450                           350

Variance                   $1,350,000              ($350,000)

Sales volume variance = $1,350,000 favourable - 350,000 adverse = $1,000,000 Favourable

Favourable sales volume means that there is higher standard contribution or profit (margin) than the budgeted contribution or profit.

Two reasons for favourable outcome:

1. Sales mix variance is favourable which means that higher proportion of more profitable product (Product A has higher margin) is sold than planned.

2. Sales quantity variance is favourable meaning that higher quantity is sold than budgeted.