Business – 5.5 Budgets – Variances | e-Consult
5.5 Budgets – Variances (1 questions)
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Answer:
- Total Variance (TV)
TV = Actual Cost – Flexible Budget Cost
| Actual Cost | £162,500 |
| Flexible Budget Cost | £150,000 |
| TV | £12,500 Unfavourable |
- Spending (Price) Variance (SPV)
Standard cost for actual output = Standard cost per unit × Actual units = £30 × 5,000 = £150,000.
SPV = Actual Cost – Standard Cost for actual output
| Actual Cost | £162,500 |
| Standard Cost (5,000 units) | £150,000 |
| SPV | £12,500 Unfavourable |
- Efficiency (Volume) Variance (EV)
Because the flexible budget is already based on the actual output, the efficiency variance is zero.
EV = Flexible Budget Cost – Standard Cost for actual output = £150,000 – £150,000 = £0.
Interpretation
- The unfavourable total and spending variances indicate that the firm spent more per unit than the standard cost, pointing to higher input prices, waste, or inefficiencies.
- The zero efficiency variance shows that the firm produced exactly the level of output used in the flexible budget, so the variance is purely a cost‑control issue rather than a volume issue.