PERFORM a detailed variance analysis of the budgeted and actual contributions. Include a comprehensive breakdown of all elements causing the…

Reconciliation Actual Contribution:5,11,000 Budgeted Contribution:9,00,000 Sales Variances:1,69,000 (A) Cost Variances:2,20,000 (A) Sales Contribution Price Variance:2,95,000 (A) Sales Volume Variance:1,26,000 (F) Sales Contribution Mix Variance:36,000 (F) Material Price Variance:2,20,000 (A) Sales Contribution Quantity Variance:90,000 (F) Budgeted vs. Actual Contribution Referring to working notes, the total budgeted contribution for the year 2024-25 was - 9,00,000 while the actual contribution was - 5,11,000. There is hence an adverse variance in terms of contribution = budgeted contribution – actual contribution = 9,00,000 -511,000 = 389,000 (Adverse). The actual contribution for all three grades of fertilizers is lower than the budgeted contribution. This is because of 2 reasons: Discount policy (b) Raw material procurement cost. Now let us analyse the variances in detail. Sales variances (in terms of contribution) Sales variances in terms of contribution can be classified as sales contribution price variance and sales contribution volume variance. Sales contribution price variance is calculated as 2,95,000 (Adverse). Sr. No. Sales Contribution Price Variance Grade 1 Grade 2 Grade 3 Total 1 Actual Contribution (per kg) * Based on standard cost 150 [450-300*] 80 [280-200*] 20 [180-160*] 2 Standard Contribution (per kg) 200 100 40 3 Actual Quantity (kg) 2,500 3,100 5,400 11,000 4 Sales Contribution Price Variance = (Actual Contribution – Standard Contribution) X Actual Quantity [(1 - 2) × 3] (1,25,000) (62,000) (1,08,000) (2,95,000) SAL's sales and marketing campaign allowed for slightly higher discounts were given on bulk purchases beyond a certain limit. This policy for additional discount was not factored in the standard price (budget), resulting in a difference between actual and budgeted contribution. Sales contribution volume variance is calculated as 1,26,000 (Fav). Sr. No. Sales Contribution Volume Variance Grade 1 Grade 2 Grade 3 Total 1 Actual Quantity (kg) 2,500 3,100 5,400 11,000 2 Budget Quantity (kg) 2,000 3,000 5,000 10,000 3 Standard Contribution (per kg) 200 100 40 4 Sales Contribution Volume Variance = (Actual Quantity - Budget Quantity) X Standard Contribution [(1 - 2) × 3] 1,00,000 10,000 16,000 1,26,000 This is another fundamental metric to assess sales performance. By comparing the actual sales with the budget sales, the company can understand (a) market conditions in which it operates (b) success of any sales and marketing campaigns or even (c) the reasonableness of the company's forecasting capabilities. In the case of SAL, for the year 2024-25 the actual sales volume of 11,000 units has been higher than the budgeted sales of 10,000 units. A possible reason for this could be the spurt in demand due to its successful sales and marketing campaign for the three new grades that were introduced. This resulted in a favourable variance of 1,26,000 for the year. Sales variance in terms of contribution = Sales contribution price variance - 2,95,000 (Adverse) + Sales contribution volume variance - 1,26,000 (Favourable) = 1,69,000 (Adverse). This tallies with the overall results as explained above. It can be concluded that while volumes helped buffer the fall, SAL may have given deeper discounts that eventually impacted its profitability. For example, Grade 3 fertilizer, where the actual contribution is nil. Although SAL sold 400 units more than budget of Grade 3 fertilizer, the contribution towards actual profits was nil. This is equally due to discounts that were given as part of the sales and marketing campaign (the impact of material price discussed later). SAL's sales team should realize that such discounts may be unfeasible in the long run. Price sensitivity analysis of how the selling price of each grade impact demand is an exercise the SAL's team can undertake to understand how much discount to give in future. Analysing sales contribution volume variance in depth To analyse sales contribution volume variance better, it can be further split up as sales contribution mix variance and sales contribution quantity variance. Sales contribution mix variance is 36,000 Favourable. Products Actual Quantity (AQ) Actual Sales in Budgeted Proportion (RAQ) Difference AQ - RAQ Standard Contribution per kg Mix Variance Difference x Standard Contribution Grade 1 2,500 2,200 300 200 60,000 Grade 2 3,100 3,300 (200) 100 (20,000) Grade 3 5,400 5,500 (100) 40 (4,000) Total 11,000 11,000 36,000 Sales mix variance helps identify which product or product lines are performing well. As per the budget proportion sales volume composition was Grade 1: 20%, Grade 2: 30% and Grade 3: 50%. When applied to actual volume of 11,000 units, the distribution appears in the column RAQ – Revised Actual Quantity. The difference between actual quantity sold and the RAQ shows the variation in the mix / proportion of actual sales as compared to the budgeted proportion. Accordingly, Grade 1 has sold 300 units more, having a higher proportion in the mix. It also has the highest contribution of 200per kg as compared to the other 2 grades. This swings the variance to a favourable side. On the contrary, Grade 2 and Grade 3 have a lower proportion in the sales mix, contributing adversely to the sales mix ratio. Overall, the sales mix is positive because SAL sold more of Grade 1 fertilizer which also has a higher contribution as compared to the other 2 grades. Hence, it can be concluded the Grade 1 trends better than the other grades and contributes better towards the profitability of the business. Sales contribution quantity variance is 90,000 Favourable. Products Budget Quantity (BQ) Actual Quantity in Budgeted Proportion (RAQ) Difference RAQ - BQ Standard Contribution per kg Quantity Variance Difference x Standard Contribution Grade 1 2,000 2,200 200 200 40,000 Grade 2 3,000 3,300 300 100 30,000 Grade 3 5,000 5,500 500 40 20,000 Total 10,000 11,000 1,000 90,000 A favourable sales contribution quantity variance indicates by how much the contribution has risen exclusively on account of actual sales in a predetermined proportion (i.e. budgeted) being higher than expectations as per budget. This does not consider any impact on account of variation in sale price and hence is measured with relation to standard contribution. The actual sales are redistributed in proportion of their budget estimates to get a revised actual quantity (RAQ) mix. Hence, had the budget sales been 11,000 units, what would have been the proportion of sales of each of these grades of fertilizers? This is shown in the RAQ column. When compared with the original budget estimate of 10,000 units, it can show the impact on standard contribution due to change in the proportion of quantity of units sold. A rise in the demand side for each grade of fertilizer resulted in positively contributing to the profitability of the company. Sales contribution volume variance = Sales contribution mix variance is 36,000 Favourable + Sales contribution quantity variance is 90,000 Favourable = 1,26,000 (Favourable) Higher sales due to spurt in demand (indicated from favourable sales contribution quantity variance of 90,000) combined with a higher proportion of these sales coming from the profitable Grade 1 fertilizer (indicated from favourable sales mix variance of 36,000), resulted in a favourable sales contribution volume variance of 1,26,000. Cost variances Increase in costs due to unplanned material procurement at higher rates also adversely contributed. Material Price variance is 2,20,000 Adverse. Sr. No. Material Price Variance Grade 1 Grade 2 Grade 3 Total 1 Standard Price (per kg) 150 100 75 2 Actual Price (per kg) 170 120 95 3 Actual Quantity (kg) 2,500 3,100 5,400 11,000 4 Material Price Variance = (Standard Price - Actual Price) × Actual Quantity [(1) - (2) × 3] (50,000) (62,000) (1,08,000) (2,20,000) The material procurement cost for all the grades was higher than standard. There have been times when there is a sudden spike in demand for a particular grade of fertilizer combined with a successful sales and marketing campaign that spurred sales volume. Higher procurement cost from the open market than that agreed with the JIT supplier partners resulted in an adverse impact on actual contribution. Working Notes Budget Contribution for the year 2024-25 Sr. No. Particulars Grade 1 Grade 2 Grade 3 Total 1 Budget Quantity (kg) 2,000 3,000 5,000 10,000 2 Average Selling Price (per kg) 500 300 200 - 3 Direct Material Cost (per kg) 150 100 75 - 4 Direct Labour Cost (per kg) 100 60 75 - 5 Variable Overhead Cost (per kg) 50 40 10 - 6 Standard Contribution (per kg) [2-(3+4+5)] 200 100 40 - 7 Budgeted Contribution [1×6] 4,00,000 3,00,000 2,00,000 9,00,000 Actual Contribution for the year 2024-25 Sr. No. Particulars Grade 1 Grade 2 Grade 3 Total 1 Actual Quantity (kg) 2,500 3,100 5,400 11,000 2 Average Selling Price (per kg) 450 280 180 - 3 Direct Material Cost (per kg) 170 120 95 - 4 Direct Labour Cost (per kg) 100 60 75 - 5 Variable Overhead Cost (per kg) 50 40 10 - 6 Actual Contribution (per kg) [2-(3+4+5)] 130 60 40 - 7 Actual Contribution [1 ×6] 3,25,000 1,86,000 - 5,11,000