Date last updated: 02/06/01

Contribution Variances

Managers who have responsibility for generating contribution need to monitor how well they are producing the contribution they budgeted. Accountants compute four variances that managers find useful in managing revenues: Price variances, Volume variances, Mix variances, and cost variances.

The definitions for these variances are:

Price Variance--The amount by which actual prices differ from the target prices established by the manager.
Volume Variance--The amount contribution has increased or decreased because total units sold differ from the total originally budgeted.
Mix Variance--The mix variances occurs because the relative proportions of the unit contribution margins for the units sold differs from the budgeted proportions.
Cost Variance--The dollar amount actual fixed costs differ from the budgeted amounts.

Computation of the Variances

Price Variance =Actual dollar sales-(units sold x budgeted unit price)

Volume Variance =(Actual units sold x budgeted average unit
contribution margin)-Budgeted contribution margin

Mix Variance =(Average unit margin for units sold-Average unit margin
for budgeted units) x Actual units sold

Cost Variance =Budgeted fixed costs - Actual fixed costs

Numerical Example

The following example illustrates the calculation of these variances. Here I use three products to demonstrate the computation of the contribution variances.

Product	Budget Units	Actual Units	Budget Unit Price	Budget Unit Cost
Cola Drink Upper Laid Back Green	55,000 55,000 35,000	45,000 25,000 60,000	$.30 .25 .31	$.17 .16 .18
Total Units	145,000	130,000	na	na

First, I use this information to compute budgeted contribution margin and the contribution margin for actual units sold. The information on actual sales prices is given, and you should assume it comes from the accounting records.

Product	Budget Units at Budget Prices	Actual Units at Budget Prices	Actual Units at Actual Prices
Cola Drink Upper Laid Back Green	$16,500 13,750 10,850	$13,500 6,250 18,600	$14,000 6,000 19,000
Total Sales	$41,100	$38,350	$39,000
Cost of sales at budgeted unit costs
Cola Drink Upper Laid Back Green	$9,350 8,800 6,300	$7,650 4,000 10,800	$7,650 4,000 10,800
Cost of Sales	$24,450	$22,450	$22,450
Contribution Margin	$16,650	$15,900	$16,550
Average unit contribution margin	$.114828	$.122308	na

This information provides the data necessary to compute the contribution variances for the two products. Notice that the actual contribution margin differed from the budgeted contribution margin by only $100, i.e., the actual was $100 less that the budgeted amount. Calculations for the variances appear below.

Price Variance

Price Variance	=Actual dollar sales-(units sold x budgeted unit price)
$650	=$39,000 - $38,350

Volume Variance

=(Actual units sold x budgeted average unit
contribution margin)-Budgeted contribution margin

Actual units x average contribution margin	130,000 x .114828 = 14,928
Budget units x average contribution margin	145,000 x .114828 = 16,650
Volume variance	(15,000) x .114828 = (1,722)

Mix Variance

Mix Variance	=(Average unit margin for units sold-Average unit margin for budgeted units) x Actual units sold
$972 =	($.12230769 - $.114828) x 130,000

Cost Variance (Fixed Costs)

Cost Variance

=Budgeted fixed costs - Actual fixed costs

In this example the manager has no fixed costs to manage. Consequently, we have no fixed cost variance. However, assume the manager had budgeted $5,000 for advertising and that she had spent $6,500. Then the calculation for the cost variance would be: $5,000 - $6,500 = ($1,500).

Variance Spreadsheet

If you want to practice working with these variances, you can download a spreadsheet that enables you to work with three products. You can vary the selling prices, volumes, and unit costs for these products to see how these changes affect the different variances.

Here is another spreadsheet that has the format used in the K&R budget schedules. This worksheet uses the columnar format like the worksheets in the K&R schedules, i.e., Budget Plan, Control Budget, Actual Results, etc.