Stage 1 — The Budget: What we planned to achieve
Start by setting the budget. These are your standard/planned figures for the period. Change any input and watch the income statement rebuild instantly.
📋 Budget inputs — single product
Selling price per unit (R)
R300.00 per unit
Budgeted sales volume (units)
1 000 units
Budgeted production (units)
Plan to produce more/less than sales for stock build or release
1 000 units
Budgeted opening stock (units)
Stock on hand at the start of the budget period
0 units opening
Auto-calculated — Absorption basis
Budgeted closing stock: 0 units
Closing = Opening + Production − Sales
Material cost per unit (R)
Standard qty × Standard price
R60.00/unit
Labour cost per unit (R)
Standard hours × Standard rate
R40.00/unit
Variable overhead per unit (R)
Standard hours × VOH rate
R20.00/unit
Fixed overhead — total budget (R)
Period cost, absorbed over budget volume
R80 000 total → R80.00/unit
Budgeted Income Statement (Absorption basis)
Key ratios & insights
Budgeted Stock Movement (units)
What the budget tells us: This income statement is built entirely on standard (planned) figures,
using the absorption costing method. Every cost line is: Volume × Standard cost per unit.
If Budgeted Production differs from Budgeted Sales, a stock build or release is being planned —
a common, deliberate choice when smoothing production against seasonal demand. The budget is the benchmark — every actual result will be measured against this.
Stage 2 — What actually happened vs what we planned
Now enter the actual results. The two income statements sit side by side. Notice the profit gap — but can you explain why it happened?
📊 Actual results — change these to see the gap
Actual selling price (R/unit)
R285.00/unit
Actual units sold
1 100 units
Actual units produced
May differ from units sold — drives the stock movement
1 100 units produced
Actual opening stock (units)
Carries over from the budgeted closing stock
0 units opening
Auto-calculated
Closing stock: 0 units
Closing = Opening + Production − Sales
Actual material cost per unit (R)
R68.00/unit
Actual labour cost per unit (R)
R36.00/unit
Actual variable overhead per unit (R)
R22.00/unit
Actual fixed overhead spend (R)
R88 000 actual
Budget Income Statement (Absorption)
Actual Income Statement (Absorption)
Stock Movement — Actual (units)
The profit gap is visible — but the income statement alone cannot tell you why it occurred.
Was it because we sold more units? Or charged a lower price? Or because costs were higher?
All of these blend into a single profit number. This is the limitation the CFO must overcome.
Stage 3 — Basic variances: The first layer of insight
We now split the profit gap into its components. But notice — each variance is still a blended number. A cost variance mixes price and efficiency together. The real story is still hidden.
Budget IS
Actual IS
Basic Variance Summary
The limitation of basic variances:
A material cost variance of — tells you costs were different — but was it because the price per kg changed, or because we used more kg per unit? These are completely different management problems requiring completely different actions.
Basic variance = Actual cost − Budgeted cost
This blends price and efficiency into one number. Standard costing separates them.
A material cost variance of — tells you costs were different — but was it because the price per kg changed, or because we used more kg per unit? These are completely different management problems requiring completely different actions.
Basic variance = Actual cost − Budgeted cost
This blends price and efficiency into one number. Standard costing separates them.
Stage 4 — Standard costing: Separating Price from Efficiency from Volume
Now we need the underlying detail. Enter the standard and actual rates and quantities — not just the cost per unit. Watch how each blended variance splits into PV and EV.
🔍 Standard costing detail — rates & quantities
Standard material qty per unit (kg)
3.0 kg/unit → Std price = R20.00/kg
Actual material qty used (kg total)
3 630 kg total
Standard labour hours per unit
2.0 hrs/unit → Std rate = R20.00/hr
Actual labour hours worked (total)
2 090 hrs total
Set in Stage 2 — Actual units produced
1 100 units produced
Change this on the Actual vs Budget tab — it drives both the stock movement and the standard quantity allowed here.
Auto-calculated from Stage 1 & 2 inputs
Std mat price = b-mat ÷ b-mq
Std labour rate = b-lab ÷ b-lh
Actual mat price = (a-mat × a-prod) ÷ a-mq
Actual labour rate = (a-lab × a-prod) ÷ a-lh
Std labour rate = b-lab ÷ b-lh
Actual mat price = (a-mat × a-prod) ÷ a-mq
Actual labour rate = (a-lab × a-prod) ÷ a-lh
Basic variances (Stage 3)
Standard costing — PV & EV breakdown
The standard costing insight: Each blended variance now splits into two independent signals.
Price Variance = (Std price − Actual price) × Actual quantity
Efficiency Variance = (Std qty − Actual qty) × Std price
Price variances are usually a procurement / market issue. Efficiency variances are a production / operations issue. They require completely different management responses.
Price Variance = (Std price − Actual price) × Actual quantity
Efficiency Variance = (Std qty − Actual qty) × Std price
Price variances are usually a procurement / market issue. Efficiency variances are a production / operations issue. They require completely different management responses.
Stage 5 — Absorption vs Marginal: Two lenses, two different profit answers
The same data, the same period — but two costing philosophies can give different reported profits whenever production and sales volumes differ. Understanding why is essential for management decisions.
📦 Inventory movement — the real driver of the profit difference
Set in Stage 2 — Actual opening stock
0 units opening
Change this, Actual production, or Actual sales on the Actual vs Budget tab.
Auto-calculated
Closing stock: 0 units
Closing = Opening + Production − Sales
Absorption Costing — Operating Statement
Marginal Costing — Operating Statement
ABSORPTION COSTING
Fixed overhead is absorbed into each unit produced at a standard rate, and carried in stock value until the unit is sold.
Profit only reflects FOH for units actually sold this period.
Std FOH/unit = Budget FOH ÷ Budget units
FOH in Cost of Sales = Std FOH/unit × Units SOLD
If production exceeds sales, some FOH sits in closing stock instead of hitting the P&L — profit looks higher.
Std FOH/unit = Budget FOH ÷ Budget units
FOH in Cost of Sales = Std FOH/unit × Units SOLD
If production exceeds sales, some FOH sits in closing stock instead of hitting the P&L — profit looks higher.
MARGINAL COSTING
Fixed overhead is treated as a period cost — the full actual amount is deducted in the period incurred, regardless of how many units were produced or sold.
Contribution = Revenue − All variable costs
Profit = Contribution − Actual fixed overhead (in full)
No FOH is ever carried in stock. Closing stock is valued at variable cost only.
Contribution = Revenue − All variable costs
Profit = Contribution − Actual fixed overhead (in full)
No FOH is ever carried in stock. Closing stock is valued at variable cost only.
The management insight: The profit difference between absorption and marginal costing is not caused by the volume variance directly —
it is caused by fixed overhead sitting in closing stock under absorption costing. When production equals sales, no stock builds or depletes, and both methods report identical profit.
A CFO must always check the inventory movement before comparing profit figures prepared under the two methods.