Which of the following will most likely result in a favorable controllable margin difference?
a. Sales exceeding budget; costs under budget
b. Sales exceeding budget; costs over budget
c. Sales under budget; costs under budget
d. Sales under budget; costs over budget
The correct answer and explanation is :
Correct Answer:
a. Sales exceeding budget; costs under budget
Explanation:
Controllable margin is a key performance metric in managerial accounting that measures the profitability a manager can directly influence. It is calculated as:
[
\text{Controllable Margin} = \text{Sales} – \text{Controllable Fixed Costs} – \text{Variable Costs}
]
To achieve a favorable controllable margin difference, we need a situation where revenue increases and costs decrease relative to the budget. Let’s analyze each option:
- Sales exceeding budget; costs under budget (Option A)
- Higher sales increase total revenue.
- Lower costs (both variable and fixed) improve profitability.
- Since both factors contribute positively, the controllable margin improves significantly.
- This is the best option for a favorable controllable margin difference.
- Sales exceeding budget; costs over budget (Option B)
- While higher sales contribute positively, the increase in costs offsets some or all of the gains.
- If cost increases are proportionally higher than revenue gains, the controllable margin may not improve significantly.
- Result: Mixed impact on controllable margin.
- Sales under budget; costs under budget (Option C)
- Lower sales reduce revenue, which negatively impacts margin.
- Lower costs help offset this loss, but it may not be enough to fully compensate.
- Result: Uncertain effect, but likely neutral or slightly unfavorable.
- Sales under budget; costs over budget (Option D)
- Lower sales reduce revenue.
- Higher costs further decrease profitability.
- This results in the worst possible controllable margin difference.
Thus, the most favorable situation is Option A, where sales exceed the budget and costs remain below the budget.