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:
A favorable controllable margin difference occurs when the actual controllable margin is higher than the budgeted controllable margin. Controllable margin is calculated as:
[
\text{Controllable Margin} = \text{Contribution Margin} – \text{Controllable Fixed Costs}
]
Where:
- Contribution Margin is the difference between sales revenue and variable costs.
- Controllable Fixed Costs are fixed costs that can be influenced by the manager, such as advertising and discretionary expenses.
Now, let’s analyze each option:
- Option A (Sales exceeding budget; costs under budget) – Favorable Outcome
- Higher-than-expected sales increase revenue, boosting the contribution margin.
- Lower-than-expected costs mean expenses are reduced, increasing profit.
- Since both factors contribute positively, the controllable margin improves, leading to a favorable variance.
- Option B (Sales exceeding budget; costs over budget) – Uncertain Outcome
- While higher sales improve revenue, the increase in costs could offset the gains.
- If the cost increase is proportionally higher than the revenue increase, the net effect may be unfavorable.
- Option C (Sales under budget; costs under budget) – Mixed Outcome
- Lower sales decrease revenue, negatively impacting the contribution margin.
- Reduced costs might help offset some of the losses, but if the sales drop is significant, the net effect may still be unfavorable.
- Option D (Sales under budget; costs over budget) – Unfavorable Outcome
- Reduced sales lower revenue, shrinking the contribution margin.
- Increased costs further decrease profitability, making the controllable margin worse.
Thus, Option A is the most likely to result in a favorable controllable margin difference.