Case 017Budgeting, variance and reportingCore
A cement plant missed budgeted EBITDA by Rs 32.75 crore while selling 15% fewer tonnes. Use a flexed budget to split the variance.
1The situation
Shilakhand Cement Works budgeted to sell 1.0 million tonnes at Rs 4,500 a tonne, with variable cost of Rs 2,800 a tonne and fixed cost of Rs 60 crore, for EBITDA of Rs 110 crore. Actual results: 0.85 million tonnes sold at Rs 4,600 a tonne, variable cost of Rs 2,950 a tonne and fixed cost of Rs 63 crore, for EBITDA of Rs 77.25 crore.
The plant head says costs were under budget, because total variable cost came in Rs 29.25 crore below plan.
2Your task
Split the Rs 32.75 crore shortfall into volume, price, variable cost and fixed cost, and test the plant head's claim.
Quick check
Is the plant head right that variable costs beat budget?
Worked solution
Try it on paper, then open one step at a time.
30-second answerThe answer to give first
Volume cost Rs 25.5 crore, price added Rs 8.5 crore, variable cost per tonne cost Rs 12.75 crore and fixed cost Rs 3 crore. The plant head is wrong: variable cost looks Rs 29.25 crore under budget only because fewer tonnes were made; per tonne it ran Rs 150 over. Sales owns Rs 17 crore of the gap and operations Rs 15.75 crore.
Step 1Why is comparing actual costs with the original budget misleading?
A budget built for 1.0 million tonnes expects the costs of 1.0 million tonnes. When the plant sells 0.85, every variable line falls automatically, and the static comparison credits operations with a saving it did not earn. A flexed budgetThe original budget recalculated at the actual volume, keeping budgeted prices and costs per unit, so volume is separated from efficiency. restates the plan at actual volume, so each remaining difference reflects price or efficiency, not quantity. A family budgeting Rs 12,000 for groceries for four people that spends Rs 10,000 while two are away has not saved money if the per-person spend went up.
| Rs crore | Budget, 1.0 mt | Flexed, 0.85 mt | Actual, 0.85 mt | Actual vs flexed |
|---|---|---|---|---|
| Revenue | 450.00 | 382.50 | 391.00 | +8.50 |
| Variable cost | (280.00) | (238.00) | (250.75) | -12.75 |
| Contribution | 170.00 | 144.50 | 140.25 | |
| Fixed cost | (60.00) | (60.00) | (63.00) | -3.00 |
| EBITDA | 110.00 | 84.50 | 77.25 | -7.25 |
Step 2How does the variance split?
Volume first: 0.15 million tonnes fewer at the budgeted contribution of Rs 1,700 a tonne, Rs 25.5 crore. Then price: 0.85 million tonnes at Rs 100 more a tonne, plus Rs 8.5 crore. Variable cost: 0.85 million tonnes at Rs 150 more a tonne, minus Rs 12.75 crore, which is the overrun the static comparison hid. Fixed cost is simply Rs 63 crore against Rs 60 crore, minus Rs 3 crore. The four add to minus Rs 32.75 crore.
Step 3What does this tell management?
Group the bars by owner. Sales owns volume and price, a net minus Rs 17.0 crore: it held price up but lost 15% of tonnes, which suggests the price was set above what the market would take. Operations owns cost per tonne and fixed cost, minus Rs 15.75 crore. Rs 150 a tonne more variable cost in cement usually means fuel or power; check whether the plant switched to costlier coal, or whether lower volume worsened efficiency, since kilns run less efficiently below capacity.
Say the limit of the method. Splitting price at actual volume and volume at budget price is a convention; a different order moves a little between the bars, so state it on the bridge. And the flexed budget assumes cost per tonne should not change with volume, which is not quite true for a kiln: some of the Rs 150 may be the volume shortfall in disguise.
Where candidates lose it
Candidates compare actual variable cost of Rs 250.75 crore with the budget's Rs 280 crore and praise the plant for saving Rs 29.25 crore. That saving is the volume shortfall wearing a cost label.
The second miss is computing the price variance on budgeted volume, Rs 10 crore, which double counts with the volume variance and breaks the reconciliation.
What the interviewer asks next
- How would you split the variable cost overrun between fuel price and fuel efficiency?
- Was the Rs 100 price rise worth it if it caused the volume loss?
- How would you present this to the plant head without starting a fight?
Company names and figures are illustrative.