Budget Variance in a Café
A café prepared a monthly budget: sales of 2,000 coffees at $5.00 each, with milk cost budgeted at $0.50 per coffee, wages budgeted at $6,000 fixed, and rent $2,500. Actual results: 2,400 coffees sold at an average price of $4.80, milk cost $0.60 per coffee, wages $6,300 and rent $2,500. The owner is pleased because total sales revenue was higher than budget and concludes the business 'did well'. She wants to reward staff with a bonus and is planning to increase the milk price assumption in next month's budget to $0.60 without checking why costs rose.
1. Calculate the sales price and sales volume variances and assess whether the owner's conclusion is justified.
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Budgeted revenue = 2,000 × $5.00 = $10,000. Actual revenue = 2,400 × $4.80 = $11,520. Total revenue variance is favourable $1,520. Split it: price variance = (actual price − budget price) × actual volume = ($4.80 − $5.00) × 2,400 = −$480, unfavourable. Volume variance = (actual volume − budget volume) × budget price = (2,400 − 2,000) × $5.00 = +$2,000, favourable. The net favourable $1,520 is driven entirely by volume; the price cut of $0.20 per cup reduced revenue by $480. So revenue rose, but the owner's conclusion that the business 'did well' is premature - she must also examine the cost variances before judging performance.
2. Evaluate the milk cost and wages outcomes, and critique the plan to simply raise the budgeted milk price.
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Budgeted milk cost = 2,000 × $0.50 = $1,000; actual = 2,400 × $0.60 = $1,440, an unfavourable $440. Part of this is volume-driven: 400 extra coffees at the budget rate would cost $200, so the price/usage component is $240 unfavourable - a genuine efficiency or supplier issue. Wages were budgeted $6,000 and actual $6,300, $300 unfavourable, which may be justified by the 20% volume increase, but should be investigated. Simply raising the budget assumption to $0.60 hides the cause and builds a known inefficiency into the plan. The owner should find out whether the increase reflects a supplier price rise (adjust the budget and consider renegotiating) or waste and over-pouring (a control problem). Rewarding staff before this analysis risks rewarding the wrong behaviour.