sales-variance analysis

2009 Foster School of Business Cost Accounting L.DuCharme 1

Sales-Variance Analysis

Chapter 14

2009 Foster School of Business Cost Accounting L.DuCharme 2

Calculation of sales variances

2009 Foster School of Business Cost Accounting L.DuCharme 3

Overview of chapter

• Calculation of sales variances

• Interpretation of sales variances

2009 Foster School of Business Cost Accounting L.DuCharme 4

Overview of “Sales” variances

Actual Flexible Static

Budget Budget

|----- Flex. V.-----|-------------- Sales-volume V.---------------|

|--- Sales-Mix V.---|----------- Sales-Quant.V.------------|

|-- Mkt.-share V. --|-- Mkt.-size V.--|

Actual Mkt. size

x Actual Mkt. share

x Actual sales mix

x Actual CM /unit

Actual Mkt. size

x Actual Mkt. share

x Actual sales mix

x Budget CM /unit

Actual Mkt. size

x Actual Mkt. share

x Budget sales mix

x Budget CM /unit

Actual Mkt. size

x Budget Mkt. share

x Budget sales mix

x Budget CM /unit

Budget Mkt. size

x Budget Mkt. share

x Budget sales mix

x Budget CM /unit

2009 Foster School of Business Cost Accounting L.DuCharme 5

Things to note:

(1) Total number of units of all products sold = market size * market share

(2) Number of each product sold = market size * market share * sales mix

(3) Average CM / unit = sales mix * CM / unit

(4) “Revenue” variances can be calculated by substituting sales price for CM in all of the equations on the prior slide.

2009 Foster School of Business Cost Accounting L.DuCharme 6

Sales-VolumeVariance Components

The following information relates to EnglishLanguages Institute budget for the year 2003.

Product Grammar Trans. Comp.Selling price per unit $259 $87 $185Variable cost 189 50 95Contribution margin per unit $ 70 $37 $ 90

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Sales-VolumeVariance Components-budget

Product Grammar Translation Composition

Cont. margin $70 $37 $90

× Units 3,185 980 735

= Total $222,950 $36,260 $66,150

Sales mix 65% 20% 15%

Total budgeted contribution margin = $325,360

2009 Foster School of Business Cost Accounting L.DuCharme 8

Sales-VolumeVariance Components

Product Grammar Translation Composition

Selling $/unit $255 $85 $185

Variable cost 180 45 95

Cont. marginper unit

$ 75 $40 $ 90

The following are the actual results forEnglish Languages for the year 2003.

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Sales-VolumeVariance Components--actual

Product Grammar Translation Composition

Cont. margin $75 $40 $90

× Units 2,880 990 630

= Total $216,000 $39,600 $56,700

Sales mix 64% 22% 14%

Total actual contribution margin = $312,300

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Static-Budget Variance

Static- Static- Actual budget budget

Product results amount varianceGrammar $216,000 $222,950 $ 6,950 UTranslation 39,600 36,260 3,340 FComposition 56,700 66,150 9,450 U Total $312,300 $325,360 $13,060 U

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Flexible-Budget Variance(actual results “budget”)

Actual contribution Unit Actual

Product margin/unit volume resultsGrammar $75 2,880 $216,000Translation $40 990 $ 39,600Composition $90 630 $ 56,700

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Flexible-Budget Variance(Flexible budget)

Budgeted Actual contribution unit Flexible

Product margin/unit volume budgetGrammar $70 2,880 $201,600Translation $37 990 $ 36,630Composition $90 630 $ 56,700

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Flexible-Budget Variance

Flexible- Flexible- Actual budget budget

Product results amount varianceGrammar $216,000 $201,600 $14,400 FTranslation $39,600 $ 36,630 $ 2,970 FComposition $56,700 $ 56,700 0Total flexible-budget variance $17,370 F

2009 Foster School of Business Cost Accounting L.DuCharme 14

Sales-Volume Variance

Budgetedcontribution

Product Actual Budget margin Grammar (2,880 – 3,185) × $70 = $21,350 U Translation (990 – 980) × $37 = 370 FComposition (630 – 735) × $90 = 9,450 UTotal sales-volume variance $30,430 U

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Sales-Mix Variance

Sales-mix variance

Actual units of all products sold

(Actual sales-mix percentage– Budgeted sales-mix percentage)

Budgeted contribution margin per unit

=

×

×

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Sales-Mix Variance

Grammar: 4,500(0.64 – 0.65) × $70 = $3,150 U

Translation: 4,500(0.22 – 0.20) × $37 = $3,330 F

Composition: 4,500(0.14 – 0.15) × $90 = $4,050 U

Total sales-mix variance = $3,870 U

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Sales-Quantity Variance

Sales-quantity variance

(Actual units of all products sold– Budgeted units of all products sold)

Budgeted sales-mix percentage

Budgeted contribution margin per unit

=

××

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Sales-Quantity Variance

Grammar: (4,500 – 4,900) × 0.65 × $70 = $18,200 U

Translation: (4,500 – 4,900) × 0.20 × $37 = $ 2,960 U

Composition: (4,500 – 4,900) × 0.15 × $90 = $ 5,400 U

Total sales-quantity variance = $26,560 U

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Market-Share Variance Example

Assume that English Languages Institute derivesits total unit sales budget for 2003 from a

management estimate of a 20% market shareand a total industry sales forecast by Desert

Services of 24,500 units in the region.

In 2003, Desert Services reported actualindustry sales of 28,125 units.

2009 Foster School of Business Cost Accounting L.DuCharme 20

Market-Share Variance Example

What is English’s actual market share?

4,500 ÷ 28,125 = 0.16

Budgeted total contribution margin is $325,360.

Budgeted number of units is 4,900.

What is the budgeted averagecontribution margin per unit?

$325,360 ÷ 4,900 = $66.40

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Market-Share Variance Example

What is the market-share variance?

Actual market size in units

(Actual market share– Budgeted market share)

Budgeted contribution margin percomposite unit for budgeted mix

=

×

×

28,125(0.16 – 0.20) × $66.40 = $74,700 U

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Market-Share Variance ExampleAnother way: calculate budgets

Actual Market Size × Actual Market Share× Budgeted Average Contribution Margin Per Unit

28,125 × 0.16 × $66.40 = $298,800

Actual Market Size × Budgeted Market Share× Budgeted Average Contribution Margin Per Unit

28,125 × 0.20 × $66.40 = $373,500

$373,500 – $298,800 = $74,700 U

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Market-Size Variance Example

Market-size variance

(Actual market size in units– Budgeted market size in units)

Budgeted market share

Budgeted contribution margin percomposite unit for budgeted mix

=

×

×

(28,125 – 24,500) × 0.20 × $66.40 = $48,140 F

2009 Foster School of Business Cost Accounting L.DuCharme 24

Market-Size Variance ExampleAnother way: calculate budgets

Actual Market Size × Budgeted Market Share× Budgeted Average Contribution Margin Per Unit

28,125 × 0.20 × $66.40 = $373,500

Static Budget: Budgeted Market Size× Budgeted Market Share

× Budgeted Average Contribution Margin Per Unit24,500 × 0.20 × $66.40 = $325,360

$373,500 – $325,360 = $48,140 F

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Summary of Variances

Static-Budget Variance13,060 U

Level 1

Level 2Flexible-Budget

Variance$17,370 F

Sales-VolumeVariance

$30,430 U

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Summary of Variances

Sales-Volume Variance$30,430 U

Level 2

Level 3Sales-MixVariance$3,870 U

Sales-QuantityVariance

$26,560 U

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Summary of Variances

Sales-Quantity Variance$26,560 U

Level 3

Level 4Market-Share

Variance$74,700 U

Market-SizeVariance$48,140 F

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Another ExampleBOZOtronics

(on class webpage)

****************End of Chapter 14