W. BentzEMBA 8021 Agenda Today Points regarding the practice questions Update regarding the final input Quiz Overview of product control system variances Comments about the use of selected variances

W. BentzEMBA 8022 Much of the remainder of the course is concerned with MANAGEMENT CONTROL SYSTEMS.

W. BentzEMBA 8023 Contribution Variances Remember, the purpose of our variance schemes at the management control level are to help to explain why actual results differed from planned results. We do not presume the plan was optimal for either the planned or the realized environments. Rather, we are attempting to shed some light on the reasons for differences.

W. BentzEMBA 8024 Contribution Variances Once we have developed a variance scheme and computed some variances, we still need to have some heuristics to guide the process of investigating variances in a cost-effective manner. Variances are defined as either good or bad in terms of their effects on income.

W. BentzEMBA 8025 Managerial Performance No variance scheme can anticipate operating conditions, market conditions, the actions of competitors, and economic developments. Our inability to anticipate the above forces is even more limited in a global marketplace that is subject to political shocks and natural disasters.

W. BentzEMBA 8026 Managerial Performance What we can hope to do is to isolate some common effects that tend to be associated with different centers of responsibility and to provide a starting point for more in-depth analyses of actual performance. Areas in conformance with plan receive less attention than those not in conformance. We are of the opinion that successes should be reviewed along with failures to continuously improve.

W. BentzEMBA 8027 Managerial Performance This perspective is entirely consistent with the idea organizations should be managed based on the data. At some level, performance should be analyzed for corrective action and problem-solving solutions. The intent is not to club managers into conformance, but to pursue the continuous cycle of planning, acting, evaluating, replanning, etc.

W. BentzEMBA 8028 Performance Dimensions For the most part, we have focused on: –Price realization –Sales volumes Overall sales volume Sales mix –Production (cost) variances Resource prices Efficiency of resource usage Idle capacity cost

W. BentzEMBA 8029 Bentz/Lusch Schema We attempt to add the following additional perspectives: –Planning versus performance separation –Strategic versus operating emphasis The response has been best among those firms most concerned with positioning in definable markets and concerned with market share.

W. BentzEMBA Case I (Onion Style)-Plan Products:TotalPlainDeluxe Price $ 11$ 10 $ 12 Variable costs Contribution $ 5$ 4 $ 6 Planned sales-u u Contribution $ 50$ 20 $ 30 Planned sales mix50% 50% Total sales - 10 units

W. BentzEMBA Example - Actual Products:Total PlainDeluxe Price$11.2$ 10 $ 12 Variable costs Contribution $ 5.2$ 4 $ 6 Actual sales-units u Contribution $ 52$ 16 $ 36 Actual sales mix40% 60% Total sales - 10 units

W. BentzEMBA Calculation of Variances Actual - Plan = Variance Contribution Margin$ 52 -$ 50 = $ 2 Quantity Variances Only: Plain: (Q A - Q B )C B = (4 - 5)$4 =-$ 4 Deluxe: (Q A - Q B )C B = (6 - 5)$6 = + 6 Total: $ 2 Total variance = sum of the product variances.

W. BentzEMBA Decomposition of Variance When it is appropriate to consider a mix variance, the total contribution margin variance is divided into an overall volume effect and a mix effect. Volume: (TQ A - TQ B )C B =( )$5 =$0

W. BentzEMBA P = Plain, D = Deluxe Mix: (Q AP - Q BP )(C BP -C B ) = (4 - 5)($4 - $5) = -1(-$)1 = +$ 1 (Q AD - Q BD )(C BD -C B )= (6 - 5)($6 - $5) = +1($1) = +$1 Total mix variance= $ 2

W. BentzEMBA Total Quantity Variance Total quantity variance =$ 2 Two variance system: Overall volume variance$ 0 Mix variance 2 Total quantity variance$ 2 In this very simple case, it is easy to see we sold I more Deluxe unit, and 1 less Plain. The Deluxe units have a higher contribution margin - $2.

W. BentzEMBA Case II - Plan Products:Total PlainSoSoDeluxe Price$10.9 $ 10$ 11 $ 12 Variable costs Contribution $ 4.9 $ 4$ 5 $ 6 Planned sales u Contribution $ 49 $ 12$ 25 $ 12 Planned sales mix 30% 50% 20% Total sales - 10 units

W. BentzEMBA Case II - Actual Products:Total PlainSoSoDeluxe Price$10.8 $ 10$ 11 $ 12 Variable costs Contribution $ 4.8 $ 4$ 5 $ 6 Actual sales u Contribution $ 53 $ 16$ 25 $ 12 Actual sales mix 36.4%45.4% 18.2% Total sales - 11 units Note: The above amounts are rounded.

W. BentzEMBA Case II Quantity Variances Actual - Plan = Variance Contribution Margin$ 53 -$ 49 = $ 4 Quantity Variances Only: (Actual Q - Budget Q)Product CM Plain: (Q AP - Q BP )C BP = (4 - 3)$4 =+$ 4 SoSo: (Q AS - Q BS )C BS = (5 - 5)$5 = +$ 0 Deluxe: (Q AD - Q BD )C BD = (2 - 2)$6 = +$ 0 Total of quantity variances $ 4

W. BentzEMBA Quantity Variances The quantity variances measure the effects on income of differences in the sales per the budget and actual sales, product by product. There is no breakdown as to the major causes of the differences. Price differences and cost differences are not reflected in the quantity variances, just the effect of different quantities on total contribution margin.

W. BentzEMBA Decomposition of Variance Volume effect: (TQ A - TQ B )C B =( )$4.9 = $4.9 Mix effect (Q AP - Q BP )(C BP -C B ) : Pl: ( )($4 - $4.9) =.7(-$0.9)= -$.63 So: ( )($ ) = -.5(+$0.1)= Dx: ( )($ ) = -.2(+$1.1)= Total mix variance= -$0.9 Total quantity variance = $4.0

W. BentzEMBA NOTICE! Because we cannot clearly point to the substitution of one product for another in Case II, the most useful measure is the overall impact of selling a slightly different mix of products. Normally, one can get some overall sense of the shifts taking place, and a measure of the overall mix variance, but emphasizing individual mix variance elements may not be worth the additional cost and time.

W. BentzEMBA Remember Conditions under which the mix variance is more likely to be useful: 1. Contribution margins must vary from product to product to get a mix variance. 2. The products compete for limited production, promotion or distribution resources. Thus, a constraint limits total sales in some way.

W. BentzEMBA Remember 3.The products are substitutes for one another in the view of consumers. So if a group of consumers choose among cars, small trucks, or sport-utility vehicles, then they are substitutes for comparison purposes. Substitution is by the consumer in this case.

W. BentzEMBA Conversely, Conditions under which an overall volume variance is apt to be useful: 1.A mix variance is used to estimate the effects of shifts in the mix of products sold. The two variances must go together to explain the total variance. 2.Contribution margins vary little across products, and managers have little interest in individual quantity variances.

W. BentzEMBA Market Share Variances The addition of market share variances represent a small step. The idea is to separate the rising (falling) tide effect associated with changes in the overall market for a product, and to determine how the firm did relative to the market. The specification of a market share goal is key to this process.

W. BentzEMBA Market Share Variances In addition, we provide for the possibility that other factors may influence the ability of the firm to deliver product. There is more subjectivity here, but the idea is to estimate the effect of production problems or distribution problems on profitability. Of course, lost sales are not the complete story, if products have varying contributions margins.

W. BentzEMBA Market Share Variances Suppose the goal is to keep 10% of a market. To our previous illustration, add the information that the market is 100 units, and our target share is 10% of the total market. Further, assume the market increases to 110 units, but we sell 12 units. How well did we perform?

W. BentzEMBA Market Share Variances Market share performance variance: ( %{110})$4.90 = $4.90 or (12/ ){110}$4.90 = $4.90 Market size planning variance: ( %){100} $4.90 = $4.90

W. BentzEMBA Market share planning If subsequent conditions indicate we should have planned for a different market share, we can calculate a market share planning variance. [(S R - S P )M R ]C P where S R is the share per the revised plan, and S P is the share per the ex-ante plan.

W. BentzEMBA Market share performance variance

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W. BentzEMBA 80232