1. 2009 Foster School of Business Cost Accounting L.DuCharme 1 Sales-Variance Analysis Chapter 14

2. 2009 Foster School of Business Cost Accounting L.DuCharme 2 Calculation of sales variances

3. 2009 Foster School of Business Cost Accounting L.DuCharme 3 Overview of chapter Calculation of sales variances Interpretation of sales variances

4. 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

5. 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.

6. 2009 Foster School of Business Cost Accounting L.DuCharme 6 Sales-Volume Variance Components The following information relates to English Languages Institute budget for the year 2003. Product Grammar Trans. Comp. Selling price per unit$259 $87$185 Variable cost 189 50 95 Contribution margin per unit$ 70 $37$ 90

7. 2009 Foster School of Business Cost Accounting L.DuCharme 7 Sales-Volume Variance Components-budget ProductGrammarTranslationComposition Cont. margin$70$37$90 × Units3,185980735 = Total$222,950$36,260$66,150 Sales mix65%20%15% Total budgeted contribution margin = $325,360

8. 2009 Foster School of Business Cost Accounting L.DuCharme 8 Sales-Volume Variance Components ProductGrammarTranslationComposition Selling $/unit$255$85$185 Variable cost 180 45 95 Cont. margin per unit $ 75$40$ 90 The following are the actual results for English Languages for the year 2003.

9. 2009 Foster School of Business Cost Accounting L.DuCharme 9 Sales-Volume Variance Components--actual ProductGrammarTranslationComposition Cont. margin$75$40$90 × Units2,880990630 = Total$216,000$39,600$56,700 Sales mix64%22%14% Total actual contribution margin = $312,300

10. 2009 Foster School of Business Cost Accounting L.DuCharme 10 Static-Budget Variance Static- Static- Actual budget budget Product results amount variance Grammar$216,000$222,950$ 6,950 U Translation 39,600 36,260 3,340 F Composition 56,700 66,150 9,450 U Total$312,300$325,360$13,060 U

11. 2009 Foster School of Business Cost Accounting L.DuCharme 11 Flexible-Budget Variance (actual results “budget”) Actual contribution Unit Actual Product margin/unit volume results Grammar$752,880$216,000 Translation$40 990$ 39,600 Composition$90 630$ 56,700

12. 2009 Foster School of Business Cost Accounting L.DuCharme 12 Flexible-Budget Variance (Flexible budget) Budgeted Actual contribution unit Flexible Product margin/unit volume budget Grammar$702,880$201,600 Translation$37 990$ 36,630 Composition$90 630$ 56,700

13. 2009 Foster School of Business Cost Accounting L.DuCharme 13 Flexible-Budget Variance Flexible-Flexible- Actual budget budget Product results amount variance Grammar$216,000$201,600$14,400 F Translation$39,600 $ 36,630$ 2,970 F Composition$56,700 $ 56,700 0 Total flexible-budget variance$17,370 F

14. 2009 Foster School of Business Cost Accounting L.DuCharme 14 Sales-Volume Variance Budgeted contribution Product Actual Budget margin Grammar(2,880 – 3,185) × $70 =$21,350 U Translation (990 – 980) × $37 = 370 F Composition (630 – 735) × $90 = 9,450 U Total sales-volume variance$30,430 U

15. 2009 Foster School of Business Cost Accounting L.DuCharme 15 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 = × ×

16. 2009 Foster School of Business Cost Accounting L.DuCharme 16 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

17. 2009 Foster School of Business Cost Accounting L.DuCharme 17 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 = × ×

18. 2009 Foster School of Business Cost Accounting L.DuCharme 18 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

19. 2009 Foster School of Business Cost Accounting L.DuCharme 19 Market-Share Variance Example Assume that English Languages Institute derives its total unit sales budget for 2003 from a management estimate of a 20% market share and a total industry sales forecast by Desert Services of 24,500 units in the region. In 2003, Desert Services reported actual industry sales of 28,125 units.

20. 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 average contribution margin per unit? $325,360 ÷ 4,900 = $66.40

21. 2009 Foster School of Business Cost Accounting L.DuCharme 21 Market-Share Variance Example What is the market-share variance? Actual market size in units (Actual market share – Budgeted market share) Budgeted contribution margin per composite unit for budgeted mix = × × 28,125(0.16 – 0.20) × $66.40 = $74,700 U

22. 2009 Foster School of Business Cost Accounting L.DuCharme 22 Market-Share Variance Example Another 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

23. 2009 Foster School of Business Cost Accounting L.DuCharme 23 Market-Size Variance Example Market-size variance (Actual market size in units – Budgeted market size in units) Budgeted market share Budgeted contribution margin per composite unit for budgeted mix = × × (28,125 – 24,500) × 0.20 × $66.40 = $48,140 F

24. 2009 Foster School of Business Cost Accounting L.DuCharme 24 Market-Size Variance Example Another 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 Unit 24,500 × 0.20 × $66.40 = $325,360 $373,500 – $325,360 = $48,140 F

25. 2009 Foster School of Business Cost Accounting L.DuCharme 25 Summary of Variances Static-Budget Variance 13,060 U Level 1 Level 2 Flexible-Budget Variance $17,370 F Sales-Volume Variance $30,430 U

26. 2009 Foster School of Business Cost Accounting L.DuCharme 26 Summary of Variances Sales-Volume Variance $30,430 U Level 2 Level 3 Sales-Mix Variance $3,870 U Sales-Quantity Variance $26,560 U

27. 2009 Foster School of Business Cost Accounting L.DuCharme 27 Summary of Variances Sales-Quantity Variance $26,560 U Level 3 Level 4 Market-Share Variance $74,700 U Market-Size Variance $48,140 F

28. 2009 Foster School of Business Cost Accounting L.DuCharme 28 Another Example BOZOtronics (on class webpage) **************** End of Chapter 14