1. Sales Variances Variance information useful to the Sales Force ACCT 7310, Spring 2014 1

2. Summary of Variances Static-Budget Variance (difference between target and actual income) Level 1 (Horngren terminology) Level 2 Flexible-Budget Variance (difference between actual and the budget adjusted for level of sales activity) Sales-Volume Variance What is accounted for by the difference in sales level? DM, DL, OH, etc. 2

3. Analyzing Sales Variances Variations in Sales Volume may explain an important part of our total budget variance Variations in Sales Volume may explain an important part of our total budget variance Why did the Sales Volume Variance occur? Why did the Sales Volume Variance occur? Quantity reasons Quantity reasons Mix-of-products reasons Mix-of-products reasons Why did the Sales Quantity change? Why did the Sales Quantity change? Market size may have changed overall Market size may have changed overall Our share of the total market may have changed Our share of the total market may have changed 1

4. Summary of Sales Variances Sales-Volume Variance Level 2 Level 3 Sales-Mix Variance (How much accounted for by the change in product mix? Sales-Quantity Variance (How much accounted for by a change in number of “units” sold? 4

5. Summary of Variances Sales-Quantity Variance Level 3 Level 4 Market-Share Variance How much of the quantity variance is explained by loss/gain of market share? Market-Size Variance How much of the quantity variance is explained by loss/gain of total market size? 5

6. Budgeted Prices & Variable Costs Assume the English Language Institute sells Three Software Products: Product: Grammar Translation Composition Selling price per unit$259 $87$185 Variable cost 189 50 95 CM per unit$ 70 $37$ 90 6

7. Budgeted Sales in Units and $ ProductGrammarTranslationComposition Cont. margin$70$37$90 × Units3,185980735 = Total CM$222,950$36,260$66,150 Unit sales mix65%20%15% Total budgeted contribution margin = $325,360 7

8. Actual Prices, VC, and CM 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 2013. 8

9. Actual Unit Mix and Total CM 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 9

10. Static-Budget Variances 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 From Slide 6Slide 6 10

11. 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 This is what should have occurred given our level of sales. A fair benchmark for the Production/operations people! 11

12. 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 12

13. Recall Overview Static-Budget Variance $13,060 U Flexible-Budget Variance $17,370 F Sales-Volume Variance $30,430 U 13

14. Overview of the Variances Product Actual CM FB Var. Flex Budget Sales Vol. Var Static Budget Gramr. 216,000 $216,000 $14,400 F $201,600 $21,350 U $222,950 Transl. $39,600 $2,970 F $36,630 $370 F $36,260 Comp. $56,7000$56,700 $9,450 U $66,150 Total $312,300$17,370$294,930$30,430$325,360 14

15. Sales-Volume Variance Calculation emphasizing Diff. in Unit Volumes 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

16. Reasons for Sales Volume Variance If only one product, it’s simple: If only one product, it’s simple: (Actual Units-Budgeted Units)*Budg. CM/unit (Actual Units-Budgeted Units)*Budg. CM/unit With multiple products, 2 reasons: With multiple products, 2 reasons: The mix of products could change The mix of products could change The overall number of units sold could change The overall number of units sold could change These are computed as impact on CM from: These are computed as impact on CM from: Sales Mix Sales Mix Sales Quantity Sales Quantity 16

17. Sales-Mix Variance Sales-mix variance Actual units of all products sold Change in mix: (Actual sales % – Budgeted %) Budgeted contribution margin per unit = × × Computed for each product and total. 17

18. Sales-Mix Variance (in terms of CM) 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 18

19. Sales-Quantity Variance Effect on CM purely from quantity sold Sales-quantity variance (Actual units of all products sold – Budgeted units of all products sold) Budgeted sales-mix percentage Budgeted contribution margin per unit = × × Rationale: If overall sales increased… and the sales mix had been as expected (budgeted)… then contribution margin would have increased at the budget rate per unit. 19

20. 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 20

21. Further Analyzing the Sales-Quantity Variance Why did Sales Quantity Change? market-share variance  Impact on CM due to change in share market-size variance  Impact on CM due to change in overall market size 21

22. Market-Share Variance Example Assume that ELI assumed a 20% market share of a total industry sales forecast of 24,500 units of this type of software in the market. In 2013, reported actual industry sales were higher: 28,125 units. ELI’s actual market share? 4,500 ÷ 28,125 = 16% 22

23. Market-Share Variance Example Budgeted total contribution margin was $325,360. Budgeted number of units was 4,900. $325,360 ÷ 4,900 = $66.40/unit To examine the impact of market share, we need the the budgeted average CM per unit. 23

24. Market-Share Variance Example What is the market-share variance? Actual market size in units Actual market share – Budgeted share Budgeted CM per composite unit for budgeted mix = × × 28,125*(0.16 – 0.20) * $66.40 = $74,700 U Note: Not computed product-by-product, since the Sales Mix Variance already separated out that effect. We now are subdividing the Quantity variance. Given the actual market size …if our share changed …and we can use the average CM because our product mix is held constant. The Mix variance addresses the effects of mix separately. Here, we are addressing quantity only. 24

25. Market-Size Variance Actual market size in units – Budgeted market size Budgeted market share Budgeted CM per composite unit for budgeted mix = × × (28,125 – 24,500) × 0.20 × $66.40 = $48,140 F If the market size changed …and we kept our budgeted market share (and of course our mix!)… …then the effect on our CM would be according to our composite unit CM for our mix. 25

26. Thus the Sales Quantity Variance is Explained Sales-Quantity Variance $26,560 U Level 3 Level 4 Market-Share Variance $74,700 U Market-Size Variance $48,140 F 26

27. Grand Overview Static-Budget Variance $13,060 U (Effect on Contribution Margin!) Flexible-Budget Variance $17,370 F Sales-Volume Variance: $30,430 U Sales-Mix Variance $3,870 U Sales-Quantity Variance $26,560 U Market-Share Variance $74,700 U Market-Size Variance $48,140 F 27