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

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sales variances

Sales Variances

Variance information useful to the Sales Force

ACCT 7310, Spring 2014

summary of variances
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.

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

Level 2

Sales-Volume Variance

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?

summary of variances1
Summary of Variances

Level 3

Sales-Quantity Variance

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?

budgeted prices variable costs
Budgeted Prices & Variable Costs

Assume the English Language Institute sells

Three Software Products:

Product:GrammarTranslationComposition

Selling price per unit $259 $87 $185

Variable cost 189 50 95

CM per unit $ 70 $37 $ 90

budgeted sales in units and
Budgeted Sales in Units and $

Product

Grammar

Translation

Composition

Cont. margin

$70

$37

$90

× Units

3,185

980

735

= Total CM

$222,950

$36,260

$66,150

Unit sales mix

65%

20%

15%

Total budgeted contribution margin = $325,360

actual prices vc and cm
Actual Prices, VC, and CM

The following are the actual results for 2013.

Product

Grammar

Translation

Composition

Selling $/unit

$255

$85

$185

Variable cost

180

45

95

Cont. margin

per unit

$ 75

$40

$ 90

actual unit mix and total cm
Actual Unit Mix and Total CM

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

static budget variances
Static-Budget Variances

From Slide 6

Static- Static-

Actual budget budget

Productresultsamountvariance

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

flexible budget
Flexible-Budget

BudgetedActual

contribution unit Flexible

Productmargin/unitvolumebudget

Grammar $70 2,880 $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!

flexible budget variance
Flexible-Budget Variance

Flexible- Flexible-

Actual budget budget

Productresultsamountvariance

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

recall overview
Recall Overview

Static-Budget Variance

$13,060 U

Flexible-Budget

Variance

$17,370 F

Sales-Volume

Variance

$30,430 U

sales volume variance calculation emphasizing diff in unit volumes
Sales-Volume VarianceCalculation 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

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

sales mix variance in terms of cm
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

sales quantity variance effect on cm purely from quantity sold
Sales-Quantity VarianceEffect 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.
sales quantity variance
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

further analyzing the sales quantity variance
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
market share variance example
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%

market share variance example1
Market-Share Variance Example

To examine the impact of market share, we need the the budgeted average CM per unit.

Budgeted number of units was 4,900.

Budgeted total contribution margin was $325,360.

$325,360 ÷ 4,900 = $66.40/unit

market share variance example2
Market-Share Variance Example

What is the market-share variance?

Given the actual market size

=

Actual market size in units

…if our share changed

×

Actual market share – Budgeted share

…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.

×

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.

market size variance
Market-Size Variance

=

Actual market size in units – Budgeted market size

If the market size changed

…and we kept our budgeted market share (and of course our mix!)…

×

Budgeted market share

×

Budgeted CM per composite unit for budgeted mix

…then the effect on our CM would be according to our composite unit CM for our mix.

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

thus the sales quantity variance is explained
Thus the Sales Quantity Variance is Explained

Level 3

Sales-Quantity Variance

$26,560 U

Level 4

Market-Share

Variance

$74,700 U

Market-Size

Variance

$48,140 F

grand overview
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