Sales Variances - PowerPoint Presentation

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Sales Variances - PPT Presentation

Variance information useful to the Sales Force ACCT 7320 Fall 2010 1 Summary of Variances StaticBudget Variance difference between target and actual income Level 1 Horngren terminology ID: 437239

variance sales budgeted market sales variance market budgeted mix actual quantity unit share total budget units size margin product

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Slide1

Sales Variances

Variance information useful to the Sales ForceACCT 7320, Fall 2010

1Slide2

Summary of Variances

Static-Budget Variance

(difference between target and actual income)

Level

(Horngren terminology)

Level 2

Flexible-BudgetVariance(difference between actual and the budget adjusted for level of sales activity)

Sales-VolumeVarianceWhat is accounted for by the difference in sales level?

DM, DL, OH, etc.

2Slide3

Analyzing Sales Variances

Variations in Sales Volume 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 overallOur share of the total market may have changed

1Slide4

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 thechange in total number of “units” sold?

4Slide5

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-SizeVarianceHow much of the quantity variance isexplained by loss/gain of total market size?

5Slide6

Budgeted Prices & Variable Costs

Assume the English Language Institute sells Three Software Products:

Product:

Grammar Translation

CompositionSelling price per unit $259 $87 $185Variable cost 189 50

95CM per unit $ 70 $37 $ 906Slide7

Budgeted Sales in Units and $

Product

Grammar

Translation

Composition

Cont. margin

$70

$37

$90

Units

3,185

980

735

= Total

$222,950

$36,260

$66,150

Unit sales

mix

65%

20%

15%

Total budgeted contribution margin = $325,360

7Slide8

Actual Prices, VC, and CM

Product

Grammar

Translation

Composition

Selling $/unit

$255

$85

$185

Variable cost

180

Cont. margin

per unit

$ 75

$40

$ 90

The following are the actual results for

2008.

8Slide9

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

9Slide10

Static-Budget Variances

Static- Static-

Actual budget budget

Product

results

amount varianceGrammar $216,000 $222,950 $ 6,950 U

Translation 39,600 36,260 3,340 FComposition 56,700 66,150 9,450 U Total $312,300 $325,360 $13,060 U

From Slide 6

10Slide11

Flexible-Budget

Budgeted

Actual

contribution unit FlexibleProduct margin/unit

volume budgetGrammar $70 2,880 $201,600

Translation $37 990 $ 36,630Composition $90 630 $ 56,700This is what should have occurred given

our level of sales. A fair benchmark for the Production/operations people!11Slide12

Flexible-Budget Variance

Flexible- Flexible-

Actual budget

budget

Product

results

amount varianceGrammar $216,000 $201,600 $14,400 F

Translation $39,600 $ 36,630 $ 2,970 FComposition $56,700 $ 56,700 0Total flexible-budget variance $17,370 F

12Slide13

Recall Overview

Static-Budget Variance$13,060 U

Flexible-Budget

Variance

$17,370 F

Sales-Volume

Variance$30,430 U

13Slide14

Overview of

the Variances

Product

Actual CM

FB Var.

Flex Budget

Sales Vol.

Var

Static Budget

Gramr

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.

$56,700

$9,450 U

$66,150

Total

$312,300

$17,370

$294,930

$30,430

$325,360

14Slide15

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 FComposition (630 – 735) × $90 = 9,450 U

Total sales-volume variance $30,430 U15Slide16

Reasons for Sales Volume Variance

If only one product, it’s simple: (Actual Units-Budgeted Units)*Budg. CM/unitWith 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 MixSales Quantity16Slide17

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.

17Slide18

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 UTotal sales-mix variance = $3,870 U

18Slide19

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.

19Slide20

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 U20Slide21

Further Analyzing the Sales-Quantity Variance

Why did Sales Quantity Change?

market-

variance

Impact on CM due to change in share

market-size variance

Impact on CM due to change in overall market size21Slide22

Market-Share Variance Example

Assume that ELI assumed a 20% market shareof a total industry sales forecast of 24,500 units of this type of software in the market.

2008,

reported

actualindustry sales were higher: 28,125 units.

ELI’s actual market share? 4,500 ÷ 28,125 = 16%

22Slide23

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.

23Slide24

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 our product mix is assumed constant, since the Market size variance measures that, then the effect will be proportional to the composite (average) CM.

24Slide25

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.

25Slide26

Thus the Sales Quantity Variance is Explained