Advanced Management Accounting [MA2]Module 2: Variance and customer profitability analysis Overview In Module 2, you learn how revenue and customer profitability affect decision making for planning and control by using the variance analysis tools from your introductory management accounting course. You analyze the impact of revenue changes on management decision-making, and determine revenue allocation for bundled products and services. You conclude your work on the module by interpreting a customer profitability report and preparing an income statement variance analysis. Test your knowledge Begin your work on this module with a set of test-your-knowledge questions designed to help you gauge the depth of study required. Learning objectives 2.1 2.2 2.3 2.4 2.5 2.6 Describe revenue allocation when products or services are bundled. (Level 2) Determine components of sales-volume variance. (Level 1) Calculate the mix-and-yield variances for substitutable inputs. (Level 2) Evaluate the results of cost variances analysis in an activity-based costing system. (Level 1) Evaluate the results of a customer profitability analysis. (Level 1) Evaluate the results of a full income-statement variance analysis. (Level 1)2.1 Revenue allocation Learning objective Describe revenue allocation when products or services are bundled. (Level 2) Required reading Chapter 16, pages 625-632 LEVEL 2 Companies sometimes bundle products or services and sell them for a single price (for example, computer Page 1 of 20 Advanced Management Accounting [MA2]companies bundle software applications; telephone companies offer free or discounted phones when customers opt for multi-year contracts; telecommunications companies bundle phone, TV, and Internet services.) Two methods are used to determine the exact timing and allocation of revenues for bundled products or services — the stand-alone method and the incremental method. Stand-alone The stand-alone method of revenue allocation uses individual prices and costs to determine allocation of revenues. Several methods of allocation, however, can be used under the stand-alone method, each yielding a different allocation of revenues. Incremental This method of revenue allocation requires the company to rank the bundled products as primary product, then first incremental product, second incremental product, and so on. This ranking can be determined based on either customer survey, sales revenue of individual products, or management judgment. The following example demonstrates revenue allocation for large kitchen appliances bundled for sale at Larry’s Appliances Ltd. Example 2.1-1: Larry’s Appliances Ltd. – Revenue allocation Larry’s Appliances bundles a fridge and stove package for $1,200. Each fridge sells for $800 and has a manufacturing cost of $400, and each stove has a manufacturing cost of $450 and sells for $600. Revenues and costs can be allocated as follows: 1.Stand-alone (based on individual prices) Fridge= $800 × $1,200 = $685 $800 + $600 Stove= $600 × $1,200 = $515 $800 + $600 Similar calculations can be made by identifying the manufacturing costs, physical units, or stand-alone total revenues for the year. Unit-selling weights often represent the best available external measure of benefit received by the company. This type of allocation is justified on the basis of ease of use, or because information on other measures is limited. 2.Incremental Assume that the fridge is designated as the primary product, and the stove as the first incremental product. The fridge would be allocated the full $800 and the stove would be allocated the difference ($1,200 – $800 = $400). Product Revenue allocated Cumulative revenue Fridge$800 $800 Stove ($1,200 – 800) $400 $1,200 $1,200 Alternatively, assume the fridge sells an average of 3 units for each stove sold. Management may Page 2 of 20 Advanced Management Accounting [MA2]conclude that the bundled prices are mainly driven by fridge sales, and decide to weight the fridge sales as follows: Fridge StoveFridge (if primary):$800 $400 Stove (if primary): $600 $600 Fridge= ($800 × 3 + $600 ×1) =$3,000= $750 (3 + 1) 4 Stove=($600 × 1 + $400 × 3) = $1,800= $450 (3 + 1) 4 Total: $1,200 2.2 Sales-volume variance Learning objective Determine components of sales-volume variance. (Level 1) Required reading Chapter 16, pages 632-0 Notes on the textbook reading Page 637: The second line of the market-size variance calculation should read\" = [4,000,000 units (cases) – 3,560,000] × 0.25 × 0.5880.\" The first bracket is missing. Page 0: In the textbook solution to Problem 2 for self-study, the second market-share variance calculation should be: \"Market-Size Variance = $4,250,000U.\" If you find terms in the required readings for this topic that you are unfamiliar with, refer to the cost classifications definitions on page 2. LEVEL 1 Sales-volume variances are the differences that arise from fluctuations in the contribution margin (CM) and/or the level of actual sales and the expected (budgeted) sales. Sales-volume variance calculations are similar to the variance analysis components introduced in earlier management accounting courses, which focus on the difference between the flexible budget and actual results for variable and fixed costs. The variances provided here are part of the income statement, and include the differences between the static budget, flexible budget, and actual results. Exhibit 16-4 on page 638 shows a summary of the relationships between the sales-volume variances and the sales mix and quantity variances, and between the market-share and market-size variances. The information Page 3 of 20 Advanced Management Accounting [MA2]provided for Spring Distribution Company is based on an activity-based system with cost classifications defined on page 2. The following example demonstrates calculation of sales volume variance for Electra Company’s products. Example 2.2-1: Electra Co. – Sales-volume variance Budgeted data for the year for Electra Co., which makes and sells lamps and phones, are as follows: Unit sales Sales mix Sales price Variable cost Contribution margin Static budget Phones Total 600,000 1,000,000 0.6 1.00 $24 $34,400,000 $18 $6 $7,600,000 Actual results Phones Total 582,800 940,000 0.62 1.00 $22 $30,681,600 $18 $4 $6,617,600 Lamps 400,000 0.4 $50 $40 $10 Lamps 357,200 0.38 $50 $38 $12 The static-budget variance is the difference between actual contribution margin results and budgeted CM. Static-budget variance U = Unfavourable F = Favourable The flexible-budget variance is the difference between the actual results and the flexible budget, based on actual sales mix percentage and actual against budgeted contribution margin. Flexible- budget = Actual sales × Actual × Actual CM variance in units sales mix per unit Lamps=(940,000 × 0.38) ×($12 – $10)Phones=(940,000 × 0.62) ×($4 – $6)Flexible-budget variance ($714,400 F + $1,165,600 U) − Budgeted CM per unit = $714,400 F= $1,165,600 U= $451,200 U= Actual results − Static-budget amount= $6,617,600 − $7,600,000= $982,400 UA loss of $451,200 was recognized as a result of the lower CM on the phones, which was reduced by the gain on the increased margin on the lamps. The sales-volume variance is somewhat of a misnomer, as it identifies the difference in sales but is computed based on the contribution margin, not sales. Sales-volume Actual sales quantity in Static budget sales =− ×varianceunits quantity in units Lamps= (357,200−400,000)× $10Phones= (582,800−600,000)× $ 6Sales-volume variance ($428,000 U + $103,200 U)Budgeted CM per unit= $428,000 U= $103,200 U= $531,200 UBy not selling as much as expected, a loss of $531,200 is recognized. The proof of the static-budget variance is as follows: Static-budget variance$982,400=Flexible-budget variance=$451,200+Sales-volume variance+$531,200Page 4 of 20 Advanced Management Accounting [MA2]Sales-mix and quantity variances The sales-volume variance can be further subdivided into these two components: Any difference between budgeted sales and actual sales (flexible budget), will arise from either a difference in the sales mix compared to anticipated levels or a difference in the quantity of sales compared to anticipated levels (static budget). You may notice a difference between this approach and the approach used in your introductory management accounting course, as there are no set GAAP procedures and rules for managerial accounting as there are for financial accounting. The textbook approach identifies the difference in volume variance as made up of these two possibilities: The sales quantity may be greater or less than budgeted. The actual sales mix may differ from that budgeted. If this happens, the total level of sales will differ from anticipated (budgeted) as each unit or product is likely to have a different contribution margin. Sales-mix Actual units of all Actual sales-mix Budgeted Budgeted variance=products sold× percentage – sales-mix × CM per unit percentageLamps=940,000× (0.38 – 0.40) × $10 = $188,000 UPhones=940,000× (0.62 – 0.60) × $ 6 = $112,800 FSales-mix variance = ($188,000 U + $112,800 F) = $75,200 UElectra Co. lost $75,200 in margin due to the change in sales mix from the expected 60-40 split in sales-mix percentage to the actual sales mix. Sales of lamps were down, with a higher budgeted contribution margin, and this had a negative overall impact on contribution margin. The sales mix is based on a composite unit (or hypothetical mixed-unit cost) for a fictitious unit of sales: Budgeted CM per composite for budgeted mix $4.00 $3.60 $7.60 Budgeted CM Actual sales-mix Budgeted CM per unit Budgeted sales-per unit percentage for actual mix mix percentage Lamps $10.00 0.38 $3.80 0.40 Phones $6.00 0.62 $3.72 0.60 $7.52 Sales-mix variance = 940,000 (actual units) × ($7.52 – $7.60) = $75,200 U Sales-Actual Budgeted units Budgeted sales-quantity =units of − all ××Budgeted CM per unitmix percentagevarianceall products soldproducts sold Lamps=(940,000 − 1,000,000)× 0.40×$10 = $240,000 UPhones=(940,000 − 1,000,000)× 0.60×$6 = $216,000 USales-quantity variance = $240,000 U + $216,000 U = $456,000 UThe reduction of actual sales compared to budgeted sales caused an overall loss of $456,000. This is the reduction in contribution margin from lower than anticipated sales, given the budgeted percentages and contribution margins, which isolates the impact of the reduction of sales exclusively. Proof is as follows: Page 5 of 20 Advanced Management Accounting [MA2]Sales-volume variance$531,200 U= Sales-mix variance= $75,200 U+ Sales-quantity variance+ $456,000 UMarket-share and market-size variances In addition to sales-mix and quantity variances, sales would be affected if the total market size (all sales by all competitors) were to shift relative to expected levels. A company would also determine its expected level of market share based on the total size of the market. For example, an increase in the price of gas could decrease the total size of the market for large SUVs, or emergence of a new, more fuel-efficient model could mean that anticipated market share might differ from the static budget expectations that were estimated at the beginning of the year. Assume that Electra Co. based its static budget for lamps on achieving a 10% market share of the industry’s total expected sales of $4,000,000 ($4,000,000 × 10% = $400,000 budgeted level of sales). Assume also that the actual sales total for the industry was $4,465,000 and the company actually achieved a market share of 8% of the actual market ($4,465,000 × 0.08 = $357,200). Market-Budgeted Budgeted CM per share = Actual market × − market × composite unit for variance size in unitsActual market share share budgeted mix = 4,465,000× (0.08 − 0.10) × $4.00 = $357,200 U The market-share variance shows that the company did not achieve the 10% expected levels of 4,000,000 units, but achieved 8% of the larger market of 4,465,500 units of sales. Market-size variance Actual Budgeted CM per = market size − Budgeted market × Budgeted market × composite unit for in unitssize in units sharebudgeted mix= (4,465,000− 4,000,000)× 0.10 × $4.00 = $186,000 FThe market-size variance is positive, as the total size of the market was greater than expected. If Electra Co. had achieved its desired market share and contribution margin of the larger market, contribution margin should have been greater by $186,000. That is, the company should have sold an additional 46,550 units (465,500 units × 10%) and each of these additional units should have provided a CM of $4.00 or $186,000. Sales-quantity variance $171,200 U= Market-share variance = $357,200 U+ Market-size variance $186,000 FThis analysis is for the lamps only. The remaining sales-quantity variances would occur from differences in the phone market size and share. 2.3 Mix-and-yield variances for substitutable inputs Learning objective Calculate the mix-and-yield variances for substitutable inputs. (Level 2) Required reading Page 6 of 20 Advanced Management Accounting [MA2]Chapter 16, Appendix pages 650-6 LEVEL2 Many manufacturing and production operations require mixing different ingredients or inputs to achieve the output product. In this situation, mix-and-yield variances — differences between the flexible budget and actual results — arise from the following sources. The flexible budget consists of a pre-determined mix of product and price. The variances arise from differences in actual price versus anticipated. In the Appendix example on page 650 and Exhibit 19-9, the actual cost of Caltoms and Flotoms differed from the anticipated amount, resulting in a $10,400 U total price variance. Efficiency of production caused a $4,450 U variance that had the following components: The inputs were expected to be 0.50 Latoms, 0.30 Caltoms, and 0.20 Flotoms, while the actual inputs were 0.50 Latoms, 0.35 Caltoms, and 0.15 Flotoms. This could be due to a change in the price of Flotoms, which caused the company to change the level of inputs to reduce the amount of Flotoms and increase the amount of Caltoms. This resulted in a $3,250 F mix variance because of the lower cost of Caltoms relative to Flotoms. Another change was in the quantity of input relative to output. The company expected to use a total of 6,400 tonnes of input to achieve the desired 4,000 tonnes of output, but in reality used 6,500 tonnes of input to achieve the desired output, resulting in a $7,700 U yield variance. The graphic on page 6 summarizes the output of Exhibits 16-9 and 16-10. Mix-and-yield variances can also be illustrated in the production of beer. If the prices of certain ingredients were to increase, the company could alter the percentages of barley and hops and still produce a beer. Changing the inputs (that is, mix variance) could save the company money, but it may affect the yield or output achieved. The company would also be aware that this could alter the flavour of the beer, which could affect customer sales (which would then be reflected in sales variances); in other words, changing the input mix may affect quality. 2.4 Activity-based costing and variance analysis Learning objective Evaluate the results of cost variances analysis in an activity-based costing system. (Level 1) Required reading Chapter 8, pages 304-308 LEVEL 1 Activity-based costing classifies costs into four activities in a cost hierarchy: unit-level, batch-level, product-sustaining level, and facility-sustaining level. Variance analysis related to variable and fixed manufacturing overhead focuses on batch, product, and facility-sustaining level activities. Understanding this relationship helps managers to further analyze costs in production. The following analysis is based on the scenario given Page 7 of 20 Advanced Management Accounting [MA2]in the text reading. Analyzing the variable costs of setups per batch requires the following steps: Step 1: Using the budgeted batch size, calculate the number of batches that should have been used to produce the actual output. 151, 200 units ÷ 150 per batch = 1,008 batches. Step 2: Using budgeted setup-hours per batch, calculate the number of setup-hours that should have been used. 1,008 batches × 6 hours per batch = 6,048 hours. Step 3: Using the budgeted variable cost per setup hour, calculate the flexible budget for variable setup overhead costs. 6,048 hours × $20 per hour = $120,960. Exhibit 8-5 on page 306 presents calculations of the spending and efficiency variances for setup costs. Spending variances arise from the differences of actual cost per hour ($21) against budgeted ($20), and efficiency variances arise from the smaller batch size (140 per batch versus 150), which requires more batches. Fixed-overhead costs are also computed using traditional fixed-overhead spending and production-volume variances as follows: Step 1: Choose the time period for the budget (20X7). Step 2: Select the cost-allocation base for allocating fixed overhead costs to the cost object(s). Budgeted setup hours for 20X7 are 7,200 hours. Step 3: Identify the fixed overhead costs associated with the cost-allocation base. Budgeted fixed setup cost for 20X7 is $216,000. Step 4: Compute the rate per unit of the cost-allocation base used to allocate fixed overhead costs to the cost object(s). $216,000 ÷ 7,200 hours = $30 per hour Exhibit 8-6 on page 308 summarizes the spending variance ($4,000 U, due to higher costs than anticipated), and production-volume variance ($34,560 U, due to the inefficient use of the facilities). The company had expected to produce 180,000 units but produced only 151, 200 units, and therefore did not use the facilities to anticipated levels. 2.5 Customer profitability analysis Learning objective Page 8 of 20 Advanced Management Accounting [MA2]Evaluate the results of a customer profitability analysis. (Level 1) Required reading Chapter 16, pages 0-9 Note on the textbook reading Page 1: Line 3 of the spreadsheet on page 1 should read \"Units Sold\" instead of \"Cash Sold.\" LEVEL 1 Not all customers generate the same revenue or cost the same to service, which you learned when you looked at activity-based costing (ABC) in your introductory management accounting course. This topic looks at how the concepts of ABC are used to determine customer profitability. The first table on page 1 shows how different price discounts can have an impact on the revenues generated per customer (for example, quantity discounts for customers purchasing in large dollar volumes, discounts offered to attract certain customers or to move products during a sale). Customer-cost analysis also requires ABC techniques. Differences in costs — arising from variables such as distance from warehouse, number of sales representative visits, size of orders, frequency of orders (some might order daily, as in just-in-time, while others order every two weeks, and so on), product handling fees, and rush deliveries — all affect customer profitability. Steps in profitability analysis 1.Identify costs according to unit-level, batch-level, customer- or product-level sustaining, and corporate-level sustaining costs. This is similar to ABC, in which different levels depend on the type of business. 2.Determine the cost driver for each cost pool. Calculate total cost in cost pools and total output for each cost driver. 3.Apply the cost to customers, based on the actual use of each cost. Certain costs (at the corporate-sustaining level or, in the case of this example, distribution costs) are not allocated to the customer but are used in a segment-margin approach to determine overall profitability, which is separate from customer profitability. Exhibit 16-5 on page 3 shows the application of these steps to determine customer-level operating income. These costs are directly applicable to management of individual customers and should be considered for short-term decisions. As in relevant costing, fixed costs of production are often considered sunk costs and not relevant to decisions. Costs associated with the distribution center (for example, warehouse costs, management salaries) and corporate-level costs do not filter down (that is, are not allocated) to individual customer levels. These are considered costs of capacity — the ability to sell products to customers — not customer-level costs. This point is made clear in Exhibit 16-6 on page 5, where distribution-channel operating costs and corporate-sustaining level costs are excluded from the customer profitability analysis. These costs are considered in the overall long-term viability and corporate-level decisions but not at the customer profitability level. However, some accountants advocate including distribution costs and corporate-sustaining Page 9 of 20 level costs for overall long-term pricing decisions to ensure long-term profitability. Exhibit 16-7 shows the cumulative customer profitability analysis, which is determined by calculating the profitability of each individual customer and then calculating an overall, cumulative profitability. Individual customer profitability is determined by dividing customer-level operating income into total customer revenue. This is then ranked to determine which customers are the most profitable. This information helps managers determine whether excessive discounts are being offered, and decide where resources should be allocated in customer relations. Customer-profitability analysis also includes non-quantitative information (for example, a new customer maybe more costly to manage than well-established customers). Managers should also consider the following factors: Short-run and long-run customer profitability Customer retention likelihood Customer growth potential Increases in overall demand from having high-profile customers Ability to learn from customers 2.6 Full income-statement variance analysis Learning objective Evaluate the results of a full income-statement variance analysis. (Level 1) LEVEL 1 Variance analysis is essential in good management accounting reporting. Detailed analysis of variances allows management to better understand the operating realities of the organization. The following computer illustration requires you to work through a detailed variance analysis, using Excel to analyze the actual-to-budget variances. Computer illustration 2.6-1: Actual-to-budget variances Conclusion: Now that you have calculated all the variances, further analysis is required. For example, in looking at the sales variances, you need to determine whether the increase in volume sold is due to an increase in the market for the product. If so, did Becker & Clarke keep pace with the growth in the market or did it lose market share? Was the reason for the gained sales volume due to the lower prices? Did the lower prices affect profitability? Positive variances also need to be analyzed, and the underlying situation should be assessed, to make sure other potentially serious problems aren’t being overlooked. 2.6 Full-income statement variance analysis - Content Links Advanced Management Accounting [MA2]Computer Illustration 2.6-1: Actual-to-budget variances Becker & Clarke Inc. created a budget for the 20X8 fiscal year. It is now January, 20X9, and the finance department must analyze the results of the year’s operations. Material provided File MA2M2P1 containing two partially completed worksheets, M2P1 and M2P1Var, and the two solution worksheets, M2P1S and M2P1VarS. If you have trouble creating the formulas for the variances, review variance analysis in your introductory management accounting course or review Chapters 7 and 8 of the text. Procedure 1.Open the file MA2M2P1 from the data folder 2.Go to tab M2P1 and study the layout of the spreadsheet. The data table is contained in section A6 to H43. Below this is the area for completing the budget, flexible budget, and actual income statements. 3.Use column C, starting at row 55 and working to row 68, to complete the actual income statement by referencing information in the data table. Row 52 has been completed to illustrate the method. 4.Use column E, starting at row 55 and working to row 68, to complete the flexible budget income statement by referencing information in the data table. 5.Use column G, starting at row 55 and working to row 68, to complete the original budget income statement by referencing information in the data table. 6.In column D, calculate the variance between the original budget and the flexible budget. 7.In column F, calculate the variance between the flexible budget and the actual results. 8.Next go to tab M2P1Var and study the layout. This tab is used to do the detailed variance analysis. The sales analysis is completed in section A5 to H12. 9.Row 8 has been completed to illustrate the method. Have a good look at the formula in cell H8: =IF((D8-E8)*F8=M2P1!D52,M2P1!D52,FALSE) This formula confirms that the variance analysis as done on sheet M2P1Var comes up with the same number as on sheet M2P1. That is, the straight-forward calculation of the difference between the original budget and the flexible budget is explained by the analysis done in cells D8 to H8. 10.Now complete row 11 for the price variance. 11.In section A13 to H88, the variance analysis for Cost of goods sold should be completed. Complete the following rows for the identified variances. Direct-material variances Row Description 17 Volume variance 20 Price variance 26 Efficiency variance 28 Total flexible budget Page 11 of 20 Advanced Management Accounting [MA2]Direct-labour variances Row Description 33 Volume variance 37 Price 42 Efficiency 44 Total flexible budget Variable-overhead variances Row Description 49 Volume 55 Spending 59 Efficiency 61 Total flexible budget Use the same logic as was used for the sales section. Note that cells H28, H44, and H61 have already got formulas. For H28 the formula is: =IF(H26 + H21 = M2P1!F55,M2P1!F55,FALSE) Remember that the Volume variance calculated in row 17 is the difference between the original budget and the flexible budget. Then note that the difference between the flexible budget and the actual results can be broken down into two variances, the price variance and the efficiency variance. This formula then confirms that the total of the two variances as calculated equals the value calculated by comparing the flexible budget to actual. If summing the two variances does not come up with the same value, the cell will display an error message. 12.A63 to H74 contains the analysis of the variable overhead variance based on the activity-based method. Enter the appropriate formulas in cells H66, H68, and H70. In section A72 to H74, the variance is compared with the variance calculated in F57 in sheet M2P1. 13.A76 to H85 is used to calculate the fixed overhead variances for Cost of goods sold. In row 80, enter the formulas and calculate the production-volume variance. In row 85, enter the formulas and calculate the spending variance. 14.Section A to H103 is used to analyze the variances for the other expenses. Page 12 of 20 Advanced Management Accounting [MA2]Module 2 summaryDescribe revenue allocation when products or services are bundled There are two overarching methods: Stand-alone and incremental revenue allocation. Stand-alone uses the unbundled prices and costs and the allocation methods are based on selling prices manufacturing costs physical units, and stand-alone total revenues for the year. Incremental revenue allocation uses a product ranking system. Determine components of sales-volume variance Static-budget variance = Actual results − Static budget amount. Sales-volume variance = (Actual sales quantity in units − Static budget sales quantity in units) × budgeted C/M per unit. Static-budget variance = Flexible-budget variance + Sales-volume variance. Sales-mix variance = Actual units of all products sold × (Actual sales mix percentage − Budgeted sales mix percentage) × Budgeted CM per unit. Sales-quantity variance = (Actual units of all products sold − Budgeted units of all products sold) × Budgeted sales mix percentage × Budgeted CM per unit. Market-share variance = Actual market size in units × (Actual market share − Budgeted market share) × Budgeted CM per composite unit for budgeted mix. Market-size variance = (Actual market size in units − Budgeted market size in units) × Budgeted market share × Budgeted CM per composite unit for Budgeted mix. Sales quantity variance = Market share variance + Market size variance. Calculate the mix-and-yield variances for substitutable inputs Mix variance for substitutable inputs = Actual total quantity of all inputs used × (Actual input mix percentage − Budgeted input mix percentage) × Budgeted price for the input. Total mix variance for substitutable inputs = Sum of all individual mix variances. Yield variance for specific substitutable input = (Actual total quantity of all inputs used − Budgeted total quantity of all inputs used) × Budgeted input mix percentage × Budgeted price. Total yield variance = Sum of all yield variances. Evaluate the results of cost variances analysis in an activity-based costing system Using the cost hierarchy, unit level, batch-level, product-sustaining level, and facility-sustaining level, analyze all fixed and variable costs. Page 13 of 20 Advanced Management Accounting [MA2]Step 1 takes the activity-based budget numbers and creates a flexible budget based on actual performance. Step 2 compares flexible budget to actual. Evaluate the result of a customer profitability analysis Identify costs according to unit-level, batch level, customer, or product sustaining costs. Determine the cost driver for each cost pool. Calculate total cost in cost pools and total output for each cost driver. Apply the cost to customers based on actual usage. Compare revenues and costs to determine profitability of each customer. Analyze information to determine actionable opportunities to improve profit. Evaluate the results of a full-income statement variance analysis Incorporates variance analysis into the income statement by providing for each item data associated with the static budget, flexible budget, and actual results. This format allows capturing planning variances and operating variances. In turn, these variances are broken down into their elementary components (price, rate, spending, budget, usage or efficiency, and volume variances). Module 2 self-test Using the following information, answer questions 1, 2, and 3. Budgeted ActualBedsChairsTotalBedsChairsTotal40,000120,000160,00050,000100,000150,000 Sales mix Unit salesSales price Variable costContribution margin $500 $350 $150 0.250.75 $90 $68 $22 $30.800M$510 $380 $8.0M $130 1.000.333 0.667 1.00 $88 $34.300M$68 $20 $8.500M Question 1 Compute the flexible-budget variance. Solution (To view the content from this link, go to end of document.) Page 14 of 20 Advanced Management Accounting [MA2]Question 2Compute the sales-volume variance. Solution (To view the content from this link, go to end of document.) Question 3 Compute the static-budget variance. Solution (To view the content from this link, go to end of document.) Question 4 Exercise 16-19, pages 656-657 Note: When the question refers to net revenues, this is the same as contribution margin. Solution (To view the content from this link, go to end of document.) Question 5 Textbook, Exercise 16-23, page 658 Solution (To view the content from this link, go to end of document.) Question 6 Exercise 16-25, page 659 Solution (To view the content from this link, go to end of document.) Question 7 Problem 16-28, pages 660-661 For this question, replace Required 4 in the text with the following: Summarize the relationship visually between the sales-mix, sales-quantity, sales-volume, flexible-budget, and static-budget variances using your answers to the above. Solution (To view the content from this link, go to end of document.) Question 8 Problem 16-29, page 661 Solution (To view the content from this link, go to end of document.) Page 15 of 20 Advanced Management Accounting [MA2]Module 2 assignmentQuestion 1 (10 marks) Computer Question Chapter 11, Problem 11-41, page 4 (5 marks for each requirement) Material Provided Data file MA2A2Q1 Description Complete Required 1 of Problem 11-41 manually, then complete Required 2 using the Excel spreadsheet provided. Required Set this decision up as a linear program using Excel. Run Solver on your Excel worksheet, making sure to include all constraints including non-negativity. Save your Answer and Sensitivity Reports. Do not be concerned if you obtain non-integer answers for batches; do not round fractions to the nearest integer when you present your recommendations. Give a full explanation of any recommendations that you make. Procedure 1.Start Excel and open the file MA2A2Q1. The data table is in cells A4 to F16. 2.Note that initial values have been entered in cells D20 and E20. 3.Select Solver from the Tools menu on the toolbar. The Solver parameters dialog box will appear. If Solver is not available on your Tools menu, follow the installation instructions provided under the How To tab. Click “Use software in the course,” then click “Use Excel.” 4.Click the Options button and select Assume Linear Model and Assume Non-Negative to ensure that a linear model is used (that is, with no exponents) and that solutions that include negative values for choice variables (that is production numbers) are not used. Click OK to return to the Solver Parameters dialog box. 5.Set the target cell to C23. To select $C$23, drag the Solver Parameters dialog box to reveal cell C23, then click the cell once. The cell reference of $C$23 will appear in the Set Target Cell box. Click Max for “Equal to.” This tells Excel that you want the cell containing the total contribution margin to be maximized in solving the linear problem. 6.Click the By Changing Cells box and select cell D20:E20. 7.Click the Subject to the Constraints box and then click Add. This brings you to the Add Constraints dialog box. The first constraint is that the mixing time cannot exceed 720 minutes. Enter cell C26 in Cell Reference. Using the drop down box, choose <= then set E26 in the Constraint box. Then click Page 16 of 20 Advanced Management Accounting [MA2]8.9.10.11.the OK button to return to the Solver Parameters dialog box. If you make an error entering the constraint, you can change it by selecting the constraint and clicking the Change button. Add the remaining constraints for the problem as follows: Cell referenceConstraintC27E27C28E28 You are now ready to solve the linear program. In the Solver Parameters dialog box, click Solve. The Solver Results dialog box will appear. Ensure that the Keep Solver Solution is selected. In the Reports box, click both Answer and Sensitivity Reports to select them and then click OK. Now click the Sensitivity Report 1 tab to display the results of the sensitivity analysis. Then check the Answer Report 1 by clicking the Answer Report 1 tab. Using Edit, Copy, Paste, copy the Answer and Sensitivity Reports into Word. Question 2 (17 marks) Problem 1-35, Chapter 1, page 28 (7 marks for Part 1; 5 marks for Part 2; and 5 marks for Part 3) Question 3 (16 marks) Percy Metal Corporation (PMC) supplies various types of machine tools to manufacturing companies. PMC has always paid a lot of attention to the quality of its products. Recently, an outside supplier has approached PMC to supply an important and intricate component of one of the more advanced tools that PMC has been manufacturing in-house. Doug Walters, a junior accountant at PMC, has collected the following information regarding this proposal. The internal costs of manufacturing one unit of this component are as follows: Direct materials:Direct labour:Variable overhead:Fixed overhead:Total cost:$29.60 13.00 19.5026.00$88.10(@150% of direct labour cost)(@200% of direct labour cost)The outside supplier has quoted a price of $90 per unit for supplying this component. The following is a conversation that took place among the manufacturing manager (Davis Swann), the buyer (Anita Simon), and Doug Walters. Walters: “I think that we should continue to manufacture internally because we can save $1.90 per unit on this component.” Swann: “According to your report, we would save $1.90 per unit, but I do not agree with those numbers.” Walters: “But I followed the same costing guidelines this company has used for years. I even cross-checked my numbers with historical data and know for sure that the overhead rates I used are correct.” Page 17 of 20 Advanced Management Accounting [MA2]Swann: “I am sure you have done your job thoroughly, but I think that our costing system is archaic. This component is complex and difficult to manufacture. I believe that our overhead allocation method does not accurately capture the production difficulties and the additional resources that are devoted to the manufacture of this component. For example, a significant portion of our quality problems are due to this component. We spend close to a third of our quality inspection time on just this component alone, but that is not reflected in the costing. These quality problems cause delays in getting this component to the assembly department, and that causes a delay in getting the final product to the customers. Many of our customers are expecting just-in-time deliveries, and are upset when we’re late.” Simon: “I know that the supplier that has approached us has a strong reputation for quality. Therefore, we can rest assured that there would be negligible quality problems.” Swann: “Doug, your report does not consider this additional benefit from buying outside. I would appreciate if you can rework your numbers to better reflect the true costs associated with manufacturing this component internally.” Required (8 marks each) a.Assume the role of Doug Walters. What are the different kinds of costs that are likely to be associated with the manufacture of the component? Does the current costing system capture these costs? b.Recommend improvements in the costing system. Question 4 (17 marks) As Alex Pearson reviewed the financial results of The Old Mill Restaurant for the year ended October 31, 20X6, he could hardly believe that a year had gone by since he had met with the owner, Charley Turner. That meeting had been less stressful than expected; Alex had explained why the restaurant had not reached its planned profit for 20X5, and after discussion, they had agreed on an operating plan for 20X6. Mr. Turner had been surprisingly receptive to Alex’s analysis and explanation of the factors that had contributed to the 20X5 profit shortfall. Alex was convinced that his decision to prepare a detailed reconciliation of the 20X5 planned profit with the 20X5 actual profit, including the identification of those factors for which Alex had control and those for which Mr. Turner had control, had been the major cause for the successful outcome of last year’s meeting. Moreover, Mr. Turner’s subsequent decision to award Alex a $5,000 bonus for 20X5 had come as a most pleasant surprise. This year, Alex was looking forward to discussing 20X6 performance with Mr. Turner. To prepare for that meeting, Alex reviewed the 20X6 operating plan that he and Mr. Turner had agreed upon. The expenses shown in the 20X6 plan were based on the same assumption as the 20X5 operating plan. Labour costs were expected to average $13.00 per hour for four full-time cooks and $3.25 per hour for cashiers and servers. The lease agreement on the restaurant was not up for renewal until 20X8, so the terms of the monthly rent remained the same as in 20X5. A $6,000 increase in management expense over the planned amount for 20X6 was due to a $4,000 salary increase given to Alex and a $2,000 salary increase given to the assistant restaurant manager. As further preparation for his meeting with Mr. Turner, Alex prepared an operating statement comparing the actual results with the original plan for 20X6 (see Exhibit 2.1).In addition, he reflected on some of the trends both in the market and those he had noticed at the restaurant over the past year. Customer count continued to rise, which pleased both Alex and Mr. Turner immensely. Furthermore, the restaurant’s 20X6 cash register reports showed a reduction in coupon use as compared to 20X5, and Alex thought this trend should result in a more favourable relationship between gross sales and net sales. However, Alex also noticed a continued unfavourable shift in customer mix toward lunch and away from dinner. Actual prices of food purchased by Page 18 of 20 Advanced Management Accounting [MA2]Mr. Turner were 1% higher than expected in 20X6, and actual labour hours for cooks and actual hourly wages for cooks, cashiers, and servers were as planned. The market for dining out in Old Mill for meals in the restaurant’s price range was predicted to be 8,528,000 units. Actual market turned out to be 9,208,333 meals. There were no menu price changes during 20X6. Alex knew Mr. Turner would want to understand the profit impact of any deviations from plan. Therefore, he decided to prepare a detailed reconciliation of the 20X6 planned profit with the 20X6 actual profit. Alex hoped this year’s meeting with Mr. Turner would go as well as last year’s meeting and that he would receive a bonus for 20X6. Required a.What were the major factors that contributed to the difference between actual net sales and planned net sales for 20X6? (5 marks) b.What were the major factors that contributed to the difference between actual net profit and planned net profit for 20X6? (6 marks) c.Assess Alex Pearson’s performance during 20X6. Does he deserve a bonus? Should the bonus be as much as the previous year? (6 marks) Exhibit 2.1: The Old Mill Restaurant — Operating Information Financial informationGross salesNet salesFoodLabourOther operating expensesContribution marginAdvertisingMiscellaneousAmortizationInsuranceTaxes and licensesRent (Base)Rent (SurchargeManagementProfit Other statistics Average weekly customer count% customers: lunch% customers: dinnerAverage gross bill: lunch20X6 actual$1,900,6001,790,1001.050,533192,400150,168396,99970,9213,26024,0009,65011,17072,0005,030107,500$93,468 20X6 actual4,25060%40%$7.00 20X6 plan 4,10050%50%$7.5020X6 plan1,972,1001,812,2001,084,655191,360157,768378,41769,0243,00024,0009,50011,00072,0008,605101,000$80,288Page 19 of 20 Advanced Management Accounting [MA2]Average net bill: lunchAverage cost: lunchAverage gross bill: dinnerAverage net bill: dinnerAverage cost: dinner$6.50$5.04$11.00$10.50$8.20$7.00$5.38$11.00$10.00$8.07Question 5 (20 marks) Debbie’s Dolls sells two premium collectible dolls, Miss Jayne and Miss Kaylee. Budgeted sales total 80,000 units, consisting of 32,000 Miss Jayne dolls and 48,000 Miss Kaylee dolls, based on previous year’s performance. Selling prices and variable cost information on the two dolls are as follows: Selling priceVariable costMiss Jayne$.00 $29.92Miss Kaylee$68.30$51.62Debbie’s salespeople currently receive flat salaries that total $400,000. Management has decided to make a change to the compensation packages of the sales force in an effort to increase sales. Management has heard that commission-based packages create the kind of incentive they are looking for to get sales moving. Management has come up with a plan that will pay 10% commission on total gross sales. The plan results in sales of 24,100 units of Miss Jayne dolls and 62,900 units of Miss Kaylee dolls. Required: a.Calculate the sales-mix variances. (4 marks) b.Calculate the contribution margin segmented based on product. (4 marks) c.The president doesn’t understand what the variance numbers mean and is having trouble with the idea that sales are up but profit is down. Explain the sales-mix variance to the president. (5 marks) d.Analyze this situation and determine if the company made a good decision on the compensation plan. Is there a better plan that you could recommend? The president wants a brief memo with recommendations. (7 marks) Question 6 (20 marks) Problem 16-38, Chapter 16, page 665 (10 marks for each part) 100 Assignment 2 You must be online to view this course component. Page 20 of 20 Self-test 2
Solution 1
Budgeted CMActual CMFlexible budget Actual salesActual sales
per unitper unitin unitsmixvariance
Beds = (150,000 × 0.333) × ($130 – $150) = $1,000,000 U Chairs = (150,000 × 0.667) × ($20 – $22) = $200,000 U Total = $1,000,000 U + $200,000 U = $1,200,000 U
Self-test 2
Solution 2
Static budget salesBudgeted CMActual salesSales volume
–
quantity in units quanitity in unitsper unitVariance
Beds = (50,000 – 40,000) x $150 = $1,500,000 F Chairs = (100,000 – 120,000) x $22 = $440,000 U Total = $1,500,000 F + $440,000 U = $1,060,000 F
Self-test 2
Solution 3
Static-budget variance = Actual results – Static-budget amount Static-budget variance = $8,500,000 – $8,0,000 = $140,000 U Or
Static-budget variance = Flexible-budget variance + Sales-volume variance = $1,200,000 U + $1,060,000 F = $140,000 U
Self-test 2
Solution 4 1.
Sales-volume
Budgeted sales⎞Budgeted CM⎛Actual sales
= variance ⎜quantity in units− ⎟× per ticketquantity in units⎝⎠
of revenue
Lower-tier tickets = (6,600 – 8,000) × $18.50 = $25,900 U Upper-tier tickets = (15,400 – 12,000) × $4.10 = 13,940 F All tickets $11,960 U
2.
=(8,000 ×$18.50) +(12,000 ×$4.10)Budgeted average CM
per unit20,000 =
Budgeted
Lower-tier Upper-tier
The sales-quantity variances is computed as:
Sales-quantity
Budgeted⎛Actual unitsBudgeted units⎞Budgeted
⎜⎟
variance = ⎜of all tickets − of all tickets⎟× sales-mix × CM
⎜⎟percentageof revenuessoldsoldper ticket ⎝⎠
8,000
= 0.40
20,000 12,000
= 0.60
20,000
$148,000 +$49,200$197,200
=
20,00020,000 =
$9.86 per unit (seat sold)
Sales-mix percentages:
Actual
6,600
= 0.30
22,000 15,400
= 0.70
22,000
The sales-quantity variances are:
Lower-tier tickets = (22,000 – 20,000) × 0.40 × $18.50 = Upper-tier tickets = (22,000 – 20,000) × 0.60 × $4.10 = All tickets
$14,800 F
4,920 F $19,720 F The sales-mix variance is computed as:
Sales-mixActual unitsBudgeted
Actual sales-Budgeted sales-⎛⎞
variance = of all tickets × ⎜ − ⎟ × CMmix percentagemix percentage⎝⎠ sold per ticket
The sales-mix variances are: Lower-tier tickets = 22,000 × (0.30 – 0.40) × $18.50 = $40,700 U Upper-tier tickets = 22,000 × (0.70 – 0.60) × $4.10 = 9,020 F All tickets $31,680 U
3. The Penguins increased average attendance by 10% per game. However, there was a sizable
shift from lower-tier seats (budgeted net revenue of $18.50 per seat) to the upper-tier seats (budgeted net revenue of $4.10 per seat). The net result: the actual net revenue was $11,960 below the budgeted net revenue.
Columnar presentation of sales-volume, sales-quantity, and sales-mix variances for the Penguins
Flexible Budget: Static Budget: (Actual Units of (Actual Units of (Budgeted Units of All Tickets Sold All Tickets Sold All Tickets Sold × Actual Sales Mix) × Budgeted Sales Mix) × Budgeted Sales Mix) × Budgeted Unit × Budgeted Unit × Budgeted Unit CM CM CM (1) (2) (3) Panel A: (22,000 × 0.30a) × $18.50 (22,000 × 0.40b) × $18.50 (20,000 × 0.40b) × $18.50 Lower-tier 6,600 × $18.50 8,800 × $18.50 8,000 × $18.50
$122,100 $162,800 $148,000 $40,700 U $14,800 F
Sales-mix variance
Sales-quantity variance
$25,900 U Sales-volume variance
Panel B: (22,000 × 0.70c) × $4.10 (22,000 × 0.60d) × $4.10 (20,000 × 0.60d) × $4.10 Upper-tier 15,400 × $4.10 13,200 × $4.10 12,000 × $4.10
$63,140 $,120 $49,200 $9,020 F $4,920 F
Sales-mix variance
Sales-quantity variance
$13,940 F Sales-volume variance
Panel C: All Tickets
(Sum of Lower-tier and Upper-tier tickets)
$185,240e $216,920f $197,200g
$31,680 U Total sales-mix variance $19,720 F Total sales-quantity variance
$11,960 U Total sales-volume variance
F = favourable effect on operating income; U = unfavourable effect on operating income.
Actual sales mix: Budgeted sales mix: abLower-tier = 6,600 ÷ 22,000 = 30% Lower-tier = 8,000 ÷ 20,000 = 40% cdUpper-tier = 15,400 ÷ 22,000 = 70% Upper-tier = 12,000 ÷ 20,000 = 60% ef$122,100 + $63,140 = $185,240 $162,800 + $,120 = $216,920 g
$148,000 + $49,200 = $197,200
Self-test 2
Solution 5
1. (in thousands)
Avery Group Duran Systems Retail Systems Wizard Partners Santa Clara College Grainger Services Software Partners Problem Solvers Business Systems Okie Enterprises
Customer Revenues $265 185 168 327 240 85 179 81 142 378
Customer Costs $182 184 178 225 308 74 100 108 110 231 Customer Operating Income $83 1 (10) 102 (68) 11 79 (27) 32 147
Cumulative Customer- Operating Customer Operating Income Level
Divided by Operating
Customer Income Revenue Revenue Income Okie Ent. $ 147 $ 378 39% $ 147 Wizard P 102 327 31% 249 Avery Group 83 265 31% 332 Software P 79 179 44% 411 Business S 32 142 23% 443 Grainger S 11 85 13% 4 Duran S 1 185 1% 455 Retail S -10 168 -6% 445 Problem S -27 81 -33% 418 Santa Clara C. -68 240 -28% 350 $ 350 $ 2,050
Customer Profitability Analysis Customer Level Customer Level
Cumulative Customer-Level Operating Income as a % of Total Customer-Level Operating Income
42% 71% 95% 117% 127% 130% 130% 127% 119%
100%
Customer profitability graphed:
$200
$150
$100
$50
$‐ ‐$50
‐$100
Series1
2.
The options Instant Service should consider include:
(a) Increase the attention paid to Okie Enterprises and Wizard Partners. These are “key
customers” and every effort has to be made to ensure they retain IS. IS may well want to suggest a minor price reduction to signal how important it is in their view to provide a cost-effective service to these customers.
(b) Seek ways of reducing the costs or increasing the revenues of the problem accounts—
Santa Clara College and Problem Solvers. For example, are the copying machines at Santa Clara outdated and in need of repair? If yes, an increased charge may be appropriate. Can IS provide better on-site guidelines to users about ways to reduce breakdowns?
(c) As a last resort, IS may want to consider dropping particular accounts. For example, if
Santa Clara College will not agree to a fee increase but has machines continually
breaking down, IS may well decide that it is time not to bid on any more work for this customer.
3.
Major problems in accurately estimating the operating costs of each customer are:
(a) Basic underlying records may not be accurate. For example, some technicians include
travel time, break time, etc., in their time records to create an appearance of high work effort.
(b) Not all costs for individual repair people are easily assignable to individual customers.
For example, how is the cost of a trip to pick up parts for three customers assigned among individual customers?
(c) Many costs of IS are not related to specific customers. For example, advertising by IS is
aimed at a general market rather than being targeted to a specific potential customer.
Self-test 2
Solution 6
= =
1 and 2. =
=Actual total quantity of all inputs used and actual input mix percentages for each input are as
follows:
Chemical Actual Quantity Actual Mix Percentage Echol 24,080 24,080 ÷ 86,000 = 0.28 Protex 15,480 15,480 ÷ 86,000 = 0.18 Benz 36,120 36,120 ÷ 86,000 = 0.42
=
CT-40 10,320 10,320 ÷ 86,000 = 0.12 Total 86,000 1.00
Budgeted total quantity of all inputs allowed and budgeted input mix percentages for each input are as follows:
Chemical Actual Quantity Actual Mix Percentage Echol 25,200 25,200 ÷ 84,000 = 0.30 Protex 16,800 16,800 ÷ 84,000 = 0.20 Benz 33,600 33,600 ÷ 84,000 = 0.40 CT-40 8,400 8,400 ÷ 84,000 0.10 Total 84,000 1.00
Total direct materials efficiency variance is computed as:
Direct materials
⎛ActualBudgeted inputs allowed⎞Budgeted
efficiency variance = ⎜ − ⎟ × pricesinputsfor actual outputs achieved⎝⎠for each input
Echol (24,080 – 25,200) × $0.22
Protex (15,480 – 16,800) × $0.47 Benz (36,120 – 33,600) × $0.17 CT-40 (10,320 – 8,400) × $0.32 Total direct materials efficiency variance = $246 F = 620 F = 428 U = 614 U $176 U
The total direct materials yield variance is computed as the sum of the direct materials yield variances for each input:
Echol (86,000 – 84,000) × 0.30 × $0.22 = 2,000 × 0.30 × $0.22 = $132 U Protex (86,000 – 84,000) × 0.20 × $0.47 = 2,000 × 0.20 × $0.47 = 188 U Benz (86,000 – 84,000) × 0.40 × $0.17 = 2,000 × 0.40 × $0.17 = 136 U CT-40 (86,000 – 84,000) × 0.10 × $0.32 = 2,000 × 0.10 × $0.32 = U Total direct materials yield variance $520 U
=The total direct materials mix variance can also be computed as the sum of the direct materials mix =
variances for each input: =
=
DirectActualBudgetedActualBudgeted⎛⎞
⎜direct materialsmaterialsdirect materials⎟quantity of allprice of⎜⎟ = − × × ⎜input mixmix varianceinput mix⎟direct materialsdirect materials⎜⎟⎜percentagefor each inputpercentage⎟inputs usedinputs⎝⎠
Budgeted total quantity⎞BudgetedBudgeted⎛Actual total⎜quantity of allmaterialsof all direct materials⎟direct materialsprice of
⎟ × = ⎜ − ×
yield variance⎜direct materialsinputs allowed for⎟input mixdirect materials
⎜⎟⎟for each input⎜inputs usedactual output achievedpercentageinputs⎝⎠
Direct
Echol (0.28 – 0.30) × 86,000 × $0.22 = –0.02 × 86,000 × $0.22 = $378 F
Protex (0.18 – 0.20) × 86,000 × $0.47 = –0.02 × 86,000 × $0.47 = 808 F =Benz (0.42 – 0.40) × 86,000 × $0.17 = 0.02 × 86,000 × $0.17 = 292 U =
=CT-40 (0.12 – 0.10) × 86,000 × $0.32 = 0.02 × 86,000 × $0.32 = 550 U =
Total direct materials mix variance $344 F
3. Energy Products used a larger total quantity of direct materials inputs than budgeted, and so
showed an unfavourable yield variance. The mix variance was favourable because the actual mix contained more of the cheapest input, Benz, and less of the most costly input, Protex, than the budgeted mix. The favourable mix variance offset some, but not all, of the unfavourable yield variance—the overall efficiency variance was unfavourable. Energy Products will find it profitable to shift to the cheaper mix only if the yield from this cheaper mix can be improved. Energy Products must also consider the effect on output quality of using the cheaper mix, and the potential consequences for future revenues.
Columnar presentation of direct materials efficiency, yield, and mix variances for the Energy Products Company for August 2007
Flexible Budget: Budgeted Total Quantity of Actual Total Quantity Actual Total Quantity All Inputs Allowed for of All Inputs Used of All Inputs Used Actual Output Achieved × Actual Input Mix × Budgeted Input Mix × Budgeted Input Mix × Budgeted Price × Budgeted Price × Budgeted Price (1) (2) (3) Echol 86,000 × 0.28 × $0.22 = $ 5,298 86,000 × 0.30 × $0.22 = $ 5,676 84,000 × 0.30 × $0.22 = $ 5,4 Protex 86,000 × 0.18 × $0.47 = 7,276 86,000 × 0.20 × $0.47 = 8,084 84,000 × 0.20 × $0.47 = 7,6 Benz 86,000 × 0.42 × $0.17 = 6,140 86,000 × 0.40 × $0.17 = 5,848 84,000 × 0.40 × $0.17 = 5,712
× 0.10 × $0.32 = 2,752 84,000 × 0.10 × $0.32 = 2,688 CT-40 86,000 × 0.12 × $0.32 = 3,302 86,000 $22,360 $21,840 $22,016
$344 F Total mix variance $520 U Total yield variance $176 U Total efficiency variance
F = favourable effect on operating income; U = unfavourable effect on operating income
Self-test 2
Solution 7
1. Actual contribution margins
Actual Actual Actual Actual Variable Contribution Sales Actual Actual Selling Costs per Margin per Volume in Contrib. Contrib. Product Price Unit Unit Units Dollars Percent PalmPro $3 $178 $176 11,000 $ 1,936,000 15% PalmCE 290 92 198 44,000 8,712,000 70% PalmKid 107 73 34 55,000 1,870,000 15% 110,000 $12,518,000 100%
The actual average contribution margin per unit is $113.80 ($12,518,000 ÷ 110,000 units). Budgeted Contribution Margins
Budgeted Budgeted Budgeted Budgeted Variable Contribution Sales Budgeted Budgeted Selling Costs per Margin per Volume in Contribution Contribution Product Price Unit Unit Units Dollars Percent PalmPro $384 $182 $202 12,500 $ 2,525,000 19% PalmCE 274 98 176 37,500 6,600,000 49% PalmKid 1 65 50,000 4,450,000 32% 100,000 $13,575,000 100%
The budgeted average contribution margin per unit is $135.75 ($13,575,000 ÷ 100,000 units).
2. Actual Sales Mix Actual Actual Actual Actual Variable Contribution Sales Selling Costs per Margin per Volume in Actual Product Price Unit Unit Units Sales Mix
PalmPro $3 $178 $176 11,000 10.0% PalmCE 290 92 198 44,000 40.0% PalmKid 107 73 34 55,000 50.0% 110,000 100.0% Budgeted Sales Mix Budgeted Budgeted Budgeted Budgeted Variable Contribution Sales Selling Costs per Margin per Volume in Budgeted Product Price Unit Unit Units Sales Mix
PalmPro $384 $182 $202 12,500 12.5% PalmCE 274 98 176 37,500 37.5% PalmKid 1 65 50,000 50.0% 100,000 100.0% 3.
Flexible-budget variance of contribution margin:
Actual
Flexible-budget −
Resultsamount
PalmPro = ==PalmCE
=
=
=PalmKid
=
($176 × 11,000) – ($202 × 11,000)
$1,936,000 – $2,222,000 $286,000 U (198 × 44,000) – ($176 × 44,000)
$8,712,000 – $7,744,000 968,000 F ($34 × 55,000) – ($ × 55,000) $1,870,000 – $4,5,000
= =
3,025,000 U $2,343,000 U Total flexible-budget variance
Sales-volume variance of contribution margin:
=
Budgeted⎛Actual salesBudgeted sales⎞=
⎜⎟==quantity quantitymargin−× contrib. ⎜⎟ =⎜in units⎟in unitsper unit⎝⎠ ===
PalmPro (11,000 – 12,500) × $202 =
–1,500 × $202 = $303,000 U PalmCE (44,000 – 37,500) × $176 6,500 × $176 PalmKid (55,000 – 50,000) × $ 5,000 × $ Total sales-volume variance
= =
445,000 F $1,286,000 F =
1,144,000 F
Sales-mix variance of contribution-margin:
Budgeted⎞Budgeted⎛Actual
⎜⎟
of all × ⎜sales mix − sales mix⎟ × contrib. margin
⎟products sold⎜per unit⎝percentagepercentage⎠
=
PalmPro 110,000 × (0.10 – 0.125) × $202
=
= 110,000 × –0.025 × $202 = $555,500 U
=
PalmCE 110,000 × (0.40 – 0.375) × $176 =
= 110,000 × 0.025 × $176 = 484,000 F
=
PalmKid 110,000 × (0.50 – 0.50) × $
Actual units
110,000 × 0.00 × $ Total sales-mix variance
= =
0 F $ 71,500 U =Sales-quantity variance of contribution margin:
=
=BudgetedBudgeted⎛Actual unitsBudgeted units⎞
=⎜⎟
of all of all−⎜⎟ × sales mix × contrib. margin=
⎜products soldproducts sold⎟percentageper unit=⎝⎠
=
PalmPro (110,000 – 100,000) × 0.125 × $202 10,000 × 0.125 × $202
PalmCE (110,000 – 100,000) × 0.375 × $176 10,000 × 0.375 × $176
PalmKid (110,000 – 100,000) × 0.50 × $ 10,000 × 0.50 × $ Total sales-quantity variance
= =
445,000 F $1,357,500 F =
660,000 F
=
$252,500 F
4. Static-Budget Variance
Static-budget variance PalmPro $ 5,000 U PalmCE 2,112,000 F PalmKid 2,580,000 U Total $1,057,000 U Flexible-budget variance Sales-volume variance PalmPro $ 286,000 U PalmPro $ 303,000 U PalmCE 968,000 F PalmCE 1,144,000 F PalmKid 3,025,000 U PalmKid 445,000 F Total $2,343,000 U $1,286,000 F Sales-mix variance Sales-quantity variance PalmPro $555,500 U Palm Pro $252,500 F PalmCE 484,000 F PalmCE 660,000 F PalmKid 0 PalmKid 445,000 F Total $ 71,500 U Total $1,357,500 F
5. Some factors to consider are:
• The difference in actual vs. budgeted contribution was $1,057,000. However, the contribution from the PalmCE exceeded budget by $2,112,000 while the contributions from the PalmPro and the PalmKid were lower than expected to an offsetting degree.
• In percentage terms, the PalmCE accounted for 70% of total contribution vs. a planned 49% contribution. However, the PalmPro accounted for 15% vs. planned 19% and the PalmKid accounted for only 15% vs. a planned 32%.
• In unit terms (rather than in contribution terms), the PalmKid accounted for 50% of the sales mix as planned. However, the PalmPro accounted for only 10% vs. a budgeted 12.5% and the PalmCE accounted for 40% vs. a planned 37.5%.
• Variance analysis for the PalmPro shows an unfavourable sales-mix variance outweighing a favourable sales-quantity variance and producing an unfavourable sales-volume variance of $303,000. The drop in sales-mix share was far larger than the gain from an overall greater quantity sold.
• The PalmCE gained both from an increase in share of the sales mix as well as from the increase in the overall number of units sold. These factors combined to a $1,144,000 favourable sales-volume variance.
• The PalmKid maintained sales-mix share—as a result, the sales-mix variance is zero. However, PalmKid sales did gain from the overall increase in units sold.
• Overall, there was a favourable total sales-volume variance. However, the large drop in PalmKid’s contribution margin per unit combined with a decrease in the number of
PalmPro units sold vs. budget, led to the total contribution margin being much lower than budgeted.
Other factors could be discussed here—for example, it seems that the PalmKid did not
achieve much success with a three digit price point—selling price was budgeted at $1 but dropped to $107. At the same time, variable costs increased. This could have been due to a marketing push aimed at announcing the lower price in some markets. Students should also realize that the above solution considers mostly numerical impacts, while a full analysis should be taken with respect to the overall strategy, and marketing campaign analysis. Palm pilots were very common in the 1990’s and early 2000’s, however a lot of the features of palm pilots were subsequently included in cell phones and blackberries. This caused a drop in demand for palm pilots, and hence could have resulted in the decline of demand for the
highend, and the significant drop in price in the lowend, while those still wanting a palm pilot would adopt the midrange. New competition in the low end could have required a drop in price, but the overall low end market could have increased. This would show up in the market size variances (see the next question). Further analysis would be required to determine the causes of the variances.
Self-test 2
Solution 8 1.
Actual Budgeted
Worldwide 500,000 400,000
=
Aussie Info. 110,000 100,000 =
=22% Market share 25%
Average contribution margin per unit:
Actual $113.80 ($12,518,000 ÷ 110,000) Budgeted $135.75 ($13,575,000 ÷ 100,000) =Budgeted=Actual⎛ActualBudgeted⎞=
⎜⎟contribution margin
market size × ⎜market − market⎟ ×
per composite unit⎜share⎟in unitsshare⎝⎠for budgeted mix Market-share variance =
× (0.22 – 0.25) × $135.75 500,000 =
= 500,000 × (–0.03) × $135.75
$2,036,250 U
Market-size variance =
Budgeted
Budgeted⎞Budgeted⎛Actual
contribution margin⎜⎟
⎜market size − market size⎟ × market × per composite unit⎜in unitsin units⎟share⎝⎠for budgeted mix
× 0.25 × $135.75 (500,000 – 400,000)
100,000 × 0.25 × $135.75 $3,393,750 F
2. While the market share declined (from 25% to 22%), the overall increase in the total market
size meant a favourable sales-quantity variance:
Sales-quantity variance $1,357,500 F
Market share variance Market-size variance $2,036,250 U $3,393,750 F
3. The required actual market size is the budgeted market size, i.e., 400,000 units. This can
easily be seen by setting up the following problem:
Market-size variance =
Budgeted
Budgeted⎞Budgeted⎛Actual
contribution margin⎜⎟
market size market size market −××⎜⎟per composite unit⎜in units⎟in unitsshare⎝⎠for budgeted mix
= (M – 400,000) × 0.25 × $135.75
When M = 400,000 the market-size variance is $0.
Actual market-share calculation
Again, the answer is the budgeted market share, 25%. By definition, this will hold irrespective of the actual market size. This can be seen by setting up the appropriate equation:
Actual market size × (M – 25%) × $135.75 = $0
