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, and expanding
them to include additional variance analysis techniques. You analyze the impact of revenue changes on
management decision-making, and determine revenue allocation for bundled products and services. Finally, you
conclude your work on the module by interpreting a customer profitability report and preparing a complete
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.
Assignment reminder
Assignment 1 (see Module 5) is due at the end of week 5 (see Course Schedule). It is a good idea to review
the assignment now so that you are familiar with the requirements and can prepare for any necessary work in
advance as you work through Modules 1-5
Topic outline and learning objectives
2.1 Revenue allocation Describe revenue allocation when products or services are bundled.
(Level 2)
2.2 Sales-volume variance Determine components of sales-volume variance. (Level 1)
2.3 Mix-and-yield variances for
substitutable inputs
Calculate the mix-and-yield variances for substitutable inputs. (Level 2)
2.4 Activity-based costing and variance
analysis
Evaluate the results of cost variances analysis in an activity-based
costing system. (Level 1)
2.5 Customer profitability analysis Evaluate the results of a customer profitability analysis. (Level 1)
2.6 Full income-statement variance
analysis
Evaluate the results of a full income-statement variance analysis.
(Level 1)
Module summary
Print this module
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2.1 Revenue allocation
Updated September 7, 2010, MA2-10-TU04
Learning objective
Describe revenue allocation when products or services are bundled. (Level 2)
Required reading
Chapter 16, pages 782-788
Note: On page 786 of the textbook after the second paragraph change the following formula
FROM:
FinanceMaster: ($125 + $155) = $380 2 = $190
2
TO:
FinanceMaster: ($225 + $155) = $380 2 = $190
2
LEVEL 2
Many companies sell individual products or services; other companies sometimes bundle products or services to
sell for a single price. For example, computer companies bundle software applications, telephone companies
offer free or discounted phones when customers opt for multi-year contracts, and telecommunications
companies bundle phone, TV, and Internet services. If you purchase a high-definition TV package, you might
also be required to subscribe to several channels. Music CDs include 10 or more songs bundled and sold as a
unit. Bundling products provides more value to the customer. Bundling also moves products that may be slower
sellers and introduces new products or services. For example, video game consoles are bundled with one or
two new games both to add value and to reduce costs to consumers.
Companies use these two methods to allocate revenues to bundled products:
Stand-alone method
The stand-alone method of revenue allocation uses individual prices and costs to determine
allocation of revenues. The textbook presents several methods of allocation that can be used
under the stand-alone method, each yielding a different allocation of revenues.
Incremental method
The incremental method of revenue allocation requires the company to rank the bundled products
as primary product, first incremental product, second incremental product, and so on. This
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ranking can be determined based on customer surveys, sales revenue of individual products, or
management judgment.
The following example demonstrates revenue allocation for large kitchen appliances bundled for sale at Larrys
Appliances Ltd.
Example 2.1-1: Larrys Appliances Ltd. Revenue allocation
Larrys Appliances bundles a fridge and stove package for $1,200. Each fridge sells for $800 and has a
manufacturing cost of $400. 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 = $686
$800 + $600

Stove = $600 $1,200 = $514
$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
conclude that the bundled prices are mainly driven by fridge sales, and decide to weight the
fridge sales as follows:
Fridge Stove
Fridge (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
Updated August 16, 2010, MA2-TU02; September 20, 2010, MA2-10-IBO4-Mo-2.2-typo-ALL
2.2 Sales-volume variance
Learning objective
Determine components of sales-volume variance. (Level 1)
Required reading
Chapter 16, pages 790-796
Note on the textbook reading
On page 796, 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.
LEVEL 1
Sales-volume variances are the differences that arise from fluctuations in the level of actual sales and the
expected (budgeted) sales. Sales-volume variance calculations are similar to the variance analysis components
introduced in your earlier management accounting course. The variances provided here are part of the income
statement, and include the differences between the static budget, flexible budget, and actual results. These
variances are calculated using the budgeted contribution margin.
Exhibit 16-4 on page 797 shows a summary of the relationships between the sales-volume variance and the
sales mix and quantity variances, and between the market-share and market-size variances. The following
example demonstrates calculation of these variances for Electra Companys 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:
Static budget Actual results
Lamps Phones Total Lamps Phones Total
Unit sales 400,000 600,000 1,000,000 357,200 582,800 940,000
Sales mix 0.4 0.6 1.00 0.38 0.62 1.00
Sales price $50 $24 $34,400,000 $50 $22 $30,681,600
Variable cost $40 $18 $38 $18
Contribution
margin $10 $6 $7,600,000 $12 $4 $6,617,600
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The static-budget variance is the difference between the total actual contribution margin results times actual
sales and total budgeted contribution margin times budgeted sales.
Static-budget variance = Actual results Static-budget amount
= $6,617,600 $7,600,000
= $982,400 U
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 the difference between the actual and budgeted contribution margins.

Actual sales
in units (Actual CM Budgeted CM)
Flexible-budget
= variance
Lamps 357,200 (($50-$38) $50 $40)) = $714,400 F

Phones 582,800 (($22-$18) ($24 $18)) = $1,165,600 U

Flexible-budget variance ($714,400 F + $1,165,600 U) = $451,200 U
A 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 the difference between the actual and planned units sold. It focuses on the
budgeted contribution margin.

By not selling as much as expected, a loss of contribution margin of $531,200 is recognized. The proof of the
static-budget variance is as follows:
Static-budget variance
= Flexible-budget variance + Sales-volume variance
$982,400 U = $451,200 U + $531,200 U
Sales-mix and sales-quantity variances
In a multi-product company the sales-volume variance can be further subdivided into the sales-mix and sales-
quantity variances.
The sales quantity, which considers the total of all units sold at the budgeted sales mix, 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) since each unit or product is likely to have a different
contribution margin.

Actual units
of all products sold
Actual
sales-mix
percentage
Budgeted
sales-mix
percentage
Budgeted
CM per unit
= Sales-mix
variance

Lamps 940,000 (0.38 0.40) $10 = $188,000 U
Phones 940,000 (0.62 0.60) $ 6 = $112,800 F
Sales-mix variance = ($188,000 U + $112,800 F) = $75,200 U
Electra 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 of 62/38. Sales of lamps were down, with a higher budgeted contribution
margin, and this had a negative overall impact on contribution margin.
Another method for calculating the variance is to determine the budgeted CM per composite unit. This
composite unit (or hypothetical mixed-unit cost) is a fictitious unit of sales of both products using either the
actual or budgeted sales mix:
Budgeted CM
per unit
Actual sales-mix
percentage
Budgeted CM
per unit for
actual mix

Budgeted
sales-mix
percentage
Budgeted CM
per composite unit
for budgeted
mix
Lamps $10.00 0.38 $3.80 0.40 $4.00

Phones $ 6.00 0.62 $3.72 0.60 $3.60


$7.52 $7.60

Sales-mix variance = 940,000 (actual units) ($7.52 $7.60) = $75,200 U
The budgeted contribution margin per composite unit for budgeted mix figure will be used later to calculate the
market-share and market-size variances.
The sales-quantity variance determines the variances between total budgeted sales and actual sales based on
the budgeted sales mix.
The reduction of total actual units sold compared to budgeted sales caused an overall loss of $456,000. This is
the reduction in budgeted contribution margin from lower than anticipated sales, given the budgeted sales mix
percentages and contribution margins, which isolates the impact of the reduction of sales exclusively. Proof is
as follows:
Sales-volume variance = Sales-mix variance + Sales-quantity variance

$531,200 U = $75,200 U + $456,000 U
Market-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 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. The market share and market size variances are a further analysis of the sales quantity
variance. (When working through these calculations, 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.)
Assume that Electra had anticipated (budgeted for) a 10% market share of the overall market of 10,000,000
units. (10,000,000 x 0.1 = 1,000,000) This accounts for the total unit sales as shown in the original data with
400,000 lamps and 600,000 phone sales. The actual sales in the entire market were 10,107,527 combined for
the lamps and phones during the year. Therefore, Electra had an actual market share of 9.3%
(940,000/10,107,527)
Here we use the budgeted contribution margin per composite unit for budgeted mix calculated above for the
sales quantity variance.
Note: On Exhibit 16-3 on page 795, each calculation uses the budgeted CM per composite unit for budgeted
sales mix. The calculations are correct, and they use the composite unit budgeted CM; however, the exhibit
calls it the budgeted average contribution margin per unit.
The market-share variance shows that the company did not achieve the 10% expected levels of 10,000,000
units, but achieved 9.3% of the larger market of 10,107,527 units of sales, resulting in a loss of $537,720.
The market size variance is Electras share of the increase or decrease in demand for the product. Note again
that the budgeted contribution margin per composite unit for budgeted mix is used to calculate this variance.
$81,720F = (10,107,527 10,000,000) x 0.10 x $7.60
The 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, the contribution margin
should have been greater by $81,720. That is, the company should have sold an additional 10,753 units
((10,107,527-10,000,000)*10%) and each of these additional units should have provided a CM composite of
$7.60 or $81,720 (note that resulting numbers have been rounded).
Sales-quantity variance
= Market-share variance + Market-size variance
$456,000 U = $537,720 U $81,720 F
This analysis represents the joint sales for both products, and therefore the composite weighted average
contribution margin is used. The analysis could also be done for each individual product (phone or lamp), using
the individual contribution margins of the products.
2.3 Mix-and-yield variances for substitutable inputs
Learning objective
Calculate the mix-and-yield variances for substitutable inputs. (Level 2)
Required reading
Chapter 16, pages 796-800
LEVEL2
Many manufacturing and production operations require mixing different ingredients or inputs to achieve the
output product. In this situation, mix-and-yield variances that were introduced in your earlier management
accounting course are reviewed here. The figure on page 800 provides an illustration of where the mix-and-
yield variances fit into the total picture of variance analysis in comparison to the price and efficiency variances.
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 example on page 798 and Exhibit 16-5, 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. Note
that the yield variance is based on the budgeted mix of ingredients.
The graphic on page 800 summarizes the output of Exhibits 16-5 and 16-6.
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 mix of 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.
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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 382-386
Chapter 5, pages 207-209 (Cost Hierarchies)
LEVEL 1
In your introductory management accounting course, you learned that activity-based costing classifies costs
into a four-part cost hierarchy consisting of:
output unit-level (for each product, such as 100% inspection)
batch-level (such as setup for a production run)
product-sustaining level (such as product design costs)
facility-sustaining level (such as rent or administration)
Here you will learn more about calculating variances in an activity based costing environment.
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 in the text reading, which focuses on the
analysis of batch level costs. Analyzing the variable costs of setups per batch could be completed using 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 8-10 on page 384 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
along with 0.25 hours more setup time per batch.
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Fixed-overhead cost variances are also computed using traditional fixed-overhead spending and production-
volume variances. The spending variance is the actual cost less the flexible budget cost. (Note on page 385
when calculating the fixed setup overhead spending variance the actual cost of $220,000 should not have a U
after the number.)
The application rate to determine the volume variance is calculated as follows:
Step 1: Choose the time period for the budget (2010).
Step 2: Select the cost-allocation base for allocating fixed overhead costs to the cost object(s).
Budgeted setup hours for 2010 are 7,200 hours.
Step 3: Identify the fixed overhead costs associated with the cost-allocation base.
Budgeted fixed setup cost for 2010 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.
Therefore the fixed overhead costs would have been allocated as follows:
1008 actual batches x 6 budgeted hours per batch x $30 applied per hour = $181,440 applied $216,000
$181,440 = $34,560U
Exhibit 8-11 on page 386 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
Updated September 7, 2010, MA2-10-TU04
Learning objective
Evaluate the results of a customer profitability analysis. (Level 1)
Required reading
Chapter 16, pages 805-813
Notes on the textbook reading
Page 805: Line 3 of the spreadsheet should read "Units Sold" instead of "Cash Sold."
Page 809: Exhibit 16-9, column D header has a typo: It should read Customer-Level Operating
Income Divided by Revenue (3) = (1) / (2)
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 805 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 (e.g., daily for just-in-time, every two weeks), product
handling fees, and rush deliveries, all affect customer profitability.
Steps in profitability analysis
1. Identify costs according to unit-level, batch-level, customer-sustaining, distribution-channel, and
corporate-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-channel 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 16-7 on page 808 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
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relevant to decisions. Costs associated with the distribution center (for example, warehouse costs, management
salaries) and corporate-sustaining 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 16-8 on page 808, 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 level costs for
overall long-term pricing decisions to ensure long-term profitability. Exhibit 16-9 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 are not being overlooked.
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Computer Illustration 2.6-1: Actual-to-budget variances
Becker & Clarke Inc. created a budget for the 20X8 fiscal year. It is now J anuary, 20X9, and the finance
department must analyze the results of the years 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 flexible budget and the actual results.
7. In column F, calculate the variance between the original budget and the flexible budget.
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((E8-D8)*F8 = M2P1!F52, M2P1!F52, 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. (Note that the sales volume variance is
the difference between the static budget costs and the flexible budget costs.)
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Direct-material variances
Row Description
17 Sales volume variance
21 Price variance
26 Efficiency variance
28 Total flexible budget
Direct-labour variances
Row Description
33 Sales volume variance
37 Price
42 Efficiency
44 Total flexible budget
Variable overhead variances
Row Description
49 Sales 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!D55,M2P1!D55,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 A89 to H103 is used to analyze the variances for the other expenses.
Module 2 summary
Describe 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 CM 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.
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Total mix variance + total yield variance = total efficiency variance
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.
Take the activity-based budget numbers and create a flexible budget based on actual
performance.
Compare flexible budget to actual.
Evaluate the result of a customer profitability analysis
Identify costs according to unit-level, batch-level, customer-sustaining, distribution-channel or
corporate-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 associated
with the static budget, flexible budget, and actual results.
This format allows flexible-budget variances and sales-volume 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 Actual
Beds Chairs Total Beds Chairs Total
Unit sales 40,000 120,000 160,000 50,000 100,000 150,000
Sales mix 0.25 0.75 1.00 0.333 0.667 1.00
Sales price $500 $90 $30.800M $510 $88 $34.300M
Variable cost $350 $68 $380 $68
Contribution margin $150 $22 $8.640M $130 $20 $8.500M
Question 1
Calculate the flexible-budget variance.
Solution
Question 2
Calculate the sales-volume variance.
Solution
Question 3
Calculate the static-budget variance.
Solution
Question 4
Exercise 16-18, page 821
Solution
Question 5
Textbook, Exercise 16-22, page 822
For part 2 prepare an exhibit for IS similar to Exhibit 16-9 only.
Solution
Question 6
Exercise 16-24, page 823
Assume that the budgeted quantity has been adjusted based on the actual output as expressed in the flexible
Course Schedule Course Modules Review and Practice Exam Preparation Resources
budget. (In other words, Energy Products Company used a total of 86,000 litres to produce Gas Gain.
According to the budget, they should have used a total of 84,000 units of input to produce the same amount
of Gas Gain.)
Solution
Question 7
Problem 16-27, pages 824-825
Solution
Question 8
Problem 16-28, page 825
Solution

Self-test 2
Solution 1

Self-test 2
Solution 2

Self-test 2
Solution 3

Self-test 2
Solution 4
1.
Salesvolume
variance
=

units in quantity
sales Actual

units in quantity
sales Budgeted

per ticket margin

on contributi Budgeted

Lowertiertickets = (3,3004,000)$20 = $14,000U

Uppertiertickets = (7,7006,000)$5 = 8,500F
Alltickets $5,500U

2.
unit per margin on contributi
average Budgeted
=
000 , 10
$5) (6,000 $20) 000 , 4 ( +

=
10,000
$30,000 000 , 80 $ +
=
000 , 10
000 , 110 $

= $11perunit(seatsold)

Sales-mix percentages:
Budgeted Actual
Lowertier
000 , 10
000 , 4
=0.40
000 , 11
300 , 3
=0.30

Uppertier
000 , 10
000 , 6
=0.60
000 , 11
700 , 7
=0.70

Solution Exhibit 16-18 presents the sales-volume, sales-quantity, and sales-mix
variances for lower-tier tickets, upper-tier tickets, and in total for the Penguins in
2010.
The sales quantity variance can also be calculated using the budgeted average
contribution margin of $11. $11 1,000 units = $11,000 F.

The sales-quantity variances can also be computed as:

Salesquantity
variance
=

sold
tickets all of
units Budgeted
sold
tickets all of
units Actual

percentage
mix - sales
Budgeted

per ticket
margin cont.
Budgeted

The sales-quantity variances are:

Lower-tier tickets = (11,000 10,000) 0.40 $20 = $ 8,000 F
Upper-tier tickets = (11,000 10,000) 0.60 $ 5 = 3,000 F
All tickets $11,000 F

The sales quantity variance can also be calculated using the budgeted average
contribution margin of $11. $11 1,000 units = $11,000 F

The sales-mix variance can also be computed as:

Salesmix
variance
=
sold
tickets all of
units Actual

Actual Budgeted Budgeted

contribution margin sales-mix sales-mix
per ticket percentage percentage






The sales-mix variances are

Lower-tier tickets = 11,000 (0.30 0.40) $20 = $22,000 U
Upper-tier tickets = 11,000 (0.70 0.60) $ 5 = 5,500 F
All tickets $16,500 U

3. ThePenguinsincreasedaverageattendanceby10%pergame.However,therewasasizable
shiftfromlowertierseats(budgetedcontributionmarginof$20perseat)totheuppertierseats
(budgetedcontributionmarginof$5perseat).Thenetresult:theactualcontributionmarginwas
$5,500belowthebudgetedcontributionmargin.

SOLUTIONEXHIBIT1618

ColumnarPresentationofSalesVolume,SalesQuantity,andSalesMixVariancesforPenguins

FlexibleBudget:
ActualUnitsof
AllProductsSold
ActualSalesMix
BudgetedContribution
MarginperUnit
(1)

ActualUnitsof
AllProductsSold
BudgetedSalesMix
BudgetedContribution
MarginperUnit
(2)
StaticBudget:
BudgetedUnitsof
AllProductsSold
BudgetedSalesMix
BudgetedContribution
MarginperUnit
(3)
PanelA:
Lowertier

(11,0000.30
a
)$20
3,300$20

(11,0000.40
b
)$20
4,400$20

(10,0000.40
b
)$20
4,000$20
$66,000 $88,000 $80,000
$22,000U $8,000F
Salesmixvariance Salesquantityvariance
$14,000U
Salesvolumevariance
PanelB:
Uppertier

(11,0000.70
c
)$5
7,700$5

(11,0000.60
d
)$5
6,600$5

(10,0000.60
d
)$5
6,000$5
$38,500 $33,000 $30,000
$5,500F $3,000F
Salesmixvariance Salesquantityvariance
$8,500F
Salesvolumevariance

PanelC:
AllTickets
(SumofLower
tierandUpper
tiertickets)
$104,500
e
$121,000
f
$110,000
g

$16,500U $11,000F
Totalsalesmixvariance Totalsalesquantityvariance
$5,500 U
Totalsalesvolumevariance
F=favourableeffectonoperatingincome;U=unfavourableeffectonoperatingincome.

ActualSalesMix:
a
Lowertier = 3,30011,000 = 30%
c
Uppertier = 7,70011,000 = 70%
e
$66,000+$38,500=$104,500

BudgetedSalesMix:

b
Lowertier = 4,00010,000 =40%

d
Uppertier = 6,00010,000 =60%

$88,000+$33,000=$121,000

$80,000+$30,000=$110,000

Self-test 2
Solution 5

Customer profitability, service company

1.
Avery Okie Wizard Grainger Duran
Revenues $260,000 $200,000 $322,000 $122,000 $212,000
Technicianandequipmentcost 182,000 175,000 225,000 107,000 178,000
Grossmargin 78,000 25,000 97,000 15,000 34,000
Servicecallhandling
($75 150;240;40;120;180) 11,250 18,000 3,000 9,000 13,500
Webbasedpartsordering
($80 120;210;60;150;150) 9,600 16,800 4,800 12,000 12,000
Billing/Collection
($50 30;90;90;60;120) 1,500 4,500 4,500 3,000 6,000
Databasemaintenance
($10 150;240;40;120;180) 1,500 2,400 400 1,200 1,800
Customerleveloperatingincome $54,150 $(16,700) $84,300 $(10,200) $700

2. CustomersRankedonCustomerLevelOperatingIncome
Cumulative
CustomerLevel
CustomerLevel CustomerLevel Cumulative
OperatingIncomeasa
%ofTotal
Operating Customer OperatingIncome CustomerLevel CustomerLevel
Customer Income Revenue asa%ofRevenue OperatingIncome OperatingIncome
Code (1) (2) (3)=(1) (2) (4) (5)=(4) $112,250
Wizard $84,300 $322,000 26.18% $84,300 75%
Avery 54,150 260,000 20.83% 138,450 123%
Duran 700 212,000 0.33% 139,150 124%
Grainger (10,200) 122,000 8.36% 128,950 115%
Okie (16,700) 200,000 8.35% 112,250 100%
$112,250 $1,116,000

The above table and graph present the summary results. Wizard, the most
profitable customer, provides 75% of total operating income. The three best

customers provide 124% of ISs operating income, and the other two, by incurring
losses for IS, erode the extra 24% of operating income down to ISs operating income.

3. TheoptionsthatInstantServiceshouldconsiderinclude:
a. IncreasetheattentionpaidtoWizardandAvery.Thesearekeycustomers,andevery
efforthastobemadetoensuretheyareretainedbyIS.ISmaywellwanttosuggestaminorprice
reductiontosignalhowimportantitisintheirviewtoprovideacosteffectiveservicetothese
customers.
b. Seekwaysofreducingthecostsorincreasingtherevenuesoftheproblemaccounts
OkieandGrainger.Forexample,arethecopyingmachinesatthosecustomerlocationsoutdatedandin
needofrepair?Ifyes,anincreasedchargemaybeappropriate.CanISprovidebetteronsiteguidelines
tousersaboutwaystoreducebreakdowns?
c. Asalastresort,ISmaywanttoconsiderdroppingparticularaccounts.Forexample,if
Grainger(orOkie)willnotagreetoafeeincreasebuthasmachinescontinuallybreakingdown,ISmay
welldecidethatitistimenottobidonanymoreworkforthatcustomer.Butcaremustthenbetakento
otherwiseuseorgetridoftheexcessfixedcapacitycreatedbyfiringunprofitablecustomers.

Self-test 2
Solution 6

16-24 Direct materials efficiency, mix, and yield variances

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:

ChemicalBudget Quantity Budget 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

Solution Exhibit 16-24 presents the total direct materials efficiency, yield, and mix
variances for August 2010.

Total direct materials efficiency variance can also be computed as:

Direct materials
Actual Budgeted inputs allowed Budgeted
efficiency variance
inputs for actual outputs achieved prices
for each input

=




Echol = (24,080 25,200) $0.22 = $246 F
Protex = (15,480 16,800) $0.47 = 620 F
Benz = (36,120 33,600) $0.17 = 428 U
CT-40 = (10,320 8,400) $0.32 = 614 U
Total direct materials efficiency variance $176 U

The total direct materials yield variance can also be computed as the sum of the direct
materials yield variances for each input:

Direct Actual total Budgeted total quantity
materials quantity of all of all direct materials

yield variance direct materials inputs allowed for
for each input inputs used actual output achieved



=

Budgeted Budgeted
direct materials price of

input mix direct materials
percentage inputs

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 = 64 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:

Direct Actual Budgeted Actual B
materials direct materials direct materials quantity of all

mix variance input mix input mix direct materials
for each input percentage percentage inputs used



=




udgeted
price of
direct materials
inputs

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. EnergyProductsusedalargertotalquantityofdirectmaterialsinputsthanbudgeted,andso
showedanunfavourableyieldvariance.Themixvariancewasfavourablebecausetheactualmix
containedmoreofthecheapestinput,Benz,andlessofthemostcostlyinput,Protex,thanthe
budgetedmix.Thefavourablemixvarianceoffsetsome,butnotall,oftheunfavourableyieldvariance
theoverallefficiencyvariancewasunfavourable.EnergyProductswillfinditprofitabletoshifttothe
cheapermixonlyiftheyieldfromthischeapermixcanbeimproved.EnergyProductsmustalsoconsider
theeffectonoutputqualityofusingthecheapermix,andthepotentialconsequencesforfuture
revenues.

SOLUTION EXHIBIT 16-24

Columnar Presentation of Direct Materials Efficiency, Yield, and Mix Variances
for The Energy Products Company for August 2010

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 = $ 5,544
Protex 86,000 0.18 $0.47 = 7,276 86,000 0.20 $0.47 = 8,084 84,000 0.20 $0.47 = 7,896
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
CT-40 86,000 0.12 $0.32 = 3,302 86,000 0.10 $0.32 = 2,752 84,000 0.10 $0.32 = 2,688
$22,016 $22,360 $21,840
$344 F $520 U
Total mix variance 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

16-27 Variance analysis, sales-mix, and sales-quantity variances

1. ActualContributionMargins
Product

Actual
Selling
Price
Actual
Variable
Costper
Unit
Actual
Contribution
Marginper
Unit
Actual
Sales
Volumein
Units
Actual
Contribution
Dollars
Actual
Contribution
Percent
PalmPro
$349 $178 $171 11,000 $1,881,000 16%
PalmCE
285
92 193 44,000 8,492,000 71%
PalmKid
102 73 29 55,000 1,595,000 13%
110,000 $11,968,000 100%
The actual average contribution margin per unit is $108.80
($11,968,000 110,000 units).

Budgeted Contribution Margins

Product

Budgeted
Selling
Price
Budgeted
Variable
Costper
Unit
Budgeted
Contribution
Marginper
Unit
Budgeted
Sales
Volumein
Units

Budgeted
Contribution
Dollars

Budgeted
Contribution
Percent
PalmPro $379 $182 $197 12,500 $2,462,500 19%
PalmCE 269 98 171 37,500 6,412,500 49%
PalmKid 149 65 84 50,000 4,200,000 32%
100,000 $13,075,000 100%
The budgeted average contribution margin per unit is $130.75 ($13,075,000
100,000 units).

2. ActualSalesMix

Product
Actual
SalesVolume
inUnits

Actual
SalesMix
PalmPro 11,000 10.0% (11,000 110,000)
PalmCE 44,000 40.0% (44,000 110,000)
PalmKid 55,000 50.0% (55,000 110,000)

110,000
100.0%



Budgeted Sales Mix
Product
Budgeted
SalesVolume
inUnits

Budgeted
SalesMix
PalmPro 12,500 12.5% (12,500 100,000)
PalmCE 37,500 37.5% (37,500 100,000)
PalmKid 50,000 50.0% (50,000 100,000)

100,000
100.0%

3. Salesvolumevariance:
=
Actual Budgeted
quantity of quantity of
units sold units sold





Budgeted
contribution margin
per unit

PalmPro (11,000 12,500) $197 $ 295,500 U
PalmCE (44,000 37,500) $171 1,111,500 F
PalmKid (55,000 50,000) $ 84 420,000 F
Total sales-volume variance $1,236,000 F

Salesmixvariance:
=
sold products
all of
units Actual

percentage
mix sales
Actual

percentage
mix sales
Budgeted

unit per
margin contrib.
Budgeted

PalmPro = 110,000 (0.100.125) $197 $541,750U
PalmCE = 110,000(0.400.375)$171 470,250F
PalmKid = 110,000(0.500.50)$84 0F
Totalsalesmixvariance $71,500U

Sales-quantity variance:
=

sold products
all of
units Actual

sold products
all of
units Budgeted

percentage
mix sales
Budgeted

unit per
margin contrib.
Budgeted

PalmPro (110,000100,000)0.125$197 $246,250F
PalmCE (110,000100,000)0.375$171 641,250F
PalmKid (110,000100,000)0.50$84 420,000F
Totalsalesquantityvariance $1,307,500F

Solution Exhibit 16-27 presents the sales-volume variance, the sales-mix
variance, and the sales-quantity variance for PalmPro, PalmCE, PalmKid, and in total
for the third quarter 2010.

SOLUTIONEXHIBIT1627
SalesMixandSalesQuantityVarianceAnalysisofAussieInfonauticsfortheThirdQuarter2010.

FlexibleBudget: StaticBudget:
ActualUnitsof ActualUnitsof BudgetedUnitsof
AllProductsSold AllProductsSold AllProductsSold
ActualSalesMix BudgetedSalesMix BudgetedSalesMix
BudgetedContribution BudgetedContribution BudgetedContribution
MarginPerUnit MarginPerUnit MarginPerUnit
PalmPro 110,0000.10$197=$2,167,000110,0000.125$197=$2,708,750100,0000.125$197=$2,462,500
PalmCE 110,0000.40$171=7,524,000110,0000.375$171=7,053,750100,0000.375$171=6,412,500
PalmKid 110,0000.50$84=4,620,000110,0000.50$84=4,620,000100,0000.50$84=4,200,000
$14,311,000$14,382,500$13,075,000
$71,500 U $1,307,500 F
Salesmixvariance Salesquantityvariance
$1,236,000 F
Salesvolumevariance
F = favourable effect on operating income; U= unfavourable effect on operating income.

4. Thefollowingfactorshelpusunderstandthedifferencesbetweenactualandbudgeted
amounts:
Thedifferenceinactualversusbudgetedcontributionmarginswas$1,107,000unfavourable
($11,968,000$13,075,000).However,thecontributionmarginfromthePalmCEexceeded
budgetby$2,079,500($8,492,000$6,412,500)whilethecontributionsfromthePalmPro
andthePalmKidwerelowerthanexpectedandoffsetthisgain.Thisisattributabletolower
unitsalesinthecaseofPalmProandlowercontributionmarginsinthecaseofPalmKid.
Inpercentageterms,thePalmCEaccountedfor71%ofactualcontributionmarginversusa
planned49%contributionmargin.However,thePalmProaccountedfor16%versusA
planned19%andthePalmKidaccountedforonly13%versusaplanned32%.
Inunitterms(ratherthanincontributionterms),thePalmKidaccountedfor50%ofthesales
mixasplanned.However,thePalmProaccountedforonly10%versusabudgeted12.5%
andthePalmCEaccountedfor40%versusaplanned37.5%.
VarianceanalysisforthePalmProshowsanunfavourablesalesmixvarianceoutweighinga
favourablesalesquantityvarianceandproducinganunfavourablesalesvolumevariance.
Thedropinsalesmixsharewasfarlargerthanthegainfromanoverallgreaterquantity
sold.
ThePalmCEgainedbothfromanincreaseinshareofthesalesmixaswellasfromthe
increaseintheoverallnumberofunitssold.
ThePalmKidmaintainedsalesmixshareat50%asaresult,thesalesmixvarianceiszero.
However,PalmKidsalesgainedfromtheoverallincreaseinunitssold.
Overall,therewasafavourabletotalsales-volumevariance.However,thelargedropin
PalmKidscontributionmarginperunitcombinedwithadecreaseintheactualnumberof
PalmProunitssold,aswellasadropintheactualcontributionmarginperunitbelow
budget,ledtothetotalcontributionmarginbeingmuchlowerthanbudgeted.

Other factors could be discussed herefor example, it seems that the PalmKid
did not achieve much success with a three-digit price pointselling price was
budgeted at $149 but dropped to $102. At the same time, variable costs increased.
This could have been due to a marketing push that did not succeed.

Self-test 2
Solution 8

16-28 Market-share and market-size variances (continuation of 16-27).

1.
Actual Budgeted
Worldwide 500,000 400,000
AussieInfo. 110,000 100,000
Marketshare 22% 25%

Average contribution margin per unit:
Actual = $108.80 ($11,968,000 110,000)
Budgeted = $130.75 ($13,075,000 100,000)

Market-share
variance
=
Actual
market size
in units

Budgeted
Actual Budgeted
contribution margin
market market
per composite unit
share share
for budgeted mix





= 500,000(0.220.25)$130.75
= 500,000(0.03)$130.75
= $1,961,250 U

Market-size
variance

=
Actual Budgeted
market size market size
in units in units

Budgeted
Budgeted
contribution margin
market
per composite unit
share
for budgeted mix

= (500,000 400,000) 0.25 $130.75
= 100,0000.25$130.75
= $3,268,750F

Solution Exhibit 16-28 presents the market-share variance, the market-size
variance, and the sales-quantity variance for the third quarter 2010.

SOLUTIONEXHIBIT1628
MarketShareandMarketSizeVarianceAnalysisofAussieInfonauticsfortheThirdQuarter2010.

StaticBudget:
ActualMarketSize ActualMarketSize BudgetedMarketSize
ActualMarketShare BudgetedMarketShare BudgetedMarketShare
BudgetedAverage BudgetedAverage BudgetedAverage
ContributionMargin ContributionMargin ContributionMargin
PerUnit PerUnit PerUnit
500,0000.22
a
$130.75
b
500,0000.25
c
$130.75
b
400,0000.25
c
$130.75
b

$14,382,500 $16,343,750 $13,075,000

$1,961,250U $3,268,750F
Marketsharevariance Marketsizevariance
$1,307,500 F
Sales-quantity variance

F=favourableeffectonoperatingincome;U=unfavourableeffectonoperatingincome
a
Actual market share: 110,000 units 500,000 units = 0.22, or 22%
b
Budgeted average contribution margin per unit $13,075,000 100,000 units = $130.75 per
unit
c
Budgeted market share: 100,000 units 400,000 units = 0.25, or 25%

2. Whilethemarketsharedeclined(from25%to22%),theoverallincreaseinthetotalmarketsize
meantafavourablesalesquantityvariance:

SalesQuantityVariance
$1,307,500F

MarketShareVariance MarketSizeVariance
$1,961,250U $3,268,750F

3. Therequiredactualmarketsizeisthebudgetedmarketsize,i.e.,400,000units.Thiscaneasily
beseenbysettingupthefollowingequation:

mix budgeted for

unit composite per
margin on contributi
Budgeted
share
market
Budgeted
units in
size market
Budgeted
units in
size market
Actual
variance
size - Market

=
=(M400,000)0.25$130.75

When M = 400,000, the market-size variance is $0.

ActualMarketShareCalculation
Again,theansweristhebudgetedmarketshare,25%.Bydefinition,thiswillholdirrespectiveof
theactualmarketsize.Thiscanbeseenbysettinguptheappropriateequation:
Market-share
variance

=
Actual
market size
in units

Budgeted
Actual Budgeted
contribution margin
market market
per composite unit
share share
for budgeted mix





= Actualmarketsize(M25%)$130.75
WhenM = 25%,themarketsharevarianceis$0.