Market-Size Variance

The market-size variance is the difference in budgeted contribution margin at budgeted market share caused solely by actual market size in units being different from budgeted market size in units. The formula for computing the market-size variance is as follows:

The market-size variance is favorable (F) because actual market size increased 3.23% $[(\text{800,000}-\text{775,000})÷\text{775,000}=\mathrm{0.0323,}\hspace{0.17em}\mathrm{or}\hspace{0.17em}\mathrm{3.23}\%]$ compared to budgeted market size.

Managers should probe the reasons for the market-size and market-share variances for 2019. Is the $1,225,000 F market-size variance because of an increase in market size that can be expected to continue in the future? If yes, the Provalue Division has much to gain by attaining or exceeding its budgeted 20% market share. Was the $2,450,000 unfavorable market-share variance because of competitors providing better offerings or greater value to customers? Did competitors aggressively cut prices to stimulate market demand? Although Provalue Division managers reduced prices a little relative to the budget, should they have reduced prices even more, particularly for business-sales customers where Provalue sales were considerably below budget and selling prices significantly higher than the prices charged to wholesalers? Was the quality and reliability of Provalue computers as good as the quality and reliability of competitors?

Some companies place more emphasis on the market-share variance than the market-size variance when evaluating their managers. That’s because they believe the market-size variance is influenced by economy-wide factors and shifts in consumer preferences that are outside the managers’ control, whereas the market-share variance measures how well managers performed relative to their peers.

Be cautious when computing the market-size variance and the market-share variance. Reliable information on market size and market share is not available for all industries. The automobile, computer, and television industries have widely available market-size and ­market-share statistics. In other industries, such as management consulting and personal financial planning, information about market size and market share is far less reliable.

Exhibit 15-14 presents an overview of the sales-mix, sales-quantity, market-share, and market-size variances for the Provalue Division. These variances can also be calculated in a multiproduct company, in which each individual product has a different contribution margin per unit. The Problem for Self-Study presents such a setting.