Sales Variances

Learning Objective 6 Subdivide the sales-volume variance into the sales-mix variance and the sales-quantity variance and the sales-quantity variance into the market-share variance and the market-size variance

The customer-profitability analysis in the previous section focused on the actual profitability of individual customers within a distribution channel (wholesale, for example) and their effect on the Provalue Division’s profitability for 2019. At a more strategic level, however, recall that Provalue Division sells Provalue in two different markets: wholesale and directly to businesses. The operating margins in the business-sales market are higher than the operating margins in the wholesale market. In 2019, the Provalue Division had budgeted to sell 60% of Provalue through wholesalers and 40% directly to businesses. It sold fewer Provalue computers in total than it had budgeted, and its actual sales mix (in computers) was 66.67% to wholesalers and 33.33% directly to businesses. Regardless of the profitability of sales to individual customers within each of the wholesale and business-sales channels, the Provalue Division’s actual operating income, relative to the master budget, is likely to be negatively affected by the lower number of Provalue computers sold and the shift in mix toward the less profitable wholesale customers. Sales-quantity and sales-mix variances can identify the effect of each of these factors on the Provalue Division’s profitability. Companies such as Cisco, GE, and Hewlett-Packard perform similar analyses because they sell products through multiple distribution channels like the Internet, the telephone, and retail stores.

The Provalue Division classifies all customer-level costs, other than fixed machining costs of $11,400,000, as variable costs and all distribution-channel, division-sustaining, and ­corporate-sustaining costs as fixed costs. To simplify the sales-variance analysis and calculations, we assume that variable costs vary with the number of Provalue computers sold. (This means that average batch sizes remain the same as the total number of Provalue computers produced and sold change.) Without this assumption, the analysis becomes more complex and needs to be done using the ABC-variance analysis approach described in Chapter 8. The basic insights, however, do not change.

Budgeted and actual operating data for 2019 are as follows:

Budget Data for 2019

<p>A table shows budget data for Provalue Division for 2019</p>

The table depicts selling price, variable cost per unit, contribution margin per unit, sales volume in units, sales mix (based on units), and contribution margin for wholesale channel and business-sales channel as well as totals. The details of the table are as follows:

1. Wholesale channel

2. Business-sales channel

3. Total

Actual Results for 2019

<p>A table shows actual results for Provalue Division for 2019</p>

The table depicts selling price, variable cost per unit, contribution margin per unit, sales volume in units, sales mix (based on units), and contribution margin for wholesale channel and business-sales channel as well as totals. The details of the table are as follows:

  1. Wholesale channel
    • Selling price: 975.50 dollars
    • Variable cost per unit: 749.225 dollars
    • Contribution margin per unit (selling price minus variable cost per unit): 226.275 dollars
    • Sales volume in units: 100,000 dollars
    • Sales mix, based on units, percentage of total unit sales in wholesale channel equals 100,000 units divided by 150,000 total units: 66.67 percent
    • Contribution margin (contribution margin per unit times sales volume in units): 22,627,500 dollars
  2. Business-sales channel
    • Selling price: 1,049.00 dollars
    • Variable cost per unit: 784.55 dollars
    • Contribution margin per unit (selling price minus variable cost per unit): 264.45 dollars
    • Sales volume in units: 50,000 dollars
    • Sales mix, based on units: 33.33 percent
    • Contribution margin (contribution margin per unit times sales volume in units): 13,222,500 dollars
  3. Total
    • Sales volume in units: 150,000 dollars
    • Sales mix, based on units: 100 percent
    • Contribution margin (contribution margin per unit times sales volume in units): 35,850,000 dollars

The budgeted and actual fixed distribution-channel costs, division costs, and corporate-level costs are the same (see Exhibit 15-6 and Exhibit 15-7).

Recall that the levels of detail introduced in Chapter 7 included the static-budget variance (level 1), the flexible-budget variance (level 2), and the sales-volume variance (level 2). The sales-quantity and sales-mix variances discussed in this chapter are level 3 variances that subdivide the sales-volume variance.*

Static-Budget Variance

The static-budget variance is the difference between an actual result and the corresponding budgeted amount in the static budget. Our analysis focuses on the difference between actual and budgeted contribution margins (column 6 in the preceding tables). The total static-budget variance is $2,125,000 unfavorable variance (U) (actual contribution margin of $35,850,000−budgeted contribution margin of $37,975,000). Exhibit 15-11 (columns 1 and 3) uses the columnar format introduced in Chapter 7 to show detailed calculations of the static-budget variance. Managers can gain more insight about the static-budget variance by subdividing it into the flexible-budget variance and the sales-volume variance.

Exhibit 15-11

Flexible-Budget and Sales-Volume Variance Analysis of Provalue Division for 2019

Table shows the flexible-budget and sales-volume variance analysis of Provalue Division for 2019.

Details of the wholesale channel, business-sales channel, and all Provalue level 1 and level 2 are as follows: 

(A) Panel A: Wholesale channel

1. Actual Results is given by Actual Units of All Provalues Sold times Actual Sales Mix times Actual Contribution Margin per Unit: $22,627,500 (calculated by taking the product of 150,000, 0.6667, and $226.275)

2. Flexible Budget is given by Actual Units of All Provalues Sold times Actual Sales Mix times Budgeted Contribution Margin per Unit: $22,500,000 (calculated by taking the product of 150,0000, 0.6667, and $225)

3. Static Budget is given by Budgeted Units of All Provalues Sold times Budgeted Sales Mix times Budgeted Contribution Margin per Unit: $20,925,000 (calculated by taking the product of 155,000, 0.60, and $225)

Level 2

Flexible-budget variance: $127,500 Favorable is the difference of above (1) and (2).

Sales-volume variance: $1,575,000 Favorable is the difference of above (2) and (3).

Level 1 

Static-budget variance: $1,702,500 Favorable is the difference of above (1) and (3).

(B) Panel B: Business-sales channel

1. Actual Results is given by Actual Units of All Provalues Sold times Actual Sales Mix times Actual Contribution Margin per Unit: $13,222,500 (calculated by taking the product of 150,000, 0.3333, and $264.45)

2. Flexible Budget is given by Actual Units of All Provalues Sold times Actual Sales Mix times Budgeted Contribution Margin per Unit: $13,750,000 (calculated by taking the product of 150,000, 0.3333, and $275)

3. Static Budget is given by Budgeted Units of All Provalues Sold times Budgeted Sales Mix times Budgeted Contribution Margin per Unit: $17,050,000 (calculated by taking the product of 155,000, 0.40, and $275)

Level 2

Flexible-budget variance: $527,500 Unfavorable is the difference of above (1) and (2).

Sales-volume variance: $3,300,000 Unfavorable is the difference of above (2) and (3).

Level 1

Static-budget variance: $3,827,500 Unfavorable is the difference of above (1) and (3).

(C) Panel C: All Provalues

1. Actual Results is given by Actual Units of All Provalues Sold times Actual Sales Mix times Actual Contribution Margin per Unit: $35,850,000

2. Flexible Budget is given by Actual Units of All Provalues Sold times Actual Sales Mix times Budgeted Contribution Margin per Unit: $36,250,000

3. Static Budget is given by Budgeted Units of All Provalues Sold times Budgeted Sales Mix times Budgeted Contribution Margin per Unit: $37,975,000

Level 2

Total flexible-budget variance: $400,000 Unfavorable is the difference of above (1) and (2).

Total sales-volume variance: $1,725,000 Unfavorable is the difference of above (2) and (3).

Level 1

Total static-budget variance: $2,125,000 Unfavorable is the difference of above (1) and (3).