Revenue, Customer- Profitability Analysis, and Sales-Variance Analysis Chapter 14

Revenue, Customer-

Profitability Analysis, and

Sales-Variance Analysis

Chapter 14

©2003 Prentice Hall Business Publishing,

Cost Accounting 11/e, Horngren/Datar/Foster 14 - 1

Learning Objective 1

Discuss why a company’s revenues can differ across customers purchasing the same product.



Customer Revenue

Analysis Example

During the first six months of 2003,

English Languages Institute expanded its market and sold 200 composition programs to two new customers in Mexico.

Customer A is in Tijuana and customer B is in Guadalajara.



Customer Revenue

Analysis Example

A

Customer

140

B

60 Programs sold

List selling price $185

Invoice price $175

$185

$180

Total revenues $24,500 $10,800

What explanation(s) can be given for these revenue differences?



Customer Revenue

Analysis Example

1. The volume of programs purchased

2. The magnitude of price discounting



Customer Cost Analysis Example

Assume that English Languages Institute has an activity-based costing system that focuses on customers rather than products.

Activity Area

Order taking

Order set up

Cost Driver and Rate

$ 80 per purchase

$100 per batch




Customer A Customer B

Number of:

Purchase orders

Batches

7

7

2

2

What is the cost of servicing each customer?




Customer A:

Ordering: 7

×

$80/order = $ 560

Set-up: 7

×

$100/batch = 700

Total $1,260

English can use this information to persuade this customer to reduce usage of the ordering and setup cost drivers.




Customer B:

Ordering: 2

×

$80/order = $160

Setup: 2

×

$100/batch = 200

Total $360




Apply the concept of cost hierarchy to customer costing.



Cost Hierarchy

General Motors uses a seven-level cost hierarchy to analyze profitability.

The aim of this cost hierarchy is to assign costs to the lowest level of the hierarchy at which they can be identified.



Cost Hierarchy

1. Enterprise-related activities

2. Market-related activities

3. Channel-related activities

4. Customer-related activities

5. Order-related activities

6. Parts-related activities

7. Direct materials




Discuss why customer-profitability differs across customers

.



Customer-Profitability Profiles

Which customer is more profitable, A or B?

Revenues

A

$24,500

B

$10,800

Cost of good sold ($95 per unit) 13,300

Contribution margin $11,200

5,700

$ 5,100

Other expenses

Operating income

1,260 360

$ 9,940 $ 4,740



Customer-Profitability Profiles

Customer A seems to be more profitable.

However, customer B has a higher gross profit percentage.

Customer A has a gross profit of 40.6%

($9,940 ÷ $24,500).

Customer B has a gross profit of 43.9%

($4,740 ÷ $10,800).




Provide additional information about the sales-volume variance by calculating the sales-mix variance and the sales-quantity variance.



Sales-Volume

Variance Components

The following information relates to English

Languages Institute budget for the year 2003.

Product

Selling price per unit

Grammar Trans. Comp.

$259 $87 $185

Variable cost 189 50 95

Contribution margin per unit $ 70 $37 $ 90



Sales-Volume

Variance Components

Product Grammar Translation Composition

Cont. margin $70

×

Units 3,185

= Total

Sales mix

$222,950

65%

$37

980

$36,260

20%

$90

735

$66,150

15%

Total budgeted contribution margin = $325,360



Sales-Volume

Variance Components

The following are the actual results for

English Languages for the year 2003.


Selling $/unit $255 $85 $185

Variable cost 180 45 95

Cont. margin per unit

$ 75 $40


Cost Accounting 11/e, Horngren/Datar/Foster

$ 90

14 - 19

Sales-Volume

Variance Components


Cont. margin $75

×

Units 2,880

= Total

Sales mix

$216,000

64%

$40

990

$39,600

22%

$90

630

$56,700

14%

Total actual contribution margin = $312,300



Static-Budget Variance

Product

Grammar

Translation

Composition

Total

StaticStatic-

Actual budget budget results amount variance

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

39,600 36,260 3,340 F

56,700 66,150 9,450 U

$312,300 $325,360 $13,060 U



Flexible-Budget Variance

Actual contribution Unit

Product margin/unit volume

Grammar

Translation

$75

$40

Composition $90

2,880

990

630

Actual results

$216,000

$ 39,600

$ 56,700




Budgeted Actual contribution unit

Product margin/unit volume

Grammar

Translation

$70

$37

Composition $90

2,880

990

630

Flexible budget

$201,600

$ 36,630

$ 56,700




Product

Actual results

FlexibleFlexiblebudget budget amount variance

Grammar $216,000 $201,600 $14,400 F

Translation $39,600 $ 36,630 $ 2,970 F

Composition $56,700 $ 56,700

Total flexible-budget variance

0

$17,370 F



Sales-Volume Variance

Budgeted contribution

Product Actual Budget margin

Grammar (2,880 – 3,185)

×

$70 = $21,350 U

Translation (990 – 980)

×

$37 = 370 F

Composition (630 – 735)

×

$90 = 9,450 U

Total sales-volume variance $30,430 U



Sales-Mix Variance

=

×

×

Sales-mix variance

Actual units of all products sold

Actual sales-mix percentage

– Budgeted sales-mix percentage

Budgeted contribution margin per unit



Sales-Mix Variance

Grammar: 4,500(0.64 – 0.65)

×

$70 = $3,150 U

Translation: 4,500(0.22 – 0.20)

×

$37 = $3,330 F

Composition: 4,500(0.14 – 0.15)

×

$90 = $4,050 U

Total sales-mix variance = $3,870 U



Sales-Quantity Variance

=

×

×

Sales-quantity variance

Actual units of all products sold

– Budgeted units of all products sold

Budgeted sales-mix percentage

Budgeted contribution margin per unit




Grammar:

(4,500 – 4,900)

×

0.65

×

$70

Translation:

(4,500 – 4,900)

×

0.20

×

$37

(4,500 – 4,900)

×

Composition:

0.15

×

$90

Total sales-quantity variance

= $18,200 U

= $ 2,960 U

= $ 5,400 U

= $26,560 U




Provide additional information about the sales-quantity variance by calculating the market-share variance and the market-size variance.



Market-Share Variance Example

Assume that English Languages Institute derives its total unit sales budget for 2003 from a management estimate of a 20% market share and a total industry sales forecast by Desert

Services of 24,500 units in the region.

In 2003, Desert Services reported actual industry sales of 28,125 units.




What is English’s actual market share?

4,500 ÷ 28,125 = 0.16

Budgeted total contribution margin is $325,360.

Budgeted number of units is 4,900.

What is the budgeted average contribution margin per unit?

$325,360 ÷ 4,900 = $66.40




=

×

×

What is the market-share variance?

Actual market size in units

Actual market share

– Budgeted market share

Budgeted contribution margin per composite unit for budgeted mix

28,125(0.16 – 0.20)

×

$66.40 = $74,700 U




Actual Market Size

×

Actual Market Share

×

Budgeted Average Contribution Margin Per Unit

28,125

×

0.16

×

$66.40 = $298,800

Actual Market Size

×

Budgeted Market Share

×


28,125

×

0.20

×

$66.40 = $373,500

$373,500 – $298,800 = $74,700 U



Market-Size Variance Example

=

×

×

Market-size variance

Actual market size in units

– Budgeted market size in units

Budgeted market share

Budgeted contribution margin per composite unit for budgeted mix

(28,125 – 24,500)

×

0.20

×

$66.40 = $48,140 F



Market-Size Variance Example

Actual Market Size

×

Budgeted Market Share

×


28,125

×

0.20

×

$66.40 = $373,500

Static Budget: Budgeted Market Size

×

Budgeted market share

×


24,500

×

0.20

×

$66.40 = $325,360

$373,500 – $325,360 = $48,140 F



Level 1

Summary of Variances

Static-Budget Variance

13,060 U

Level 2

Flexible-Budget

Variance

$17,370 F

Sales-Volume

Variance

$30,430 U



Level 2


Sales-Volume Variance

$30,430 U

Level 3

Sales-Mix

Variance

$3,870 U

Sales-Quantity

Variance

$26,560 U



Level 3



$26,560 U

Level 4

Market-Share

Variance

$74,700 U

Market-Size

Variance

$48,140 F



End of Chapter 14



Revenue, Customer- Profitability Analysis, and Sales-Variance Analysis Chapter 14

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