Agenda Today
• Refine some points from last Wednesday
• Review examples of the results of your
homework assignment
• Make some observations
• Clarify our views of the activity paradigm
• Discuss efficiency & effectiveness
• Talk about standard costs of activities
EMBA 802
1
Differential Profitability View
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•
Revenue
Variable expenses
Contribution margin
Nonvariable expenses
Income from operations
Income taxes
Net income
EMBA 802
$1,000,000
300,000
$ 700,000
400,000
$ 300,000
90,000
$ 210,000
2
Profitability - Internal Report
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•
•
•
•
•
•
•
•
Revenue
Variable production cost
Contrib.margin on production
Nonvariable mfg. cost
Gross margin
Selling & admin. expenses
Income from operations
Income taxes
Net income
EMBA 802
$1,000,000
300,000
$ 700,000
400,000
$ 300,000
120,000
$ 180,000
60,000
$ 120,000
3
Profitability - External Report
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•
•
•
•
•
•
Revenue
Cost of goods sold
Gross margin
Selling & admin. expenses
Income from operations
Income taxes
Net income
EMBA 802
$1,000,000
700,000
$ 300,000
120,000
$ 180,000
60,000
$ 120,000
4
Basic Activity View
Inputs
Outputs
EMBA 802
5
Activity Terminology
• Statistics represent the numeric values
assigned to the metrics for a period.
• Data sources are the primary or
secondary sources of the statistics.
EMBA 802
6
Efficiency in Accounting
• In accounting we use cost standards, flexible
budgets and profitability measures to
evaluate efficiency. These standards relate
the work done to the cost incurred to achieve
that work. Physical measures are useful, but
the ultimate measures include profitability.
• We may measure other operating variables
because we believe they relate to profitability
in the longer run.
EMBA 802
7
Basic Activity View
INPUTS
Just
in
time
Outputs
Input/Output
EMBA 802
8
Input/Output Relationships
Yield or Productivity
INPUTS
OUTPUTS
Efficiency
EMBA 802
9
Sales Mix and Volume
Just as we have focused on contribution
margin to make product mix and other
differential profitability decisions, we are
going to focus on contribution margins in
evaluating the results of operations. In
anticipation of what comes later, let us
consider the idea of sales mix and volume
variances.
EMBA 802
10
Sales Mix & Volume
Planned Sales Mix:
Total
Sales price
$11
Variable cost
6
Contribution margin $ 5
Planned mix
EMBA 802
Plain Deluxe
$10
$12
6
6
$ 4
$ 6
50% 50%
11
Sales Mix & Volume
Suppose actual sales were 10 units:
4 units of Plain, and 6 units of Deluxe.
Quantity
Contribution
Actual - Plan
UCM - ACM
P:
(4 - 5 units) x ($4 - $5) = +$1
D:
(6 - 5 units) x ($6 - $5) = + 1
Total mix variance
= +$2
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Observe
• The effect is easy to see because we
sold one fewer of the low margin, plain
model, and one more of the deluxe
model for an increase in contribution
margin of $2. There was a clear tradeoff.
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Calculated another way-Contribution margin at standard for actual
sales of 10 units:
(4 units @ $4 + 6 units @ $6 = $52
Contribution margin at standard
for planned sales of 10 units:
(10 units @ $5 weighted avg.) = 50
Total mix variance
$2
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More Complicated
Next, let us consider a more complicated
case involving three products and a
different sales mix than planned.
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More complicated example
Price
Variable cost
Contribution
Planned mix
Plain
$ 10
6
$ 4
30%
So-So
$ 11
6
$ 5
50%
Deluxe
$ 12
6
$ 6
20%
ACM = 0.3($ 4) + 0.5($ 5) + 0.2($ 6)
= 1.2 + 2.5 + 1.2 = $ 4.9/unit
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More Complicated
Actual sales: 4 Plain, 5 SoSo, 1 Deluxe
(Actual - Plan) x (UCM - ACM)
PL
(4 - 3 u) x ($4 - 4.9) = $- 0.9
So
(5 - 5 u) x ($5 - 4.9) =
0
Dx
(1 - 2 u) x ($6 - 4.9) = - 1.1
Total mix variance
$-2.0
UCM is unit contribution marg., ACM is average
EMBA 802
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Alternative Formulation
Item
(Actual - Standard) x UCM
Plain
(4 - 3) x $ 4 = $ 4
SoSo
(5 - 5) x $ 5 = 0
Deluxe
(1 - 2) x $ 6 = - 6
Total mix variance
$- 2
UCM is unit contribution margin
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Comparing Totals
Planned contribution margin =
3 units @ $4 + 5 units @ $5 + 2 units @ $6
= $ 12 + $ 25 + $ 12 =
$ 49
Actual units at standard margin:
4 units @ $4 + 5 units @ $5 + 1 units @ $6
= $16 + $25 + $6 =
$ 47
Total variance = Actual - Plan = $ -2
EMBA 802
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Still More Complicated
Next, let us consider the case in which
both the total volume and the mix of
product sales differ from plan.
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Volume Variance
If we sell more units than planned, then
there is an overall volume effect in
addition to a possible mix effect. We
could have one without the other,
except at very low volume levels:
Volume variance = (QA - QP)ACM
(11 u - 10 u) @ $4.90 = $4.90 F
where QA is actual volume, QP is planned volume, and
ACM is the weighted-average planned contrib. margin.
EMBA 802
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More Complicated
Actual sales: 4 Plain, 5 SoSo, 2 Deluxe
(Actual - Plan) x (CM - ACM)
PL
(4 - .3[11]) x ($4 - 4.9) = 0.7($-0.9)
So
(5 - .5[11]) x ($5 - 4.9) =-0.5($ 0.1)
Dx
(2 - .2[11]) x ($6 - 4.9) =-0.2($ 1.1
Total mix variance
= $-0.90 U
Total variance = $ 4.90 - $ 0.90 = $ 4.00
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Compare the Totals for Variance
Actual volume at standard cm:
= 4 @ $4 + 5 @ $5 + 2 @ $ 6
= $ 16 + $ 25 + $ 12
= $53
Planned contribution margin:
= 10 units @ $ 4.90
= $ 49
Variance = $ 53 - $ 49, or $ 4 Favorable
EMBA 802
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Under What Conditions.....?
When a mix variance makes sense:
• Products are substitutes in the eyes of
customers.
• There are one or more constraints that
force trade-offs in the production,
distribution or sales of products and
services.
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Interpreting the Mix Variance
Under most conditions, only the total mix
variance makes sense as a measure of the
over-all impact of a change in sales mix. If
one were looking for a particular shift in
mix, then one can look at the variances for
individual products, but the variances do
not reveal exactly which products are being
substituted for which. At best, variances
can only confirm hypotheses.
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• Break for it!
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