CHAPTER 14

Sales-Variance Analysis

Sales Variances

• Spring Distribution Company sells bottled water and operates in two different markets: wholesale and retail.

• The operating margins in the retail market are much higher than the operating margins in the wholesale market.

• In June 2009, Spring had budgeted to sell 890,000 (80% of its cases to wholesalers and 20% to retailers).

• It actually sold more cases in total than it had budgeted (900,000 cases), but its actual sales mix was 84% to wholesalers and 16% to retailers.

• Spring’s actual operating income, relative to the master budget, is likely to be positively affected by the higher sales of cases and negatively affected by the shift in mix away from the more-profitable retail customers.

Budget Data for June 2009

Selling Price

Variable Cost per

Unit

Contribution Margin per

Unit

Sales Volume in

Units

Sales Mix (Based on

Units)Contribution

Margin

Wholesale channel $13.37 $12.88 $0.49 712,000 80% $348,880

Retail channel 14.10 13.12 0.98 178,000 20 174,440

Total 890,000 100% $523,320

Actual Results for June 2009

Selling Price

Variable Cost per

Unit

Contribution Margin per

Unit

Sales Volumes in Units

Sales Mix

(Based on

Units)Contribution

Margin

Wholesale channel $13.37 $12.88 $0.49 756,000 84% $370,440

Retail channel 14.10 13.17 0.93 144,000 16% 133,920

Total 900,000 100% $504,360

Static-Budget Variance

• Our analysis focuses on the difference between actual and budgeted contribution margin

• The total static-budget variance is $18,960 U (actual contribution margin of $504,360 - budgeted contribution margin of $523,320

• The next slide shows detailed calculations of the static-budget variance.

• This static-budget variance can be subdivided into the flexible-budget variance and the sales-volume variance

Flexible-Budget and Sales-Volume Variances Illustrated

Flexible-Budget Variance

• The flexible-budget variance is the difference between an actual result and the corresponding flexible-budget amount based on actual output level in the budget period.

• The flexible budget measures the contribution margin that Spring would have budgeted for the actual quantities of cases sold.

• The $7,200 U flexible-budget variance arises because actual contribution margin on retail sales of $0.93 per case is lower than the budgeted amount of $0.98 per case.

• This $0.05 per case resulted from excessive price discounts.

Sales-Volume Variance

• The sales-volume variance is the difference between a flexible-budget amount and the corresponding static-budget amount.

• The sales-volume variance shows the effect on budgeted contribution margin of the difference between actual quantity of units sold and budgeted quantity of units sold.

• The sales-volume variance of $11,760 U can be subdivided into the sales-mix variance and the sales-quantity variance.

Sales-Mix and –Quantity Variances Illustrated

Market-Share and Market-Size Variances

• Spring’s sales depend on overall demand for bottled water, as well as Spring’s share of the market.

• Spring derived its total unit sales budget for June 2009 from a management estimate of 25% market share and a budgeted industry market size of 3,560,000 units (0.25 X 3,560,000 units = 890,000 units).

• For June 2009, actual market size was 4,000,000 units and actual market share was 22.5% (900,000 units / 4,000,000 units = 0.225 or 22.5%)

• Spring’s sales-quantity variance can now be further subdivided into market-share and market-size variances.

Market-Share and –Size Variances Illustrated

Sales Variances Summarized