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firms contribution margin. A products sales mix variance is the effect that a change in the
relative proportion of the product from the budgeted proportion has on the total contribution
margin of the period. It is calculated by multiplying the difference in the sales mixes by the
number of total units sold and the budgeted contribution margin per unit:
Sales mix
variance of
a product
Actual sales
mix of the
Budgeted sales
mix of the
product
Total
units
sold
Budgeted contribution
margin per unit of
the product
product
Illustration of the Calculation
of the Sales Quantity
and Sales Mix Variances
The calculations for the sales quantity and sales mix variance can be illustrated using information from the Schmidt Manufacturing Company (used in Chapter 14). Assume that, as in
Chapter 14, we have product XV-1 but that now in addition we have product FB-33. These
are the only two products sold by Schmidt Machinery. In contrast to the results for the month
of October 2010 used in Chapter 14, we are now considering budgeted and actual results
for the month of December 2010; the budgeted information is shown in Exhibit 16.7 and
the actual information is shown in Exhibit 16.8. Note in comparing Exhibits 16.7 and 16.8
that there is no difference in prices, variable costs or fixed costs; the only differences are in
units sold. This allows us to focus strictly on the sales quantity and sales mix variances for
these two products. To begin the analysis we calculate the budgeted and actual sales mix, as
follows:
Product
Units Sold
XV-1
FB-33
1,600
3,400
Total
5,000
25% 1,000/4,000
75% 3,000/4,000
100%
Budgeted Sales
1,000
3,000
4,000
The calculation of the mix and quantity variances for each product are illustrated in
Exhibit 16.9, using the flexible budget. Panel 1 of Exhibit 16.9 shows the flexible budget
framework that is used to calculate the variances. Note that the master budget is in the righthand column C while column A has the actual sales mix, and B has the budgeted sales mix.
The difference between columns B and C is the budgeted (column C) and actual (column B)
total units sold. Panel 2 of Exhibit 16.9 shows the calculation of the mix and quantity variances
for product XV-1, while panel 3 shows the calculations for product FB-33. Panel 4 shows the
total for both products, and panel 5 shows the summary of the results for each product and in
total. Note that the sales quantity variance plus the sales mix variance for each product equals
the sales volume variance for that product. Also, the volume variance calculated here can be
EXHIBIT 16.7
Master Budget
For the Month Ended December 31, 2010
FB-33
XV-1
Total
Operational-Level Control
716 Part
Three
Per Unit
1,000
Units
Sales
Variable costs
Contribution margin
Fixed costs
$800,000
450,000
$350,000
150,000
Operating income
$200,000
Total
Per Unit
3,000
$800
450
$350
Both Products
Total
4,000
$1,800,000 $600
960,000
320
$ 840,000
$280
450,000
$2,600,000
1,410,000
$1,190,000
600,000
$ 390,000
$ 590,000
EXHIBIT 16.8
Income Statement
For the Month Ended December 31, 2010
XV-1
1,600
Per Unit
FB-33
Per Unit
3,400
Total
5,000
Sales
Variable costs
$1,280,000
720,000
$800
450
$2,040,000 $600
1,088,000 320
$3,320,000
1,808,000
Contribution margin
Fixed costs
$ 560,000
150,000
$350
$ 952,000
450,000
$1,512,000
600,000
Operating income
$ 410,000
Units
$280
$ 502,000
$ 912,000
EXHIBIT 16.9
Sales Mix and Quantity
Variances
B
Actual
Budget
Budget
C
Budget
Budget
Budget
Contribution margin
Sales mix
variance
Panel 2: Product
XV-1
Total units
Sales mix
Contribution margin
Sales quantity
variance
Flexible Budget with
Budgeted Sales Mix
Number of total units of
all products sold
Budgeted sales mix
Budgeted contribution
margin per unit
A
5,000
32%
$350
Master
(Static) Budget
Total budgeted units of
sales for all products
Budgeted sales mix
Budgeted contribution
margin per unit
B
5,000
25%
$350
C
4,000
25%
$350
$437,500 $350,000
$87,500F
1
Chapter
717
EXHIBIT 16.9
Continued
$1,050,000 $840,000
$210,000F
Panel 4: Both
Products
$560,000 $952,000
$1,512,000
$437,500 $1,050,000
$350,000 $840,000
$1,487,500
$1,190,000
Sales quantity variance
$1,487,500 $1,190,000
$297,500F
Panel 5: Summary
Product
Sales Quantity
Variance
XV1
FB33
$122,500F
98,000U
$ 87,500F
210,000F
$210,000F
112,000F
Total
$ 24,500F
$297,500F
$322,000F
reconciled to the volume variance as determined directly from the comparison of actual and
budget results in Exhibits 16.8 and 16.7, respectively. Since actual sales price equals budget
sales price in this example, the selling price variance equals zero, and since the volume variance plus the selling price variance is the total sales variance, the entire difference between
actual and budget contribution margin is the volume variance ($1,512,000
$1,190,000
$322,000). See panel 4 of Exhibit 16.9.
Actual (Exhibit
16.8)
Budget (Exhibit
16.7)
Sales
Variable costs
$3,320,000
1,808,000
$2,600,000
1,410,000
Contribution margin
$1,512,000
$1,190,000
$322,000
The analysis has partitioned the volume variance into meaningful components. For
example, with the information in Exhibit 16.9, managers would note that the change in
sales mix in favor of a higher proportion of sales of XV-1 (this product increased to 32%
Operational-Level Control
718 Part
Three
of total sales over a budget of 25%) has a net positive effect on contribution and profit
because XV-1 has a higher unit contribution than FB-33 (XV-1s contribution per unit
is $350, while FB-33s contribution is $280, from Exhibit 16.8). The favorable quantity
variance reflects that total sales units were greater than the number indicated in master
budget (for XV-1, an increase of 600 units
1,600 1,000; for FB-33, an increase of
400 units 3,400 3,000).
Note that the mix, quantity, and volume variances can be calculated on the basis of contribution margin (as we have done above), or on the basis of total sales units or dollars. For
example, if we were to use sales dollars to complete the analysis in Exhibit 16.9, then the sales
mix variance for XV-1 would have been:
(1, 600
1, 250)
$800
$280, 000
1, 250)
$350
$122, 500
Both methods are used in practice, but the contribution margin method is more commonly
used.
Sales Quantity Variance Partitioned into Market Size and Market Share Variances
Two contributing factors of the sales quantity variance are changes in the market size and
LEARNING OBJECTIVE
5
Use the flexible budget to
calculate and interpret the market
size and market share variances.
the firms share of the market. As the total global market for its products expands, a firm is
likely to sell more units. Conversely, the firm is likely to sell fewer units when the market for
its products contracts. Also, when a firms share of the market increases, the firm sells more
units and when market share decreases, sales fall.
At the time Schmidt prepared the budget for December 2010 the firm expected that the
total worldwide market for both its products, XV-1 and FB-33, would be 40,000 units per
month and that Schmidt would have 10 percent of the total market. The master budget data for
December is shown in Exhibit 16.7. Exhibit 16.8 shows the actual operations of the month.
Exhibit 16.9 shows that the firm had a favorable total sales quantity variance of $297,500 in
December.
Market size is the total units for the industry. The market size variance measures the effect
of changes in market size on a firms total contribution margin. As the market size expands,
firms are likely to sell more units. Conversely, as the market size contracts, firms are likely to
sell fewer units. In computing the market size variance, the focus is on the change in market
size: the difference between the actual and budgeted market sizes (units). When determining
the market size variance of a firm, we assume that the firm maintains the budgeted market
share and the budgeted average contribution margin per unit. The equation for computing a
market size variance follows:
Budgeted
Weighted-average
Actual
Budgeted
market
budgeted contribution
Market
size
share
margin per unit
market size market size
variance
(in units)
(in units)
The first term on the right side of the equation is the focus of the variance: the difference
in market size (in units) between the actual and the planned or budgeted market size. The
second term is the budgeted market share. The product of the first two terms is the effect of
the change in market size on unit sales if the firm maintains the budgeted market share. To
estimate the effect on contribution of the change in sales units, we multiply the number of
units by contribution margin per unit, the last term in the equation. Notice that the contribution
margin per unit is the weighted-average budgeted contribution margin per unit of all of the
firms products in the same market, not the contribution margin per unit of an individual product. The weighted-average budgeted contribution margin per unit for a firm is determined by
719
Chapter 16
dividing the total units of the firm into the total contribution margin of the firm. Some managers refer to this contribution margin as the composite contribution margin per unit. Schmidt
Company budgeted to sell 4,000 units of XV-1 and FB-33 to earn a total contribution margin
of $1,190,000, as shown in Exhibit 16.7. Thus, the weighted-average budgeted contribution
per unit is $297.50 ($1,190,000/4,000 units).
The firm budgeted to sell 4,000 units and expected the total market to be 40,000 units. The
budgeted market share is 10 percent of the total market. The total market for December 2010
turned out to be 31,250 units; the total market size contracted. Panel 1 of Exhibit 16.10 shows
the calculation of Schmidts market size variance, which is $260,312.50 unfavorable.
The actual market size of the industry (31,250 units) is a decrease of 8,750 units from the
budgeted market size of 40,000 units. If the firm maintained its budgeted market share of 10
percent, the 8,750 units decrease in market size would have decreased Schmidts total sales by
875 units. With a weighted-average contribution margin of $297.50 per unit, the decrease in
units (875) would have decreased Schmidts total contribution margin and operating income
by $260,312.50.
Market share is a firms proportion of a particular market. The market share of a firm is
a function of its core competitive competencies and competitive environment and reflects
the firms competitive position. A successful firm maintains or increases its market share. A
firm experiencing continuous erosion in its market share would likely experience financial
difficulties.
The market share variance compares a firms actual market share to its budgeted market
share and measures the effect of the difference in market shares on the firms total contribution margin and operating income. Three items are involved in determining the market share
variance: the difference between the firms actual and budgeted market share, the total actual
market size, and the weighted-average budgeted contribution margin per unit. Notice that the
computation uses the actual, not budgeted, total market size and the budgeted, not actual,
weighted-average contribution margin per unit. The product of these three factorsthe difference in market shares, total actual market size, and weighted-average budgeted contribution
margin per unitis the market share variance. The equation is:
Total actual
Weighted-average
Actual Budgeted
market size
budgeted contribution
Market
share
(in units)
margin per unit
market
market
variance
share
share
EXHIBIT 16.10