Sales Variance Analysis

Q.No.1 Himachal Foods manufactures apple products such as apple jelly and apple sauce. It makes apple sauce by blending Tolman, Golden Delicious and Ribston. Budgeted costs to produce 1,00,000 kg of applesauce in November are as follows: 45,000 kg of Tolman apples at $30 per kg------------------------------$13, 50,000. 1, 80,000 kg of Golden Delicious apples at $26 per kag---------------$46, 80,000 75,000 kg of Ribston apples at $22 per kg--------------------------------$16, 50,000 Actual costs in November are: 62,000 kg of Tolman apples at $28 per kg------------------------------$17, 36,000. 1, 55,000 kg of Golden Delicious apples at $26 per kag---------------$40, 30,000 93,000 kg of Ribston apples at $20 per kg--------------------------------$18, 60,000 Required: (a) Calculate the direct material price and efficiency variance for November. (b) Calculate the direct material mix and yield variance for November. (c) Comment on your results in requirement 1 and 2. Solution: Requirement: (1) Total direct material price variance can be computed as: Direct Material price variance for each input= [Actual price-Budgeted price] X Actual input Totalman= [$28-30] X 62,000 = $1, 24,000 F = $0 = $1, 86,000F =$3, 10,000 F

Golden Delicious= [$26-26] X 1, 55,000 Ribston apples= [$20-22] X 93,000 Total direct material price variance

Total direct material efficiency variance can be computed as: Direct material efficiency variance for each input = [Actual inputs-Budgeted input allowed for actual output achieved] X budgeted Price

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Totalman

= [$62,00045,000] X $30

= $5, 10,000 UF =$6, 50,000F = $3, 96,000UF =$2,56,000 UF

Golden Delicious= [$1, 55,0001, 80,000] X $26 Ribston apples= [$93,000-75,000] X $22 Total direct material efficiency variance Requirement: (2)

Total direct materials mix and yield variances for each input for Himachal Foods for November: Direct materials mix variances for each input=[Actual direct material input mix percentage--- Budgeted direct material input mix percentage] X Actual total quantity of all direct materials input X Budgeted price of direct materials inputs. Totalman = [0.200.15] X3, 10,000 X $30 = $4, 65,000 UF =$8, 06,000F = $3, 41,000UF =$0 U

Golden Delicious = [.50.60] X 3, 10,000 X $26 Ribston apples= [.300.25] X3, 10,000 X $22

Total direct material Mix variance

Direct materials yield variances for each input=[Actual total quantity of all direct materials input used--Budgeted total quantity of all direct material input allowed for actual output achieved] X Budgeted direct materials input mix percentage X Budgeted price of direct materials inputs. Totalman = [3, 10,0003, 00,000] X0.15 X $30 = $45,000 UF =$1, 56,000UF = $55,000 UF =$2, 56,000 UF

Golden Delicious = [3, 10,0003, 00,000] X.60 X $26 Ribston apples= [3, 10,0003, 00,000] X.25 X $22

Total direct material yield variance Requirement: (3)

Himachal foods paid less for Tolman and Ribston apples and so had a favorable direct materials price variance of $3,10,000. It also had an unfavorable efficiency variance of $2, 56,000. Himachal foods would need to evaluate if these were unrelated events or if the lower price resulted from the purchase of apples of poorer quality that affected efficiency. The net effect in this case from the cost standpoint was favorable-the saving in price being greater than the loss in efficiency. Of course, if the applesauce is of poorer quality. Himachal foods must also evaluate the potential effects on current and future revenues that have not been considered in the variance described in requirements 1 and 2.The unfavorable efficiency variance is entirely attributable to an unfavorable yield. The actual mix does deviate from the

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budgeted mix but at the budgeted price, the greater quality of Tolman and Ribston apples used in the actual mix exactly offset the fewer Golden delicious apples used. Q.No.2 Coca Cola manufactures and sells three soft drinks: Kola, Soda and Limca. Budgeted and actual sales for 2012 are as follows: Budget for 2012 Actual for 2012 Product Selling price Variable cost Cartons sold Selling per Variable cost Cartons sold per carton per carton carton per carton Kola $60 $40 4,00,000 $62 $45 4,80,000 Soda $40 $28 6,00,000 $42.50 $27.50 9,00,000 Limca $70 $45 15,00,000 $68 $46 16,20,000 Coca cola prepared the budget for 2012 assuming a 10% market share based on total sales in the Western region of USA. The total soft drinks market was estimated to reach sales of 250 lakh cartons in the region. However, actual total sales volume in the Western region was 240 lakh cartons. Required: 1. Compute the total sales-volume variance, total sales-mix variance and the total sales-quantity variance. [Calculate all variances in terms of contribution margin]. Show results for each product in your computations. 2. 3. 4. What interferences can you draw from the variances computed in requirement 1? Compute the market share variance and market size variances for Coca-Cola in 2012. [Report all variances in terms of contribution margin]. Comment on the results.

Solution: Requirement: (1) Budget for 2012 Product Selling per carton (1) $60 $40 $70 Variable cost per carton (2) $40 $28 $45 Contribution Margin per unit (3)=(1) (2) 20 12 35 Units sold (4) Sales mix (5) Contribution margin (6)= (3) X (4) 80,00,000 72,00,000 3,75,00,000 5,27,00,000

Kola Soda Limca Actual for 2012 Product

4,00,000 6,00,000 15,00,000 25,00,000

16% 24% 60% 100%

Selling per carton (1)

Variable cost per carton (2)

Contribution Margin per unit (3)=1-2

Units sold (4)

Sales mix (5)

Contribution margin (6)= (3) X (4)

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Kola Soda Limca

4,80,000 16% 81,60,000 9,00,000 30% 1,35,00,000 16,20,000 54% 3,56,40,000 30,00,000 100% 5,73,00,000 Total sales-volume variance, the total sales-quantity variance and total sales-mix variance for each product and in total for 2012. Sales volume variance= [Actual sales quantity in units -budgeted sales quantity in units] X budgeted margin per unit. Kola Soda Limca [4, 80,000-4,00,000] X $20. [9, 00,000-6,00,000] X $12. [16, 20,000-15,00,000] X $25. $16,00,000 F

$62 $42.50 $68

$45 $27.50 $46

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$36,00,000 F $30,00,000 F $82,00,000 F Sales quantity variance= [Actual units of all products sold---Budgeted units of all products sold] X Budgeted sales mix percentage X Budgeted contribution margin per unit. Kola Soda Limca [30, 00,000-25,00,000] X .16 X $20. [30, 00,000-25,00,000] X .24 X $12. [30, 00,000-25,00,000] X .60 X $25. $16,00,000 F

$14,40,000 F $75,00,000 F $1,05,40,000 F Sales-mix variance= Actual units of all products sold X [ Actual sales mix percentage--[ Budgeted sales mix percentage] X Budgeted contribution margin per unit. Kola Soda Limca 30, 00,000 X [0.16-0.16] X $20. 30, 00,000 X [.30-0.24] X $12. 30, 00,000 X [0.54-0.60] X $25. $0 $21,60,000 F $45,00,000 UF $23,40,000 UF

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Flexible Budget: Actual units of all products sold X Actual sales mix X Budgeted contribution Margin per unit. contribution margin per unit. Kola = 30, 00,000 X .16 X $20=$96, 00,000 $20=$80, 00,000 Soda= 30, 00,000 X .30X $12=$1,08, 00,000 X $12=$72, 00,000 Limca=30, 00,000 X .54 X $25=$4, 05, 00,000 .60X $25=$3, 75, 00,000 $6, 09, 00,000 $5, 27, 00,000 Sales mix Var. $23,40,000 UF

Static Budget Actual units of all products sold Budgeted units of all products sold X Budgeted sales mix X Budgeted sales mix X Budgeted

X Budgeted contribution margin per unit.

30, 00,000 X .16 X $20=$96, 00,000

25, 00,000 X .16 X

30, 00,000 X .24X $12=$86,40,000

25, 00,000 X .24

30, 00,000 X .54 X $25=$4, 50, 00,000

25, 00,000 X

$6, 32, 40,000

Sales Quantity Var $1,05,40,000 F

Sales Volume Variance=$82, 00,000 F Requirement: (2) The breakdown of sales volume variance of $82,00,000 shows that the biggest contributor is the 5,00,000 units in case of sales resulting in a sales favorable sales quantity variance of $1,05,00,000. There is a partially offsetting unfavorable sales mix variance of $23, 40,000 in contribution margin. Favorable or unfavorable effect the net operating income. Requirement: (3) Market share variance and Market size variances: Actual Western region 240 Lakh Coca-Cola 30 lakh Market Share 12.50% Actual market share=30, 00,000 units/2, 40, 00,000=12.50% Budgeted market share=25, 00,000units/2, 50, 00,000=10.00% Budget 250 25 10%

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Budgeted contribution margin per composite unit for budgeted mix=Budgeted CM/ Budgeted units sold=$5, 27, 00,000/25, 00,000= $21.08 Market share variance= Actual market size in units X [Actual market share-- Budgeted market share] X Budgeted contribution margin per composite unit for budgeted mix = 2, 40, 00,000 X [0.125- 0.10] X 21.08 =$1, 26, 48,000 F Market size variance= [Actual market size in units- Budgeted market size in units] X Budgeted market share X Budgeted cm per composite unit for budgeted mix. = [2, 40, 00,000-2, 50, 00,000] X0.10 X 21.08 =-10, 00,000 X0.10 X 21.08 =$21, 08,000 UF Requirement: (4) Market share variance is favorable because the actual 12.50% market share was higher the budgeted 10% market share. The market size variance is unfavorable because the market size decreased 4% [(2, 50, 00,000-2, 40, 00,000) /2, 50, 00,000]. While the overall total market size declined from 250 lakh to 240 lakh, the increase in market share meant a favorable sales-quantity variance. Market share Var. $1,26,48,000 F Market size Var $21,08,000 U

Sales quantity- Variance=$1, 05, 40,000 F Actual market size Budgeted market size Static Budget: Budgeted market size

X Actual market share X Budgeted market share X Budgeted market share X Budgeted average contribution Margin per unit. X Budgeted contribution margin per unit, X Budgeted contribution margin per unit. 24, 00,000 X .125 X $21.08 =$6, 32, 40,000 24, 00,000 X .10 X $21.08 =$5, 05, 92,000 Market share Var. $1,26,48,000 F Market size Var $21,08,000 U 25, 00,000 X .10 X $21.08 $5, 27, 00,000

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Sales quantity- Variance=$1, 05, 40,000 F Q.No.3 Parle operates a chain of cookie stores; Budgeted and actual operating data of its three stores for August are as follows: Budget for August: Product Chocolate chip Oatmeal Coconut White Chocolate Macadamia Nut Actual for August: Product Sales volume in pounds Chocolate chip 57,600 Oatmeal 18,000 Coconut 9,600 White Chocolate 13,200 Macadamia Nut 21,600 1,20,000 Parle attains a 10% market share based on total sales of the market. The total market is expected to be 10,00,000 pounds in sales volume for August. However, actual total market for August was 9, 60,000 pounds in sales value.. Parles focuses on contribution margin in its variance analysis: Required: 1. 2. 3. 4. 5. 6. 7. Compute the total sales-volume variance for August. Compute the total sales-mix variance for August. Compute the total sales-quantity variance for August. Comment on your results on requirement 1, 2 and 3. Compute the market share variance Compute the market size variances for August. [Report all variances in terms of contribution margin]. Comment on the results. Selling price per pound $45.00 52.00 55.00 60.00 70.00 Variable cost per pound $26.00 29.00 28.00 34.00 40.00 Contribution Margin per pound 19.00 23.00 27.00 26.00 30.00 Selling price per pound $45 50 55 60 65 Variable cost per pound $25.00 27.00 29.00 30.00 34.00 Contribution Margin per pound 20.00 23.00 26.00 30.00 31.00 Sales volume in pounds 45,000 25,000 10,000 5,000 15,000 1,00,000

Solution: Requirement: (1)

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Total sales-volume variance for August= [Actual sales quantity in pounds- Budgeted sales quantity in pounds] X budgeted contribution margin per pound The total sales volume variances are: Chocolate chip Oatmeal Coconut White Chocolate Macadamia Nut All Cookies Requirement: (2) =[57,600-45,000] X $20 =[18,000-25,000] X $23 =[9,600-10,000] X $26 =[13,200-5,000] X $30 =[21,600-15,000] X $31 =$2,52,000 F =$1,61,000 U =$10,400 UF =$2,46,000 F =$2,04,600 F $5,31,200

Sales quantity variance= [Actual pounds of all cookies sold---Budgeted pounds of all cookies sold] X Budgeted sales mix percentage X Budgeted contribution margin per pound. Chocolate chip Oatmeal Coconut White Chocolate Macadamia Nut All Cookies Requirement: (3) =[1,20,000-1,00,000] X 0.45 X $20 =[1,20,000-1,00,000] X 0.25 X $23 =[ 1,20,000-1,00,000] X 0.10 X $26 =[1,20,000-1,00,000] X 0.05 X $30 =[1,20,000-1,00,000] X 0.15 X $31 =$1,80,000 F =$1,15,000 F =$52,000 F =$30,000 F =$93,000 F $4,70,000F

Sales-mix variance= Actual pounds of all cookies sold X [Actual sales mix percentage-- Budgeted sales mix percentage] X Budgeted contribution margin per pound. The Sales-mix variances are: Chocolate chip Oatmeal Coconut White Chocolate Macadamia Nut All Cookies Actual Sales Mix: =[0.48-0.45] X 1,20,000 X $20 =[0.15-0.25] X 1,20,000 X $23 =[ 0.08-0.10] X 1,20,000 X $26 =[0.110.05] X 1,20,000 X $30 =[0.18-0.15] X 1,20,000 X $31 =$72,000 F =$2,76,000UF =$62,400 UF =$2,16,000 F =$1,11,600 F $61,200F

Chocolate chip 57,600/1,20,000 Oatmeal 18,000/1,20,000 Coconut 9,600/1,20,000 Budgeted Sales Mix: Chocolate chip Oatmeal Coconut 45,000/1,00,000 25,000/1,00,000 10,000/1,00,000

48% 15% 8%

45% 25% 10%

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Requirement: (4) Parle shows a favorable sales quantity variance because it sold more cookies in total than budgeted. Together with the higher quantities, Parle also sold more of the high margin White Choc olate and Macadamia Nut cookies relative to the budgeted mix- hence, Parle also showed a favorable total sales mix variance. Requirement: (5) Budgeted CM per pound Chocolate chip Oatmeal Coconut White Chocolate Macadamia Nut All Cookies $20 23 26 30 31 Budgeted Sales Volume in pounds 45,000 25,000 10,000 5,000 15,000 1,00,000 Budgeted Contribution Margin $9,00,000 5,75,000 2,60,000 1,50,000 4,65,000 $23,50,000

Contribution Margin per unit= $23,50,000/1,00,000= $23,50 Market share variance= Actual market size in units X [Actual market share-- Budgeted market share] X Budgeted contribution margin per composite unit for budgeted mix = 9, 60,000 X [0.125- 0.10] X 23.05 =$5, 64,000 F Market size variance= [Actual market size in units- Budgeted market size in units] X Budgeted market share X Budgeted cm per composite unit for budgeted mix. = [9,60,000-10,00,000] X0.10 X 23.05 =$94,000 UF Actual Market share: 1,20,000/9,60,000 units = 0.125 Budgeted market share: 1,00,000 units/ 10,00,000 units =0.10

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Actual market size

Budgeted market size

Static Budget: Budgeted market siz e

X Actual market share X Budgeted market share X Budgeted market share X Budgeted average contribution Margin per unit. X Budgeted contribution margin per unit, X Budgeted contribution margin per unit. 9, 60,000 X .125 X $23.05 =$28, 20, 000 9, 60,000 X .10 X $23.05 =$22, 56,000 Market share Var. $1,5,64,000 F 10, 00,000 X .10 X $23.05 $23, 50,000 Market size Var $94,000 U

Sales quantity- Variance=$4, 0,000 F

Requirement: (6) By increasing its actual market share from the 10% budgeted to the actual 12.50%, Parle has a favorable market share variance of $5, 64,000. There is a smaller offsetting unfavorable market size variance of $94,000 due to the 40,000 units decline in the total market from 10, 00,000 budgeted to an actual 9,60,000.

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