Revenue, CustomerProfitability Analysis, and
Sales-Variance Analysis
Chapter 14
©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster
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Learning Objective 1
Discuss why a company’s
revenues can differ across
customers purchasing
the same product.
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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.
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Customer Revenue
Analysis Example
Customer
A
B
Programs sold
140
60
List selling price $185
$185
Invoice price
$175
$180
Total revenues
$24,500 $10,800
What explanation(s) can be given for
these revenue differences?
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Customer Revenue
Analysis Example
1. The volume of programs purchased
2. The magnitude of price discounting
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Customer Cost Analysis Example
Assume that English Languages Institute
has an activity-based costing system that
focuses on customers rather than products.
Activity Area
Cost Driver and Rate
Order taking
$ 80 per purchase
Order set up
$100 per batch
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Customer Cost Analysis Example
Number of:
Purchase orders
Batches
Customer A
Customer B
7
7
2
2
What is the cost of servicing each customer?
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Customer Cost Analysis Example
Ordering:
Set-up:
Total
Customer A:
7 × $80/order = $ 560
7 × $100/batch =
700
$1,260
English can use this information to persuade
this customer to reduce usage of the
ordering and setup cost drivers.
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Customer Cost Analysis Example
Ordering:
Setup:
Total
Customer B:
2 × $80/order = $160
2 × $100/batch = 200
$360
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Learning Objective 2
Apply the concept of cost
hierarchy to customer costing.
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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.
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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
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Learning Objective 3
Discuss why customer-profitability
differs across customers.
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Customer-Profitability Profiles
Which customer is more profitable, A or B?
A
Revenues
$24,500
Cost of good sold ($95 per unit) 13,300
Contribution margin
$11,200
Other expenses
1,260
Operating income
$ 9,940
©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster
B
$10,800
5,700
$ 5,100
360
$ 4,740
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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).
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Learning Objective 4
Provide additional information
about the sales-volume variance by
calculating the sales-mix variance
and the sales-quantity variance.
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Sales-Volume
Variance Components
The following information relates to English
Languages Institute budget for the year 2003.
Product
Grammar Trans. Comp.
Selling price per unit
$259
$87
$185
Variable cost
189
50
95
Contribution margin per unit $ 70
$37
$ 90
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Sales-Volume
Variance Components
Product
Grammar
Translation Composition
Cont. margin
$70
$37
$90
× Units
3,185
980
735
= Total
$222,950
$36,260
$66,150
Sales mix
65%
20%
15%
Total budgeted contribution margin = $325,360
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Sales-Volume
Variance Components
The following are the actual results for
English Languages for the year 2003.
Product
Grammar
Translation Composition
Selling $/unit
$255
$85
$185
Variable cost
180
45
95
Cont. margin
per unit
$ 75
$40
$ 90
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Sales-Volume
Variance Components
Product
Grammar
Translation Composition
Cont. margin
$75
$40
$90
× Units
2,880
990
630
= Total
$216,000
$39,600
$56,700
Sales mix
64%
22%
14%
Total actual contribution margin = $312,300
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Static-Budget Variance
Product
Grammar
Translation
Composition
Total
Actual
results
$216,000
39,600
56,700
$312,300
StaticStaticbudget
budget
amount
variance
$222,950 $ 6,950 U
36,260
3,340 F
66,150
9,450 U
$325,360 $13,060 U
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Flexible-Budget Variance
Actual
contribution
Product
margin/unit
Grammar
$75
Translation
$40
Composition
$90
Unit
volume
2,880
990
630
Actual
results
$216,000
$ 39,600
$ 56,700
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Flexible-Budget Variance
Budgeted
contribution
Product
margin/unit
Grammar
$70
Translation
$37
Composition
$90
Actual
unit
volume
2,880
990
630
Flexible
budget
$201,600
$ 36,630
$ 56,700
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Flexible-Budget Variance
FlexibleActual
budget
Product
results
amount
Grammar
$216,000
$201,600
Translation $39,600
$ 36,630
Composition $56,700
$ 56,700
Total flexible-budget variance
Flexiblebudget
variance
$14,400 F
$ 2,970 F
0
$17,370 F
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Sales-Volume Variance
Product
Actual Budget
Grammar
(2,880 – 3,185)
Translation
(990 – 980)
Composition (630 – 735)
Total sales-volume variance
Budgeted
contribution
margin
× $70 = $21,350 U
× $37 =
370 F
× $90 =
9,450 U
$30,430 U
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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
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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
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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
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Sales-Quantity Variance
Grammar:
(4,500 – 4,900) × 0.65 × $70
Translation:
(4,500 – 4,900) × 0.20 × $37
Composition:
(4,500 – 4,900) × 0.15 × $90
Total sales-quantity variance
= $18,200 U
= $ 2,960 U
= $ 5,400 U
= $26,560 U
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Learning Objective 5
Provide additional information
about the sales-quantity variance
by calculating the market-share
variance and the
market-size variance.
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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.
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Market-Share Variance Example
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
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Market-Share Variance Example
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
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Market-Share Variance Example
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
× Budgeted Average Contribution Margin Per Unit
28,125 × 0.20 × $66.40 = $373,500
$373,500 – $298,800 = $74,700 U
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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
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Market-Size Variance Example
Actual Market Size × Budgeted Market Share
× Budgeted Average Contribution Margin Per Unit
28,125 × 0.20 × $66.40 = $373,500
Static Budget: Budgeted Market Size
× Budgeted market share
× Budgeted Average Contribution Margin Per Unit
24,500 × 0.20 × $66.40 = $325,360
$373,500 – $325,360 = $48,140 F
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Summary of Variances
Level 1
Level 2
Static-Budget Variance
13,060 U
Flexible-Budget
Variance
$17,370 F
Sales-Volume
Variance
$30,430 U
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Summary of Variances
Level 2
Level 3
Sales-Volume Variance
$30,430 U
Sales-Mix
Variance
$3,870 U
Sales-Quantity
Variance
$26,560 U
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Summary of Variances
Level 3
Level 4
Sales-Quantity Variance
$26,560 U
Market-Share
Variance
$74,700 U
Market-Size
Variance
$48,140 F
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End of Chapter 14
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