14 - 1 ©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/F Revenue, Customer- Profitability Analysis, and Sales-Variance Analysis Chapter 14
Dec 19, 2015
14 - 1©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster
Revenue, Customer-Profitability Analysis, and
Sales-Variance Analysis
Revenue, Customer-Profitability Analysis, and
Sales-Variance Analysis
Chapter 14
14 - 2©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster
Learning Objective 1Learning Objective 1
Discuss why a company’s
revenues can differ across
customers purchasing
the same product.
14 - 3©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster
Customer RevenueAnalysis ExampleCustomer RevenueAnalysis Example
During the first six months of 2003,English Languages Institute expandedits market and sold 200 composition
programs to two new customers in Mexico.
Customer A is in Tijuana andcustomer B is in Guadalajara.
14 - 4©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster
Customer RevenueAnalysis ExampleCustomer RevenueAnalysis Example
Customer A B
Programs sold 140 60List selling price $185 $185Invoice price $175 $180Total revenues $24,500 $10,800
What explanation(s) can be given forthese revenue differences?
14 - 5©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster
Customer RevenueAnalysis ExampleCustomer RevenueAnalysis Example
1. The volume of programs purchased
2. The magnitude of price discounting
14 - 6©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster
Customer Cost Analysis ExampleCustomer Cost Analysis Example
Assume that English Languages Institutehas an activity-based costing system that
focuses on customers rather than products.
Activity Area Cost Driver and RateOrder taking $ 80 per purchaseOrder set up $100 per batch
14 - 7©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster
Customer Cost Analysis ExampleCustomer Cost Analysis Example
Customer A Customer BNumber of:Purchase orders 7 2Batches 7 2
What is the cost of servicing each customer?
14 - 8©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster
Customer Cost Analysis ExampleCustomer Cost Analysis Example
Customer A:Ordering: 7 × $80/order = $ 560Set-up: 7 × $100/batch = 700Total $1,260
English can use this information to persuadethis customer to reduce usage of the
ordering and setup cost drivers.
14 - 9©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster
Customer Cost Analysis ExampleCustomer Cost Analysis Example
Customer B:Ordering: 2 × $80/order = $160Setup: 2 × $100/batch = 200Total $360
14 - 10©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster
Learning Objective 2Learning Objective 2
Apply the concept of cost
hierarchy to customer costing.
14 - 11©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster
Cost HierarchyCost Hierarchy
General Motors uses a seven-level costhierarchy to analyze profitability.
The aim of this cost hierarchy is to assigncosts to the lowest level of the hierarchy
at which they can be identified.
14 - 12©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster
Cost HierarchyCost 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
14 - 13©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster
Learning Objective 3Learning Objective 3
Discuss why customer-profitabilitydiffers across customers.
14 - 14©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster
Customer-Profitability ProfilesCustomer-Profitability Profiles
Which customer is more profitable, A or B?
A BRevenues $24,500 $10,800Cost of good sold ($95 per unit) 13,300 5,700Contribution margin $11,200 $ 5,100Other expenses 1,260 360Operating income $ 9,940 $ 4,740
14 - 15©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster
Customer-Profitability ProfilesCustomer-Profitability Profiles
Customer A seems to be more profitable.
However, customer B has a higher grossprofit 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).
14 - 16©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster
Learning Objective 4Learning Objective 4
Provide additional information
about the sales-volume variance by
calculating the sales-mix variance
and the sales-quantity variance.
14 - 17©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster
Sales-VolumeVariance Components
Sales-VolumeVariance Components
The following information relates to EnglishLanguages Institute budget for the year 2003.
Product Grammar Trans. Comp.Selling price per unit $259 $87 $185Variable cost 189 50 95Contribution margin per unit $ 70 $37 $ 90
14 - 18©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster
Sales-VolumeVariance Components
Sales-VolumeVariance 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
14 - 19©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster
Sales-VolumeVariance Components
Sales-VolumeVariance Components
Product Grammar Translation Composition
Selling $/unit $255 $85 $185
Variable cost 180 45 95
Cont. marginper unit
$ 75 $40 $ 90
The following are the actual results forEnglish Languages for the year 2003.
14 - 20©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster
Sales-VolumeVariance Components
Sales-VolumeVariance 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
14 - 21©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster
Static-Budget VarianceStatic-Budget Variance
Static- Static- Actual budget budget
Product results amount varianceGrammar $216,000 $222,950 $ 6,950 UTranslation 39,600 36,260 3,340 FComposition 56,700 66,150 9,450 U Total $312,300 $325,360 $13,060 U
14 - 22©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster
Flexible-Budget VarianceFlexible-Budget Variance
Actual contribution Unit Actual
Product margin/unit volume resultsGrammar $75 2,880 $216,000Translation $40 990 $ 39,600Composition $90 630 $ 56,700
14 - 23©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster
Flexible-Budget VarianceFlexible-Budget Variance
Budgeted Actual contribution unit Flexible
Product margin/unit volume budgetGrammar $70 2,880 $201,600Translation $37 990 $ 36,630Composition $90 630 $ 56,700
14 - 24©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster
Flexible-Budget VarianceFlexible-Budget Variance
Flexible- Flexible- Actual budget budget
Product results amount varianceGrammar $216,000 $201,600 $14,400 FTranslation $39,600 $ 36,630 $ 2,970 FComposition $56,700 $ 56,700 0Total flexible-budget variance $17,370 F
14 - 25©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster
Sales-Volume VarianceSales-Volume Variance
Budgetedcontribution
Product Actual Budget margin Grammar (2,880 – 3,185) × $70 = $21,350 U Translation (990 – 980) × $37 = 370 FComposition (630 – 735) × $90 = 9,450 UTotal sales-volume variance $30,430 U
14 - 26©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster
Sales-Mix VarianceSales-Mix Variance
Sales-mix variance
Actual units of all products sold
Actual sales-mix percentage– Budgeted sales-mix percentage
Budgeted contribution margin per unit
=
×
×
14 - 27©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster
Sales-Mix VarianceSales-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
14 - 28©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster
Sales-Quantity VarianceSales-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
=
××
14 - 29©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster
Sales-Quantity VarianceSales-Quantity Variance
Grammar: (4,500 – 4,900) × 0.65 × $70 = $18,200 U
Translation: (4,500 – 4,900) × 0.20 × $37 = $ 2,960 U
Composition: (4,500 – 4,900) × 0.15 × $90 = $ 5,400 U
Total sales-quantity variance = $26,560 U
14 - 30©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster
Learning Objective 5Learning Objective 5
Provide additional information
about the sales-quantity variance
by calculating the market-share
variance and the
market-size variance.
14 - 31©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster
Market-Share Variance ExampleMarket-Share Variance Example
Assume that English Languages Institute derivesits total unit sales budget for 2003 from a
management estimate of a 20% market shareand a total industry sales forecast by Desert
Services of 24,500 units in the region.
In 2003, Desert Services reported actualindustry sales of 28,125 units.
14 - 32©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster
Market-Share Variance ExampleMarket-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 averagecontribution margin per unit?
$325,360 ÷ 4,900 = $66.40
14 - 33©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster
Market-Share Variance ExampleMarket-Share Variance Example
What is the market-share variance?
Actual market size in units
Actual market share– Budgeted market share
Budgeted contribution margin percomposite unit for budgeted mix
=
×
×
28,125(0.16 – 0.20) × $66.40 = $74,700 U
14 - 34©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster
Market-Share Variance ExampleMarket-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
14 - 35©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster
Market-Size Variance ExampleMarket-Size Variance Example
Market-size variance
Actual market size in units– Budgeted market size in units
Budgeted market share
Budgeted contribution margin percomposite unit for budgeted mix
=
×
×
(28,125 – 24,500) × 0.20 × $66.40 = $48,140 F
14 - 36©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster
Market-Size Variance ExampleMarket-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 Unit24,500 × 0.20 × $66.40 = $325,360
$373,500 – $325,360 = $48,140 F
14 - 37©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster
Summary of VariancesSummary of Variances
Static-Budget Variance13,060 U
Level 1
Level 2Flexible-Budget
Variance$17,370 F
Sales-VolumeVariance
$30,430 U
14 - 38©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster
Summary of VariancesSummary of Variances
Sales-Volume Variance$30,430 U
Level 2
Level 3Sales-MixVariance$3,870 U
Sales-QuantityVariance
$26,560 U
14 - 39©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster
Summary of VariancesSummary of Variances
Sales-Quantity Variance$26,560 U
Level 3
Level 4Market-Share
Variance$74,700 U
Market-SizeVariance$48,140 F
14 - 40©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster
End of Chapter 14End of Chapter 14