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CHAPTER 20 Responsibility Accounting and → Production departments may be cost centers

Transfer Pricing when they simply provide components for
another department.
DECENTRALIZATION → Cost centers are often controlled by
comparing actual with budgeted or standard
→ Firms that grant substantial decision-making
costs.
authority to the managers of subunits are
referred to as decentralized organizations. Pro-forma Responsibility Cost Report
→ Most firms are neither totally centralized nor
totally decentralized.

Advantages

• Better information, leading to superior

decisions.
• Faster response to changing circumstances.
• Increased motivation of managers.
• Excellent training for future top-level
executives.

Disadvantages
PROFIT CENTERS
• Costly duplication of activities.
• Lack of goal congruence. → A profit center is a subunit that has responsibility
of generating revenue and controlling costs
RESPONSIBILITY ACCOUNTING → Profit center evaluation techniques include:
• Comparison of current year income with a
→ Managers should only be held responsible for
target or budget.
costs and revenues that they control.
• Relative performance evaluation compares
→ In a decentralized organization, costs and
the center with other similar profit centers.
revenues are traced to the organizational level
where they can be controlled.

Advantages

• Delegation of decision-making
• Promote concept of management by objective
• Aids in establishing standards of performance
• Permits effective use management by exception

TYPES OF RESPONSIBILITY CENTER

• Cost Center INVESTMENT CENTERS

• Profit Center
→ An investment center is a sub-unit that is
• Investment Center
responsible for generating revenue, controlling
• Revenue Center
costs, and investing in assets.
COST CENTERS → An investment center is charged with earning
income consistent with the amount of assets
→ A cost center is a subunit that has invested in the segment.
responsibility for controlling costs but not for → Most divisions of a company can be treated as
generating revenues. either profit centers or investment centers.
→ Most service departments (i.e., maintenance,
computer) are classified as cost centers.
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Objectives: Sales Quantity Variance (CM level)

✓ Motivate managers Why?

✓ Provide right incentive ✓ Pricing strategy
✓ Determine fair rewards ✓ Actions of competitors
✓ Demand
REVENUE CENTERS
Formula:
→ A distinct operating unit of a business that is
responsible for generating sales. (Actual quantity- Budgeted quantity) x Budgeted
Contribution margin = Sales Quantity variance (CM
Sales Price Variance level)

• difference between a business's expected Sales Volume Variance (CM level) - breakdown 1
price of a product or service and its actual
sales price Why?

Sales Volume Variance ✓ Cannibalization

✓ Competition
• difference between the actual and ✓ Price
expected number of units sold, multiplied ✓ Product recall
by the budgeted price per unit. ✓ Trade restrictions

Sales Mix Variance Formula:

• difference between a company's (Actual units sold - Budgeted units sold) x Budgeted
budgeted sales mix and the actual sales average Contribution Margin per unit = Sales volume
mix variance
• Sales mix is the proportion of each
product sold relative to total sales. Sales Mix Variance (CM level) - breakdown 2

Sales Quantity Variance How to Calculate Sales Mix Variance

Why? 1. Subtract budgeted unit volume from actual

unit volume and multiply by the standard
✓ Pricing strategy contribution margin. Contribution margin is
✓ Actions of competitors revenue minus all variable expenses.
✓ Demand 2. Do the same for each of the products sold.
3. Aggregate this information to arrive at the
Formula: sales mix variance for the organization.

(Actual quantity- Budgeted quantity) x Budgeted price Formula:

= Selling Quantity variance
(Flexi Budget average CM per unit – Budgeted
Sales Price Variance average CM per unit) × Actual unit sold
= Sales mix variance
Why?
Sales CM rate Variance (CM level)
✓ Pricing strategy
✓ Actions of competitors Why?
✓ Demand
✓ Cannibalization
Formula: ✓ Competition
✓ Price
(Actual price - Budgeted price) x Actual unit sales = ✓ Product recall
✓ Trade restrictions
Selling price variance
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Formula:

(Actual CM /units sold - Budgeted CM/units sold) x

Actual quantity sold = Sales CM variance

TRANSFER PRICING

Rationale

• What transfer price to charge between

segments?

Definition

• Value assigned to goods and services

transferred between segments within the
company.

Need

• Revenue of the selling department

TRANSFER PRICE

→ The price that is used to value internal transfers of

Market Price Approach
goods and services within the same company is
known as the transfer price. → Buying division must purchase internally (selling
division meets all bona fide outside prices)
Market Prices as the Maximum → Selling division is free to reject internal business.
→ Selling division doesn’t meet all bona fide outside
• The transfer price should not exceed what the prices, buying division is free to purchase outside.
acquiring division would have to pay for a similar → Independent and impartial body must be
good and given set of conditions on the outside established to settle disagreements.
market. If the outside market is cheaper, the good
should be acquired outside the organization. COST-BASED TRANSFER PRICE

Variable Cost as the Minimum – Excess Capacity Variable Cost Transfer Price
Exists
• Based on variable or differential cost
• The supplying division should not set a transfer • Ensures in the short-run the best use of total
price that is lower than the variable cost of corporate facilities
supplying the good and/or service to the • Variable cost transfer price may be profitable
requesting division. This may be less than the in the short run, but not in the long run
variable cost of serving an outside customer.
Full Cost Transfer Price
Variable Cost plus Lost Contribution Margin on
outside sales as the Minimum – Excess Capacity • Includes actual manufacturing costs + portions
Does Not Exist of marketing and administrative costs.
• Easy and convenient.
• The minimum transfer price will add a lost • No intracompany profits
contribution margin on outside sales if the • Simple and adequate end-product costing.
supplying division must turn away outside • Not suitable for decentralized companies.
customers to provide the good and/or service to
the requesting division.
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COST-BASED TRANSFER PRICE
(ALTERNATIVE COST MEASURES)

Full Absorption Cost-Based Transfer Price

• Difficulty in determining opportunity cost.

• Available records.
• Selling division’s incentive.
• Better measure for differential cost.

Cost-Plus Transfer

Normal mark-up to cost as substitute

Negotiated Transfer Price

→ Managers negotiate price.

→ Negotiated price – attempt to stimulate an
arm’s-length transaction.
→ Preserve autonomy of the division manager.
→ Time-consuming and require frequent re-
examination.

Distress Prices

• Temporary drop of markets prices below

historical average due to the outstrip of
supply from demand.

Multinational Transfer Pricing

• Minimize tax, duties and tariffs, foreign

exchange risks along with enhancing
competitive position and improving foreign
relations.

Transfer Price for Services

• Equitable transfer prices must be established

to appraise the department’s performance.
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CHAPTER 21 Decentralized Operation & Limitations of Decentralization
Segment Reporting
1. Dysfunctional decision making may result to
Segment Reporting sub-optimal or incongruent decision making.
2. Manager’s attention maybe focused on the
→ It is an income statement designed to focus on sub-unit rather the organization as a whole.
various segment of the company. A segment is any 3. Cost to gather information increased.
part or activity of an organization about which 4. Activities maybe duplicated
manager seeks costs, revenue or profit data)
Illustrative Problem 1
• Its purpose is to provide information needed
by manager to determine profitability of
product lines, divisions, sales territories &
other segments of the company.

Decentralization

→ It is the process of delegating the decision-making

authority throughout an organization.

• Top managers need to determine when

Illustrative Problem 1 Solution
delegation of responsibility is desirable.
• It maybe necessary as top management
cannot effectively manage the operation at a
very detailed level, as it lacks necessary local
knowledge. Decision at lower levels must be
made on timely basis using information at
hand to make the firm more responsive to
customer.
• Managers are allowed at various operating
levels the authority to make decisions relating
to their area of responsibilities.

Advantages of Decentralization
1. Creates greater responsiveness to local needs.
2. Leads to gain from quicker decision making.
3. Increases motivation of sub-unit managers. Illustrative Problem 1 Analysis
4. Aid management development & learning
5. Sharpens the focus of sub-unit managers.
6. Decision are best made at that level in an
organization where problems & opportunities
arise.
7. Management is relieved of much day to day
problem solving and is left free to concentrate
on long range planning and on coordination of
efforts. Levels of Segmented Statement
8. Segment managers obtain more job
satisfaction and are encouraged to put forth • Segmented income statement can be
their best efforts by giving them added presented to as many levels as possible in a
responsibility & decision-making authority. company.
9. It provides excellent training to managers by • To provide much detailed into to a manager,
giving them greater decision-making control the division can be segmented according to
over their segments. company’s major product lines, and the
10. Better and faster performance evaluation.
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product lines can be segmented as to how Segment Margin
they are being sold.
• As one move from one statement to another → This represents the margin after the segment
level, the manager looks at a smaller & cover all its costs and can be a gauge of the long-
smaller sections of the company run profitability of the segment. In case of
deciding whether to drop or keep as segment it is
Illustrative Problem 2 very useful.
→ Finally deducting the common cost (i.e. salary of
president), not traceable to individual segment
will yield the company’s net operating income or
loss of the firm.

Problems Related to Proper Cost Assignment

→ Cost must be properly assigned to determine the

profits being generated by a particular division or
segment, then all the costs attributable to that
division/segment should be assigned it. However,
the following are certain practices that hinder
proper cost assignment:

1. Omission of some costs in the assignment

process
2. Use of inappropriate methods in allocating
costs among segments of company.
3. The assignment of costs to segment when
they are really common costs.

Omission of Costs

→ The costs assigned to a segment should include

Analysis of Segment Statements all costs attributable to that segment from the
company’s entire value chain, that is all major
Sales & Contribution Margin business function that add value to a company’s
products and services.
→ For income statement respective variable cost per
segment is deducted to segment sales to derived → These business function include research &
at Contribution Margin (CM) for the segment. development (R&D), product design,
→ CM is particularly useful in determining what manufacture, marketing, distribution &
happens to profit as volume changes, assuming customer services, which are required to bring a
that the segment’s capacity & fixed cost are
product or services to the customer. If these
constant.
costs classified as “upstream costs” (i.e. R&D &
product design) & “downstream costs” (i.e.
Traceable & Common Fixed Cost
marketing, distribution & customer service) are
→ Only traceable fixed cost (i.e. salary of segment omitted, then the segment/division is under-
manager) are charge to the segment column costed which may lead management to maintain
report. These are cost incurred as a consequence products that in the long run result in losses
of the existence of segment & could be easily rather than profits for the company.
identified or traced to the particular segment.
→ After deducting traceable fixed cost from Segment
CM, the resulting amount is the segment Margin
or contribution to cover common cost. Inappropriate Methods for Allocating Costs
Cost distortion or cross-subsidization – when
costs are improperly assigned among company
segments. It occurs in (2) ways:
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1. When the company fails to track cost directly
to segment.
2. When company uses inappropriate bases for
cost allocation.

Arbitrarily Dividing Costs among Segment

→ The practice of assignment non-traceable or

common costs to segment leads to distorted
segment costs.
→ Though it is true that all cost must be covered,
arbitrary allocating common costs may produce
results that could be used in making erroneous
decisions.
→ A manager may erroneously eliminates the
segment which will result in revenue loss, the real
costs of the segment may be avoided, but
common cost will still be there, resulting in
reduction of profit of the company as a whole.
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CHAPTER 23 Financial & Non-Financial ➢ Asset valuation (historical vs current
Performance Measure
➢ Continuous improvement target
Performance evaluation
6. Choosing the timing feedback
→ It is the process by which managers at all levels, ➢ Criticality of information to organization
gain information about the performance of task success
within the firm & assess such performance against
pre-established criteria as set out in budget, plans ➢ Level of management receiving feedback
and goals, with the following goal: ➢ Company’s IT sophistication

1. Motivate the manager to provide a high ➢ Lower-level managers responsible for day
level of effort. to day operation
2. Guide them to make decision that are *Timely reporting of actual results & identification of
congruent with the goal of top deviation causes could signal corrective action.
management.
3. Provide a basis for determining fair Return of Investment (ROI)
compensation for the managers.
Advantages:
Steps in Measuring Performance
➢ It is easily understood and has gain wide usage.
1. Choosing among performance measures
➢ It is comparable to interest rates of returns of
➢ Return on investment (ROI) alternative investment.

➢ Residual income (RI) Limitations:

➢ Economic value added (EVA) ➢ Emphasizes short-run performance rather

than long run profitability.
➢ Return on sales (ROS)
➢ It results to dis-incentive for high ROI units to
2. Choosing time horizon of the performance means: invest in projects with ROI greater than the
➢ One year VS Multi year minimum rate of return but less than unit’s
current ROI.
➢ Short run VS Long run
Formula:
3. Choosing alternative definition
ROI = Net Operating Income
➢ Total asset available Ave. Operating Assets
➢ Total asset employed (minus idle asset & ROI = Net Operating Income x Sales_______
purchased for future use Sales Ave. Operating Assets
➢ Total assets employed minus current
ROI = Operating Margin x Asset Turnover (Return on
liabilities
Sales)
➢ Shareholder’s equity
Residual Income (RI)
4. Choosing measurement alternatives for
→ It is the net operating income that an investment
performance measure
center is able to earn above some minimum
➢ Current cost VS Historical cost return on operating assets.
➢ Gross value VS Book value Advantages:
5. Choosing target levels of performance ➢ A unit pursues investment opportunity as long
as the return from the investment exceeds the
➢ Selection of benchmark or target (i.e ROI minimum rate set by the firm.
for division) ➢ The firm can adjust the required rate of return
for differences in risk & type of assets
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➢ It is possible to calculate a different ➢ It is only useful when comparing companies in
investment change for different type of assets. the same line of business and of roughly the
same size.
Limitations:
Performance measurement in MNC
➢ Since it’s not a %, it suffers same problem of
profit centers in that, it is not useful for ▪ Company set up - Division VS Corporation
composing units of significantly different sizes ▪ Other environment variable
➢ It is not intuitive as ROI.
➢ It may be difficult to obtain a minimum rate of ➢ Economic variable (includes currency
return restriction, taxes, transfer, prices, capital
market and inflation)
Formula: ➢ Legal & Political (includes quality, efficiency,
& effectiveness of legal structure, defense
Operating Income xxx policy, foreign policy, degree of gov’t control &
Less: Min required return -xxx level of political unrest
Residual Income xxx ➢ Education (could refer to literary rate,
sophistication of accounting system, degree of
technical training & management
Economic Value Added (EVA) development program
➢ It is a business units income after taxes after ➢ Sociological & Cultural (MN firm treatment
deducting the cost of capital. by host country manifested in cultural & social
➢ The concept is the same as Residual Income, diversity, social attitude toward mat’l gain &
but EVA uses the firm’s cost of capital (WACC) cultural attitude towards authority & persons
instead of minimum rate of return. in subordinate position & work ethics
➢ The cost of capital is obtained by weighted
Average cost of firms two source of fund: Manager Performance vs Performance of Unit
borrowing and selling stock.
▪ Different firm Level: Top management, Middle
▪ WACC is computed as follows: level & Operating level
▪ Manager assigned to a poor performing unit
WACC = (Weightage of Equity x Cost of ➢ Favorable outcome takes years, thus it
Equity) + [(Weightage of Debt x Cost of may be mistake to conclude from poor
Debt ) x (1–Tax Rate)] performance.
▪ Division performance may be adversely affect
▪ EVA formula: by economic conditions and other constraints
beyond manager’s control
After tax income xxx
Less: Cost of Capital Manager Performance vs Performance of Unit
(Capital x WACC) -xxx
Economic Value Added (EVA) xxx → In evaluating performance, the following need to
be looked into:
Return on Sales (ROS)
➢ Manager’s environment (manager’s action
➢ It is a ratio used to evaluate a company's outcome vs effort & decision-making skills.
operational efficiency. Consider uncontrollable factors (i.e machine
➢ It is calculated by dividing operating profit by breakdown Lack of control means there is
net sales. some degree of uncertainty)
➢ Include only factors that the manager
Formula: controls.
➢ Due to uncertainty & lack of observability,
ROS = Operating Income efforts made by manager were overlooked by
Net Sales top management. A risk averse manager is
improperly biased to avoid decisions with
uncertain outcome.
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Intensity of Incentive: Financial & Non-Financial

➢ Incentive is tied up with compensation to

encourage manager’s goal be congruent with
the firm’s interest.
➢ Managers are evaluated based on the change
they can effect, even if not completely
controllable.
➢ The more company has sensitive performance
measure available to them, they more they
rely in incentive compensation for managers.
➢ Salary increases and promotion to higher
ranks depend on some measure of
performance but incentive are less direct.
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CHAPTER 24 Managing Productivity & Output per person employed = Output
Marketing Effectiveness No. of labor force
Process (activity) productivity = Output
Managing Productivity Machine hours used

→ Sustaining profitability & maintaining/improving Illustration 1

market share requires effective marketing
activities.
→ Having ability to produce more with less
resources is the story behind progress & success.
→ Productivity has become the wealth not only of
the company, but of the country.
→ Benefits of higher productivity to business are: a)
competitive advantage b) higher than average
returns c) attainment of long term success.

Measuring Productivity

Total Productivity is the measure that include all

the inputs used in the production. Below is the
summary of productivity measure:

Partial Productivity
Productivity Partial Operational Productivity Illustration 2 cont….
Partial Financial Productivity
We can note the following on this illustration:
Total Productivity (Financial Productivity)
➢ Operating income has increase only to 17%
Productivity is the ratio of output input.
[(2200-1880) ÷ 1880], even though sales has
increase favorably by 20% (1600 ÷ 8000) or
Productivity = Output
[(4,800-4000) ÷4000)] even with the fixed cost
Input
remains at P600K.
➢ The variable cost has increased by 32%
Partial productivity relates to one or part of the
[(1600+400)-(1200+320) ÷ 1,520]
input factors to the output. Basic formula is as follows:
➢ Number of factors should have contributed
number of units or 𝑉𝑎𝑙𝑢𝑒 𝑜𝑟 to the increase in direct materials & direct
𝑜𝑢𝑡𝑝𝑢𝑡 𝑚𝑎𝑛𝑢𝑓𝑎𝑐𝑡𝑢𝑟𝑒𝑑
Partial Productivity = 𝑛𝑢𝑚𝑏𝑒𝑟 𝑜𝑓 𝑢𝑛𝑖𝑡𝑠 or 𝑐𝑜𝑠𝑡 𝑜𝑓 𝑠𝑖𝑛𝑔𝑙𝑒 labor costs as well as increase in the # of units
𝑜𝑟 𝑝𝑎𝑟𝑡 𝑜𝑓 𝑡ℎ𝑒 𝑖𝑛𝑝𝑢𝑡 𝑟𝑒𝑠𝑜𝑢𝑟𝑐𝑒𝑠 manufactured & sold. Further there are
changes in proportion of the inputs used in
Measuring Productivity (By Part) production, & unit cost of resources (mat’l &
labor).
A measure of productivity can either be operational or ➢ The company should identify factors that
financial productivity measure: caused the change in order for it to
implement some cost saving measures to
Number of units or value of output manufactured
increase operating income, thus it need to
Number of units or cost of a single or part of the input resources
know changes in production of individual
Examples: production resource. Partial productivity
measure provide such.
Direct Materials Yield = Output
Input of Materials By-Part Financial Productivity Analysis

Workforce Productivity: Material

Output per labor-hour = Output ➢ 2019 Productivity 0.0067 unit/Peso spent

Input of labor hours vs
➢ 2020 Productivity 0.0060 unit/ Peso spent
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→ For 2020 productivity per hr the company have
→ This financial productivity indicates the produced 1.20 unit/hr as against 1 unit/hr in 2019.
number of units of output for every peso With total hours available of 8,000 the company
spent. In 2019 direct material financial manage to produce 9,600 unit as compare with
productiveness is 0.0067 while in 2020 its only 8,000 units only in 2019.
0.0060. This indicates decrease in productivity
in 2020 by 10% [(0.0067-0.0060) ÷ 0.0067] By-Part Productivity measure

Labor Advantage:

➢ 2019 Productivity 0.025 unit/labor hr 1. Allows analysis on a particular production input.

vs 2. Easy to interpret by all and easy to assess
➢ 2020 Productivity 0.024 unit/ labor hr productivity performance.
3. The standard for performance are often short-
→ The direct labor partial financial productivity is term for operational control, i.e. productivity
0.025 in 2019 and it reduced to 0.0024, a 4% ratios of prior batches of goods & productivity
decrease [(0.025-0.024) ÷ 0.025]. This trends within the year can therefore be tracked.
contradicts the direct labor partial operation
productivity reported earlier at 20% Limitation:
improvement.
1. Being particular in its analysis, it ignores any
Figure 24.2 provides by-Part Operation & effect that changes in other manufacturing
financial productivity analysis of Press Tool: factors have on productivity.
2. It ignores any effect that changes in other
production factors have on productivity.
3. It ignores the effect that changes in the firm’s
operating characteristics have on productivity of
the input.
4. An improved partial productivity does not imply
that the firm or division operates efficiently.

Measuring Productivity cont…

Total productivity shows the relationship between

output & the total cost of all resources. It is a financial
By-Part Operation Productivity Analysis
measure & can either be number of units or sale value
of output obtained., thus formula is as follows:
Material
Units or 𝑆𝑎𝑙𝑒𝑠 𝑉𝑜𝑙𝑢𝑚𝑒 𝑜𝑓 𝑜𝑢𝑡𝑝𝑢𝑡
➢ 2019 Productivity 0.16 unit/lb of mat’l Total Productivity =
Total cost of all Input resource
vs
➢ 2020 Productivity 0.15 unit/lb of mat’l Illustration 2 cont…

→ For 2020, productivity per pound of material is Below provides Total productivity analysis of
lower by .01 unit/lb, a decrease of 6.25% Press Tool for 2019 & 2020:
(.01÷.16). In 2020, the company required only
32,000 lbs of mat’l (4,800 ÷ 0.15), which should Total Productivity in units
only been 30,000 lbs (4,800/.16), an increase
2,000 lbs which is unfavorable.

Labor

➢ 2019 Productivity 1 unit/labor hr

vs
➢ 2020 Productivity 1.20 unit/ labor hr
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Total Productivity in peso sales

→ As noted on above total productivity in units have

decreased by 8.8% [(5.263%- 4.8%]÷5.263%] and
in sales pesos have decreased by 0.263 unit
(2.6316-2.400). Both unfavorable decrease.

Total Productivity measure

Advantage:
Summary of Variances (Sales)
Total Productivity measure the combined productivity
of all operating factors. It decreases the possibility of Selling Price Variance
manipulating factors to improve productivity measure
of other manufacturing factors. → This is the difference bet actual peso
receive/unit VS budgeted sales/unit per master
Limitation: budget. It measures the impact of deviation of
actual selling price from budgeted selling price
1. Total productivity is a financial measure & on CM & income.
executive at the operational level may have
difficulty linking productivity measures to their Formula:
day to day operation. Selling Price Variance = (Actual selling price per unit -
2. The basis for assessing changes in productivity
Budgeted selling price per unit) x Actual number of
could vary over time, that year, yearly measures
units sold
use different years as the base.
3. It can ignore the effects of changes in demand for Sales Volume Variance
the product, changes in selling prices of the goods
and services & special purchasing & selling → This is the difference bet actual units sold VS
arrangements on productivity. budgeted unit. It measures the effect on CM &
operating income when quantity sold for one or
Managing Marketing Effectiveness more products differs from quantity per master
budget.
→ No entity can gain success without effective
marketing activities that will enable to Formula:
accomplished the following: a) Earned projected
operating income b) Attained desired & budgeted Sales Volume Variance = (Number of units sold –
mkt price c) adapt to mkt change. Number of units in the master budget) x Budgeted
Contribution Margin per unit
→ Factors that affect marketing effectiveness include
selling price, sales quantity, product mix, market Sales Mix Variance
size & market share. Variances in any of these
factor affects company’s operating results & these → This is the difference between the actual VS
can prevent entity in achieving its short term budgeted sales mix, the actual total unit sold
performance objectives & strategic goals. The and the budgeted CM/unit of product. It
Components of sales variances follows: measures the effect on CM & Operating income
due to deviation of actual sales mix from
budgeted mix.
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Formula: Sales Volume Variance
Sales Mix Variance for a Product = (Actual sales mix
percentage for product – Budgeted sales mix
percentage for the product) x Actual total units of all
products sold x Budgeted unit contribution margin of
the product

Sales Quantity Variance

Illustration 2 Solution_Sales Mix
→ This measures the effect on CM & operating
income due to deviation of the actual total sales
units from budgeted total units.

Formula:
Sales Quantity Variance = (Actual total units of all
products sold – Budgeted total sales units of all
products) x Budgeted sales mix percentage of the
product x Budgeted contribution margin per unit of Sales volume variance breakdown
the product (1,140k+1,480k=2,620k)

Illustration 2 Prob Sales Mix variance

Sales Qty Variance

Illustration 2 Total Variance Computation

Extract from Chapter 20 (page 875-876)

Variance breakdown (630k+2,620k=3,250k)

Sales Price Variance

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Market Size Variance

→ This measures the effect of changes in the total

market size on the firm’s CM and Operating
income. As the size of the total market for the
firm’s product changes, the total sales of the
firm are likely to change with it.

Formula:

Market Size Variance = (Actual total units of the

market – Budgeted total units of the market) x
Budgeted market share x Weighted – average
budgeted contribution margin per unit

Market Share Variance

→ This variance compare the firm’s actual market

share to its budgeted market share & measures
the effect of change in the firm’s market share
on its total CM and operating income.

Formula:

Market Share Variance = Actual Market Share –

Budgeted Market Share) x Actual total units of the
industry x Weighted-average budgeted contribution
margin per unit

Illustration 3

Solution

Note: The 85K is unfavorable not favorable