©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster Revenue, Customer- Profitability Analysis, and Sales-Variance Analysis Chapter 14

©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster Learning Objective 1 Discuss why a company’s revenues can differ across customers purchasing the same product.

©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster 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.

©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster Customer Revenue Analysis Example Customer AB Programs sold 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?

©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster Customer Revenue Analysis Example 1. The volume of programs purchased 2. The magnitude of price discounting

©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster Customer Cost Analysis Example Assume that English Languages Institute has an activity-based costing system that focuses on customers rather than products. Activity AreaCost Driver and Rate Order taking$ 80 per purchase Order set up$100 per batch

©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster Customer Cost Analysis Example Customer A Customer B Number of: Purchase orders 7 2 Batches 7 2 What is the cost of servicing each customer?

©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster Customer Cost Analysis Example Customer A: Ordering:7 × $80/order=$ 560 Set-up:7 × $100/batch= 700 Total$1,260 English can use this information to persuade this customer to reduce usage of the ordering and setup cost drivers.

©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster Customer Cost Analysis Example Customer B: Ordering:2 × $80/order=$160 Setup:2 × $100/batch= 200 Total$360

©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster Learning Objective 2 Apply the concept of cost hierarchy to customer costing.

©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster 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.

©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster 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

©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster Learning Objective 3 Discuss why customer-profitability differs across customers.

©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster Customer-Profitability Profiles Which customer is more profitable, A or B? A B Revenues$24,500$10,800 Cost of good sold ($95 per unit) 13,300 5,700 Contribution margin $11,200$ 5,100 Other expenses 1, Operating income$ 9,940$ 4,740

©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster 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).

©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster Learning Objective 4 Provide additional information about the sales-volume variance by calculating the sales-mix variance and the sales-quantity variance.

©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster Sales-Volume Variance Components The following information relates to English Languages Institute budget for the year Product Grammar Trans. Comp. Selling price per unit$259 $87$185 Variable cost Contribution margin per unit$ 70 $37$ 90

©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster Sales-Volume Variance Components ProductGrammarTranslationComposition Cont. margin$70$37$90 × Units3, = Total$222,950$36,260$66,150 Sales mix65%20%15% Total budgeted contribution margin = $325,360

©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster Sales-Volume Variance Components ProductGrammarTranslationComposition Selling $/unit$255$85$185 Variable cost Cont. margin per unit $ 75$40$ 90 The following are the actual results for English Languages for the year 2003.

©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster Sales-Volume Variance Components ProductGrammarTranslationComposition Cont. margin$75$40$90 × Units2, = Total$216,000$39,600$56,700 Sales mix64%22%14% Total actual contribution margin = $312,300

©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster Static-Budget Variance Static- Static- Actual budget budget Product results amount variance Grammar$216,000$222,950$ 6,950 U Translation 39,600 36,260 3,340 F Composition 56,700 66,150 9,450 U Total$312,300$325,360$13,060 U

©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster Flexible-Budget Variance Actual contribution Unit Actual Product margin/unit volume results Grammar$752,880$216,000 Translation$40 990$ 39,600 Composition$90 630$ 56,700

©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster Flexible-Budget Variance Budgeted Actual contribution unit Flexible Product margin/unit volume budget Grammar$702,880$201,600 Translation$37 990$ 36,630 Composition$90 630$ 56,700

©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster Flexible-Budget Variance Flexible-Flexible- Actual budget budget Product results amount variance Grammar$216,000$201,600$14,400 F Translation$39,600 $ 36,630$ 2,970 F Composition$56,700 $ 56,700 0 Total flexible-budget variance$17,370 F

©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster Sales-Volume Variance Budgeted contribution Product Actual Budget margin Grammar(2,880 – 3,185) × $70 =$21,350 U Translation (990 – 980) × $37 = 370 F Composition (630 – 735) × $90 = 9,450 U Total sales-volume variance$30,430 U

©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster 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 = × ×

©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster 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

©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster 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 = × ×

©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster Sales-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

©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster Learning Objective 5 Provide additional information about the sales-quantity variance by calculating the market-share variance and the market-size variance.

©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster 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.

©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster 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

©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster 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

©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster 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

©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster 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

©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster 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

©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster Summary of Variances Static-Budget Variance 13,060 U Level 1 Level 2 Flexible-Budget Variance $17,370 F Sales-Volume Variance $30,430 U

©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster Summary of Variances Sales-Volume Variance $30,430 U Level 2 Level 3 Sales-Mix Variance $3,870 U Sales-Quantity Variance $26,560 U

©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster Summary of Variances Sales-Quantity Variance $26,560 U Level 3 Level 4 Market-Share Variance $74,700 U Market-Size Variance $48,140 F

©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster End of Chapter 14