ABC sells Product X to wholesalers (W) to retailers (R).

The data for

February 2008 are:

Budgeted Actual
W R W R
Selling price/unit $13.37 $14.10 $13.37
$14.10
Variable cost/unit $12.88 $13.12 $12.88
$13.17
CM/Unit $0.49 $0.98 $0.49 $0.93

Sales (in units) 712,000 178,000 756,000 144,000

Budgeted fixed costs are $160,500, and actual fixed costs are
$263,000.

Assume that the firm derived its total units sales budget from a
management estimate of a 25% market share and a total industry
sales forecast of 3,560,000 units. For February 2008, the actual
industry sales were 4,000,000 units.

Calculate all variances and provide comments.

Static-budget variance:

Static budget variance

= Actual results – Static budget amount

W
= ($0.49 x 756,000) – ($0.49 x 712,000)
= $370,440 - $348,880 =
$21,560 F

R
= ($0.93 x 144,000 – ($0.98 x 178,000)
= $133,920 - $174,440 = $40,520 U

Total = $18,960 U

Managers can get more information by

examining the flexible budget variance and
the sales volume variance.
Flexible budget variance:

Flexible-budget variance
= Actual results – flexible budget
amount

W
= ($370,440) – ($0.49 x 756,000)
= $370,440 - $370,440 = -

R
= ($133,920) – ($0.98 x 144,000)
= $133,920 - $141,120 = $7,200 U

Total = $7,200 U

For R, the flexible budget variance is $7,200

U, and, it is influenced heavily by the
decrease in CM/unit (from $0.98 to $0.93).
Sales-volume variance:

Sales-volume variance
= (Actual sales quantity in units - Static
budget quantity in units) x Budgeted
CM/unit

W
= (756,000 – 712,000) x $0.49 = 21,560
F

R
= (144,000 – 178,000) x $0.98 = $33,320 U
Total = $11,760 U

Sales mix variance

= (actual units of all products sold) x [(actual
sales mix%) – (budgeted sales mix%)] x
(budgeted CM/unit

Actual sales mix:

W 756000/900000 = 0.84
R 144000/900000 = 0.16
Budgeted sales mix:

W 712,000/890000 = 0.80
R = 0.20

Sales-mix variance:

W
900,000 x (0.84 – 0.80)x$0.49 = $17,640 F

R
900,000 x (0.16 – 0.20)x$0.98 = $35,280 U

Total = $17,640 U

Questions to ask:
• Is this sales-mix shift due to the initial
estimates being made without adequate
study?
 • Is it because our competition could sell
the regular brand at a lower price?

Sales-quantity variance:

This shows the effect of a change in the

actual unit sales from the budgeted unit
sales.

Sales quantity variance

= [(actual units of all products sold) –
(budgeted units of all products sold) x
(budgeted sales mix) x (budgeted CM/unit)

W
(900000 – 890000)x0.80x$0.49 = $3,920 F
R
(900000 – 890000)x0.20x$0.98 = $1,960 F
Total =$5,880 F

The variance is favourable if actual units

sold of all products exceed budgeted sales.
Managers can gain more insight to the sales
quantity variance by calculating the market-
share and market-size variances.

Market share variance

= (actual market size in units) x [(actual
market share) – (budgeted market share)] x
(budgeted CM per composite unit for
budgeted mix)
Budgeted CM per composite unit for
budgeted mix = (total budgeted CM)/(total
budgeted units)
= [($0.49 x 712000) + ($0.98 x
178000)]/890000 = $0.588

Actual market share

= 900,000/4000000 = 0.225

Market-share variance
= 4000000 x (0.225 – 0.25) x $0.588 = $58,800
U

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

= (4000000 – 3560000) x 0.25 x $0.588 =

$64,680 F
SUMMARY:

Static-budget variance = $18,960 U

Flexible-budget variance = $ 7,200 U

Sales-volume variance = $11,760 U
Total = $18,960 U

Sales-mix variance = $17,640 U

Sales-quantity variance = $ 5,880 F
Total = $11,760 U

Market-share variance = $58,800 U

Market size variance = $64,680 F
Total