Managerial Accounting

Case Analysis – Midwest Ice Cream Company

Zaidali Khoja – 1711442 – Section F

1. Reviewing the Sales Volume Variances as Presented by Roberts

While creating a profit plan for 1973, Midwest anticipated that the overall gallon sales would stay at the
same as that of 1972. The same approach was followed for variable product costs and fixed costs. However,
in 1973, the actual sales were higher than those anticipated. A summary of the budgeted versus revised
sales and costs is shown below:

Budgeted/Anticipated Revised
Market Size 11440000 12180000
Sales Volume 5720329 5968366
Market Share 50% 49%
Sales Revenue 9219900 9645300
Fixed Costs 1945900 1945900
Variable Costs 6628600 6936300
Contribution Margin 2591300 2709000
Income from Operations 645400 763100
Variance due to Sales Volume = 117700

Based on the information obtained above, we also outline the analysis of variance presented by Roberts and
the issues with it. It must be noted that part of the variance above is attributed to the fact that the budgeted
variable costs in the table above are for a sales volume of 5720329 and not 5968366. We therefore infer
that the variance induced by forecasting differences in sales volume is 117700.

Variance Due to Sales

Volume 117700 F
Price 12000 F
Total Variance 129700 F

Variance Due to Operations

Manufacturing 99000 U
Delivery 54000 F
Advertising 29000 U
Sellling 6000 F
Administration 10000 F
Total Variance 58000 U
Net Variance 71700 U
The issue with this variance analysis was that it was highly abstracted and did not provide any information
on the corrective actions that could be taken. Since the revenue and profit is derived from a product mix,
further breaking down the variance into its components will help find out why a variance of 71700 U was
observed.

2. Breaking Down the Sales Volume Variances

For reviewing and analyzing the sales variances as presented by Roberts, we will break down the total sales
margin variance as shown in the diagram below:

We begin by analyzing the total sales margin variance which is the sum of the sales margin price
variance and the sales margin volume variance. The computation for these variances is shown below:

Product Budgeted Sales Quantity Actual Sales Quantity Standard Contribution Margin
Vanilla 2409854 2458212 0.4329
Chocolate 2009061 2018525 0.4535
Walnut 48883 50124 0.5713
Buttercrunch 262185 268839 0.4771
Cherry Swirl 204774 261240 0.5153
Strawberry 628560 747049 0.4683
Pecan Chip 157012 164377 0.5359
Total 5720329 5968366 -
Sales Margin Volume Variance 117641.94 F (approx. 117700)

Budgeted Sales Value of Units Actually Sold 9645300

Actual Sales Value 9657300
Sales Margin Price Variance 12000 F

The sales margin variance occurring due to quantity can be attributed to that occurring from variances in
the sales mix and the sales quantity over a constant product mix. The variance due to change in sales mix
can be computed as follows:
SMMV = (Actual Sales Quantity – Actual Sales in Budgeted Proportions) × Standard Margin
 Standard
Actual Sales Actual Sales in Budgeted
Product Contribution SMMV
Quantity Proportions
Margin
Vanilla 2458212 2514346.758 0.4329 -24300.73694
Chocolate 2018525 2096175.126 0.4535 -35214.3323
Walnut 50124 51002.59708 0.5713 -501.9425144
Buttercrunch 268839 273553.5036 0.4771 -2249.289669
Cherry Swirl 261240 213653.1272 0.5153 24521.51557
Strawberry 747049 655814.75 0.4683 42724.99928
Pecan Chip 164377 163820.1373 0.5359 298.4227012
Total 5968366 5968366 - 5278.636128 F

However, we also need to find out how sales volume variance is affected by a change in the physical
quantity of the products sold in the current product mix. This can be explained through the sales margin
quantity variance. A summary of the framework so far is shown below:
SMQV = (Actual Sales in Budgeted Proportions – Budgeted Sales Quantity) × Standard Margin

Standard
Budgeted Sales Actual Sales in Budgeted
Product Contribution SMQV
Quantity Proportions
Margin
Vanilla 2409854 2514346.758 0.4329 45234.91514
Chocolate 2009061 2096175.126 0.4535 39506.2563
Walnut 48883 51002.59708 0.5713 1210.925814
Buttercrunch 262185 273553.5036 0.4771 5423.913069
Cherry Swirl 204774 213653.1272 0.5153 4575.41423
Strawberry 628560 655814.75 0.4683 12763.39942
Pecan Chip 157012 163820.1373 0.5359 3648.480799
Total 5720329 5968366 - 112363.3048 F

Now, the physical quantity of the products sold can be due to a change in the overall market size (changed
size of pie) or a change in the overall market share of the firm (changed portion of share in the existing pie).
From the SMQV, we now move to find out whether the variance was caused by a shift in market size or by
a shift in the market share of the firm.
The variance due to market size is a function of the industry sales volumes, our firm’s anticipated market
share and the average contribution margin. It can be computed as:
𝐴𝑐𝑡𝑢𝑎𝑙 𝐵𝑢𝑑𝑔𝑒𝑡𝑒𝑑 𝐵𝑢𝑑𝑔𝑒𝑡𝑒𝑑
𝐵𝑢𝑑𝑔𝑒𝑡𝑒𝑑
𝐼𝑛𝑑𝑢𝑠𝑡𝑟𝑦 𝐼𝑛𝑑𝑢𝑠𝑡𝑟𝑦 𝐴𝑣𝑒𝑟𝑎𝑔𝑒 𝑈𝑛𝑖𝑡
Market Size Variance = [ 𝑀𝑎𝑟𝑘𝑒𝑡 ] × [ - ]×[ ]
𝑆𝑎𝑙𝑒𝑠 𝑆𝑎𝑙𝑒𝑠 𝐶𝑜𝑛𝑡𝑟𝑖𝑏𝑢𝑡𝑖𝑜𝑛
𝑆ℎ𝑎𝑟𝑒 𝑀𝑎𝑟𝑔𝑖𝑛
𝑉𝑜𝑙𝑢𝑚𝑒𝑠 𝑉𝑜𝑙𝑢𝑚𝑒𝑠

Budgeted Market Share 50%

Actual Industry Volume 12180000
Expected Industry Volume 11440000
Budgeted Contribution 2591300
Unit Contribution Margin 0.45299842
Market Size Variance 167609.4155 F

Similarly, the variance due to changes in market share can be computed as shown below:
𝐴𝑐𝑡𝑢𝑎𝑙 𝐵𝑢𝑑𝑔𝑒𝑡𝑒𝑑
𝐴𝑐𝑡𝑢𝑎𝑙 𝐵𝑢𝑑𝑔𝑒𝑡𝑒𝑑
𝐼𝑛𝑑𝑢𝑠𝑡𝑟𝑦 𝐴𝑣𝑒𝑟𝑎𝑔𝑒 𝑈𝑛𝑖𝑡
Market Share Variance = [𝑚𝑎𝑟𝑘𝑒𝑡 𝑠ℎ𝑎𝑟𝑒 - 𝑚𝑎𝑟𝑘𝑒𝑡 𝑠ℎ𝑎𝑟𝑒] × [ × ]
𝑆𝑎𝑙𝑒𝑠 𝐶𝑜𝑛𝑡𝑟𝑖𝑏𝑢𝑡𝑖𝑜𝑛
𝑝𝑒𝑟𝑐𝑒𝑛𝑡𝑎𝑔𝑒 𝑝𝑒𝑟𝑐𝑒𝑛𝑡𝑎𝑔𝑒
𝑉𝑜𝑙𝑢𝑚𝑒𝑠 𝑀𝑎𝑟𝑔𝑖𝑛

Budgeted Market Share 50%

Actual Market Share 49%
Budgeted Contribution 2591300
Unit Contribution Margin 0.45299842
Actual Sales Volume 12180000
Market Share Variance -55258.68679 U

Based on the variances we computed above, we can now break down total sales margin variance into the
following components. Note that there might me slight differences in reconciliation of the split of variances
due to rounding errors.
From the model we created using the analysis of variance framework, we see that a majority of the favorable
variance in the contribution margin was due to the variance in the volume of sales. Within this volume
increase, the variance was primarily due to a change in the physical quantity of products sold and not
because of a radical shift in the product mix. Also, this change in the physical quantity of products sold was
mainly due to an overall increase in the market size that Midwest was reaching. There was some unfavorable
variance in the market share since with the actual numbers, the market share of Midwest fell by about 1%.
We can, after breaking down and analyzing the individual variances, conclude that a majority of the
favorable variance was driven by exogenous factors such as an increase and market size and not particularly
due to increase in performance. In fact, an increased market size led to a decreased market share for the
company. The company should, therefore, aim at maintaining a market share of at least 50% even with an
increasing market size.
Despite these results, we should also consider the limitations of the analysis. Firstly, analysis of variance
does not take into consideration the price elasticity of demand of goods. Changing prices of goods will
drive variance not only for prices but also for volumes by the demand supply relationship. Hence, price and
volume need to be treated as interrelated entities.