Customer-

Profitability Analysis, and

Sales-Variance Analysis

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

 Learning Objective 4

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
A B
Programs sold 140 60
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 Area Cost 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 5

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 6

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 1,260 360
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 7

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 2003.
Product Grammar Trans. Comp.
Selling price per unit $259 $87 $185
Variable cost 189 50 95
Contribution margin per unit $ 70 $37 $ 90

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

 Sales-Volume
Variance 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

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

The following are the actual results for

English Languages for the year 2003.
Product Grammar Translation Composition
Selling $/unit $255 $85 $185
Variable cost 180 45 95
Cont. margin
$ 75 $40 $ 90
per unit
©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster
 Sales-Volume
Variance 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

©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 $75 2,880 $216,0
Translation $40 990 $ 39,6
Composition $90 630 $ 56,7

©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 $70 2,880 $201,6
Translation $37 990 $ 36,6
Composition $90 630 $ 56,7

©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 8

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
Level 1
13,060 U

Flexible-Budget Sales-Volume
Level 2 Variance Variance
$17,370 F $30,430 U

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

 Summary of Variances

Sales-Volume Variance
Level 2
$30,430 U

Sales-Mix Sales-Quantity
Level 3 Variance Variance
$3,870 U $26,560 U

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

 Summary of Variances

Sales-Quantity Variance
Level 3
$26,560 U

Market-Share Market-Size
Level 4 Variance Variance
$74,700 U $48,140 F

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

 End of
Chapter 14

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