Professional Documents
Culture Documents
Sales-Variance Analysis
Chapter 14
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Learning Objective 1
Identify four purposes
for allocating costs to
cost objects.
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Learning Objective 2
Guide cost-allocation decisions
using appropriate criteria.
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Criteria to Guide
Cost-Allocation Decisions
Cause-and-effect:
Using this criterion, managers identify the
variable or variables that cause resources
to be consumed.
Benefits-received:
Using this criterion, managers identify the
beneficiaries of the outputs of the cost object.
2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster
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Criteria to Guide
Cost-Allocation Decisions
Fairness or equity:
This criterion is often cited on government
contracts when cost allocations are the basis
for establishing a price satisfactory to the
government and its suppliers.
Ability to bear:
This criterion advocates allocating costs in proportion
to the cost objects ability to bear them.
2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster
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Learning Objective 3
Discuss decisions faced
when collecting costs in
indirect-cost pools.
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Canton
$2,200,000
1,980,000
$4,180,000
Dayton
$4,000,000
2,500,000
$6,500,000
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Dayton
$400,000 $200,000
480,000 720,000
$880,000 $920,000
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9 0
9 0
T o le d o
C le v e la n d
8 0
7 6
A k ro n
7 5
C a n to n
7 1
O H IO
G re a t Mia m i
Rive r
D a y to n
7 7
7 0
C o lu m b u s
O hio
Rive r
Musking um
Rive r
C in c in n a ti
O hio
Rive r
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Assembly
direct costs
$1,300,000
Corporate costs
400,000
Total costs
$1,700,000
Finishing
direct costs:
$900,000
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Human Resources
direct costs: $1,680,000
Corporate costs: 480,000
Total costs
$2,160,000
Maintenance
direct costs:
$300,000
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Finishing Dept.
$900,000
Canton Division
$5,060,000
Maintenance Dept.
$300,000
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Learning Objective 4
Discuss why a companys
revenues can differ across
customers purchasing
the same product.
2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster
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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
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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
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Customer Revenue
Analysis Example
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Customer A
Customer B
7
7
2
2
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Customer A:
7 $80/order = $ 560
7 $100/batch =
700
$1,260
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Customer B:
2 $80/order = $160
2 $100/batch = 200
$360
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Learning Objective 5
Apply the concept of cost
hierarchy to customer costing.
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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.
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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
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Learning Objective 6
Discuss why customer-profitability
differs across customers.
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Customer-Profitability Profiles
Which customer is more profitable, A or B?
A
Revenues
$24,500
Cost of good sold ($95 per unit) 13,300
Contribution margin
$11,200
Other expenses
1,260
Operating income
$ 9,940
2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster
B
$10,800
5,700
$ 5,100
360
$ 4,740
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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
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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
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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
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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%
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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
per unit
$ 75
$40
$ 90
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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%
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Static-Budget Variance
Product
Grammar
Translation
Composition
Total
Actual
results
$216,000
39,600
56,700
$312,300
StaticStaticbudget
budget
amount
variance
$222,950 $ 6,950 U
36,260
3,340 F
66,150
9,450 U
$325,360 $13,060 U
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Flexible-Budget Variance
Actual
contribution
Product
margin/unit
Grammar
$75
Translation
$40
Composition
$90
Unit
volume
2,880
990
630
Actual
results
$216,000
$ 39,600
$ 56,700
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Flexible-Budget Variance
Budgeted
contribution
Product
margin/unit
Grammar
$70
Translation
$37
Composition
$90
Actual
unit
volume
2,880
990
630
Flexible
budget
$201,600
$ 36,630
$ 56,700
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Flexible-Budget Variance
FlexibleActual
budget
Product
results
amount
Grammar
$216,000
$201,600
Translation $39,600
$ 36,630
Composition $56,700
$ 56,700
Total flexible-budget variance
Flexiblebudget
variance
$14,400 F
$ 2,970 F
0
$17,370 F
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Sales-Volume Variance
Product
Actual Budget
Grammar
(2,880 3,185)
Translation
(990 980)
Composition (630 735)
Total sales-volume variance
Budgeted
contribution
margin
$70 = $21,350 U
$37 =
370 F
$90 =
9,450 U
$30,430 U
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Sales-Mix Variance
Sales-mix variance
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Sales-Mix Variance
Grammar:
= $3,870 U
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Sales-Quantity Variance
Sales-quantity variance
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Sales-Quantity Variance
Grammar:
(4,500 4,900) 0.65 $70
Translation:
(4,500 4,900) 0.20 $37
Composition:
(4,500 4,900) 0.15 $90
Total sales-quantity variance
= $18,200 U
= $ 2,960 U
= $ 5,400 U
= $26,560 U
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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
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Summary of Variances
Level 1
Level 2
Static-Budget Variance
13,060 U
Flexible-Budget
Variance
$17,370 F
Sales-Volume
Variance
$30,430 U
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Summary of Variances
Level 2
Level 3
Sales-Volume Variance
$30,430 U
Sales-Mix
Variance
$3,870 U
Sales-Quantity
Variance
$26,560 U
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Summary of Variances
Level 3
Level 4
Sales-Quantity Variance
$26,560 U
Market-Share
Variance
$74,700 U
Market-Size
Variance
$48,140 F
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End of Chapter 14
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