Sales Variances: Time for the hard sell? - CIMA

1 Relevant to the followingmanagement accountingpapers in the revised CIMA syllabus:FMAF, IMPM, IDECS ales Variances: time for the hard sell? G J StevenNapier UniversityThis article on Sales variances explains: why Sales variances are calculated; ow to calculate Sales variances; why it is important to identifyrelationships between products; and discusses other issues that must beconsidered in relation to business scenario will be used todemonstrate how to calculate and applysales variances. Please refer to the detailedworkings schedule to gain a fullappreciation of how to calculate salesvariances since this article focuses on thekey steps required for each Sales variances can be calculated forany organisation which sells goods orservices, these variances have not played aprominent role in CIMA s recentexaminations.

2 The time has come,however, to re-evaluate the use of thesevariances in view of the increasingawareness of the applicability of thesevariances for a wide range of must remember that thecalculation of variances only represents thefirst stage of the control cycle, it isnecessary to ascertain why variances haveoccurred then take appropriate action tocomplete this is also essential to recognise thatvariances are inter-related, for exampleprice and volume, and it is not possible tounderstand the significance of particularvariances without considering associatedvariances: quantity and mix, market sizeand market Built LtdBespoke Built Ltd (BBL) makes anddistributes a range of golfing products fromits factory to golf professionals and retailoutlets for resale to the general public: Hand-crafted persimmon drivers: Armed& Dangerous (A&D), The Terminator(TT) and Lethal Weapon 1 (LW1).

3 BBL headcovers (H) designed to protectthe drivers. A recent market surveyrevealed that 95%+ of the headcoversare sold when the drivers arepurchased. Shafts (S) and metal heads (MH).These products are used to repair alltypes of golf DataThe following budget data was obtained forBBL s products:QtyPriceCostA&D1,200 ,800 ,400 ,540 ,100 DataThe following actual data was obtained forBBL s products:QtyPriceA&D1,285 ,777 ,402 ,664 ,030 DataMost trade associations collect data fromtheir members and make it available tothem on an anonymous following data was obtained from thetrade association that representscompanies which supply golf equipment toretail outlets.

4 BudgetQtyActualQtyDrivers80,00082,500 Headcovers4,4004,464 Shafts22,00020,000 Metal Heads18,00019,000 The budget data is the market dataavailable at the time of setting the budget,and the actual data is the new data madeavailable at the end of the Sales Margin variance (FMAF)Total Sales margin variance calculates theeffect of external market factors, usingstandard cost, on profitability ie price andsales volume.(Budget Sales price - budget cost)x budget quantityLess(Actual Sales price - budget cost)x actual quantityNB Calculated for each this variance doesn t provide anyinsight into product s performance,particularly for a multiple product company,it must be calculated to provide a completereconciliation between budget and Price variance (IMPM) Sales price variance (SPV) calculates theeffect on profitability of the actual sellingprice being different from budget sellingprice.

5 (Actual selling price - budget sellingprice)x actual quantityNB Calculated for each variance should be considered inrelation to Sales volume variance since, forexample, a below budget selling price mayhave increased Volume variance (IMPM) Sales volume variance calculates the effectof actual Sales volume being different frombudget, Sales volume using standard profit,on note that Sales price variancetakes account of the difference betweenactual and budget selling ofSales VariancesTotal SalesMargin variance (FMAF) Sales PriceSales QuantityVarianceVariance(IMPM)(IMPM)Sale s MixSales QuantityVarianceVariance(IDEC)(IDEC)Mark et SizeMarket ShareVarianceVariance(IDEC)(IDEC)(Budget Sales price - budget cost)x budget quantityLess(Budget Sales price - budget cost)x actual quantityNB Calculated for each this variance has isolated the effectof volume changes on profit, it still doesn tprovide much information about products performance in the marketplace.

6 Furtheranalysis is consequently ProductsPrior to considering the other salesvariances it is essential to appreciate thatthese variances must be calculated inrelation to products which are sold into thesame market to produce a valid analysis. Itis consequently important to identifycompeting and complementary products: Competing products are products thatare sold by a company to the samemarket which compete against eachother and competitors products egA&D, TT and LW1. Complementary products are productswhich are sold as a result of the salesof another product eg BBL information will be obtained for theseproduct relationships since a company willhave an expectation of the level of demandfor each of its competing products and its secondary valid information would be obtained ifthese variances are calculated in relation toproducts sold to different markets since thefactors which influence demand andpreferences in these markets would bedifferent.

7 For example, no meaningfulinformation would result if these varianceswere calculated by SAAB for total car andjet fighter Sales since cars are sold to thegeneral public and warplanes are sold togovernments. Separate Sales variancescalculations must consequently be made foreach of BBL s markets ie drivers,headcovers, shafts and metal Quantity variance (IDEC)The Sales quantity variance calculates howmuch more / less profit would have beenmade if Sales were above / below budgetfor a competing range of products since itcalculates what should have been sold ofeach product if total actual Sales were inline with the budget Sales mix %.

8 The first step is to identify the competingproducts A&D, TT and LW1 - andcalculate the budget Sales mix. for , , , , second step is to determine howmuch of the competing products wouldhave been sold if total actual Sales were inline with the budget Sales mixA&D4464 x = 1,217TT4464 x = 1,826LW14464 x = 1,420 The third step is to multiply thedifferences between expected and budgetsales by the budget gross profit margin todetermine the Sales quantity x 37 = x 46 = 1, x 55 = 1,120 The above calculations indicate that anadditional 3,406 would have been made ifthe total Sales of the competing productswere in line with the budget Sales calculations are made for eachof the other products since each is sold to aseparate Mix variance (IDEC)The method of calculating the salesquantity variance allows the calculation of asales mix variance ie the effect onprofitability of the actual Sales mix beingdifferent from the budget Sales mix.

9 Thiscalculation determines whether or not more/ less contribution / gross profit was madeby the range of competing products as aconsequence of selling relatively more/lessof each first step is to compare actual saleswith expected Sales ie the figurescalculated for the Sales quantity note that the differences must addup to zero since total Sales are the ,2851,217+ ,7771, ,4021, ,4644,4640 The next step is to multiply thedifferences between actual and expectedsales by the budget gross profit margin todetermine the Sales mix + x 37 = + 2, x 46 = - 2, x 55 = - 1,010 The calculations indicate that a loss of 773 was made as a result of customerspurchasing relatively more of the productswhich have a lower gross profit variances are not calculated for theother products since they don t have anycompeting : Mix and QuantitySales quantity and mix variances provideuseful information since they give an insightinto market movements.

10 For example, iftotal Sales were above budget the salesquantity variance would indicate how muchmore profit should have been made as aresult of increased demand. The Sales mixvariance would then be calculated todetermine which products customersbought relatively more / less of at theincreased level of demand. If customerspurchased more of the products thatgenerate lower profit - traded down - anadverse variance would be reported. Ifcustomers purchased more of the productswhich generate higher profits - traded-up - afavourable variance would be reported. Thereasons for the variance would then beascertained and the appropriate actiontaken: amend advertising strategy.