Advanced Management Accounting
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ACCT3104
Advanced Management Accounting
Customer-Profitability Analysis, Sales-Variance
Analysis, and Revenue Allocation
(Reading - Horngren: Ch 15 & 16)
Inventory
1. Introduction to ACCT3104. Inventory Valuation Methods: Absorption, variable and throughput
costing. Capacity analysis.
2. Inventory management, EOQ and JIT.
Pricing and Customer Decisions
3. Pricing decisions and cost management.
4. Customer profitability, revenue allocation and sales variance analysis.
Performance Evaluation
5. Decentralisation, responsibility centres, and transfer pricing.
6. Organisational structures and management control systems.
7. Financial performance measures and effects.
8. Performance measurement and incentive systems.
9. Strategic management accounting, Balanced Scorecard & strategic profitability analysis.
10. Balanced Scorecard - Quality, time, and theory of constraints.
11. Ethics in management accounting.
12. Final exam communication.
Course Topics
2
You should be able to :
1. Analyse customer profitability and discuss reasons for differences in
revenues and costs of customers.
• Allocate indirect costs caused by customers to determine customer
profitability.
• Identify the importance of customer profitability profiles.
2. Be able to analyse, interpret and consider suggestions for
performance improvement relating to the sales volume variance
(when companies sell multiple products).
• Why did sales deviate from budget?
3. Understand the need for, and principles of, revenue allocation.
Learning Objectives
3
1. Customer Profitability Analysis
2. The FBV and SVV: a review
3. Decompose the Sales Volume Variance
◦ Sales Mix
◦ Sales Quantity
Market Share Variance
Market Size Variance
4. Revenue and Bundled Products
◦ Stand-alone
◦ Incremental
Lecture overview
4
➢ Customer- Revenue Analysis
Difference in customer revenues (even for same product)?
Quantity purchased; price discounts
➢ Customer- Cost Analysis
Difference in customer costs?
Customers can place different demands on company resources. ABC
focused on customers: categorises indirect costs into different cost
pools based on different cost drivers (cause-and-effect or benefits-
received relationships).
➢ An analysis of customer differences on both revenues and costs
can provide important insight into why differences in customer
profitability exists.
1. Customer Profitability
5
Example: Customer Revenues & Customer Costs
6
❖ During the first six months of 2020, ELI expanded its market and sold 200
composition programs to two new customers A and B.
A B
Programs sold 140 60
List selling price $185 $185
Invoice price $175 $180
Total revenues $24,500 $10,800
❖ Assume that ELI has an activity-based costing system that also focuses on
customers (as cost objects).
Activity Area Cost Driver Rate Used by: A B
Order taking $80 per purchase order 7 2
Set-up $100 per batch 7 2
❖ Required: Explain the revenue differences and calculate the costs of
servicing each customer.
Example: Customer Revenues & Customer Costs
7
1) Two variables explain revenue differences between these two customers:
A $24,500 ; B $10,800
• The volume of programs purchased (A: 140; B: 60)
• The magnitude of price discounting (A: $175; B: $180)
2) Customer Cost Analysis
A B
Ordering: ($80/order* 7; 2) $560 $160
Set-up : ($100/batch* 7; 2) 700 200
Total $1,260 $360
ELI can use this information to persuade this customer (A) to reduce usage of
the ordering and set-up cost drivers.
6-8
Customer Profitability Analysis
Using ABC to determine the activities, costs, and profit associated
with serving particular customers.
For various reasons,
some customers
simply are less
profitable than
others.
Customer makes frequent
order changes.
Customer needs special
parts.
Customer is difficult to
please.
F
o
r
E
x
a
m
p
le
➢ Customer-Profitability Analysis
It uses information on customer revenues and customer-level costs.
Customer-level costs ➔ Costs incurred in the first three categories of the
customer-cost hierarchy: customer output-unit –level costs, customer batch-
level costs, and customer-sustaining costs.
➢ Example: B&H Ltd wants to work with customers to reduce their costs. The
following information pertains to B&H Ltd.
1. Customer Profitability
9
1. Customer Profitability
10
Quantity of cost drivers used by each customer follows:
CUSTOMER
A D G
Units sold 20,000 10,000 1,200
Number of purchase orders 30 25 15
Number of visits to customers 12 10 8
• Customer-profitability analysis:
1. Customer Profitability
11
1. Customer Profitability
ACCT1101, Lecture 2 12
Customer-profitability analysis:
Future sales to customer G should be tracked to see if the $2.00 per unit
discount translates into higher future sales.
Customer G purchases only 6% of the units that customer A purchases but
uses one-half as many purchase orders and two-thirds as many visits to
customers ➔ It can be used to work with customers to reduce the quantity
of activities needed to support them.
Customers Ranked on customer-level operating profit:
Customer-Profitability Profiles
13
Customer profitability reports often highlight that a small percentage
of customers contribute a large percentage of operating income.
It is important that companies devote sufficient resources to maintaining
and expanding relationships with these key contributors to profitability.
The Cumulative Profitability “WHALE Curve” (20/80)
Cumulative
Profits
Most Profitable Least Profitable
Modify our relationship to
improve profitability
- assist them to improve their
ordering patterns
- charge for extra services
(orders)
- discontinue relationship
Customer Profitability Analysis
Profitable
Customers
Least Profitable
Customers
Small set vital to total
profitability
➔ devote sufficient
resources to maintain and
expand relationship
❖ 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
Gross margin 11,200 5,100
Other expenses (of customer) 1,260 360
Profit $ 9,940 $ 4,740
❖ Customer A seems to be more profitable in $.
❖ Customer B has a higher profit margin percentage.
◦ Customer A profit margin % = 40.6%
◦ Customer B profit margin % = 43.9%
Customer-Profitability Profiles
15
Customer Classification Matrix
16
Customers that are above
the diagonal are more
profitable
Low Cost to serve High
High
Net ABC
margin
realised
Low
Source: Shapiro, Rangan, Moriarty and Ross,
“Manage Customers for Profits (Not just Sales)
Dropping an unprofitable customer will:
1. eliminate long-run costs assigned to that customer.
2. eliminate most short-run costs assigned to that customer.
3. decrease long-run profitability.
4. increase the potential to cross-sell other products that are more desirable.
MCQ 1
17
2. Sales Volume Variances
ACCT1101, Lecture 2 18
Price Variance
Yield Variance Mix Variance
Efficiency Variance
AQ x SP SQ x SP
Flexible Budget Variance Sales Volume Variance
Static Budget Variance
Acct 2102
Level 1
Level 2
Level 3
Level 4
The static-budget variance will be favourable when:
1. actual fixed costs are greater than budgeted fixed costs.
2. budgeted unit sales are greater than actual unit sales.
3. The actual contribution margin is greater than the budgeted contribution
margin.
4. The budgeted variable costs are less than the actual variable costs.
MCQ 2
19
Sales Volume Variance Analysis
Levels of analysis
20
Flexible Budget Variance
Sales Mix Variance
Market Share Variance Market Size Variance
Sales Quantity Variance
Sales Volume Variance
Static Budget Variance
Level 4
Level 3
Level 2
Level 1
Working with inadequate cost data has frustrated the Company CEO, an
engineer unfamiliar with these systems. As a result, you have been asked to
consider the following data for September 2020 and recommend how variances
might be calculated and presented in performance reports:
• Static (Master) Budget in output units 20,000
• Actual units produced and sold 23,000
• Budgeted selling price per unit $40
• Budgeted variable costs per unit $25
• Budgeted total fixed costs per month $200,000
• Actual revenue $874,000
• Actual variable costs $630,000
• Favourable variance in Fixed Costs 5,000
The CEO is disappointed in the September data. Although the units sold
exceeded expectations, operating income did not.
2. Static Budget Variance (SBV), Flexible Budget Variance
(FBV) and Sales Volume Variance (SVV)
Example (Level 0, 1 and 2 Analysis):
21
(a) You have decided to present the CEO with a comparison of the actual data,
against the flexible budget, and the flexible budget data against the static or
master budget data with the aim of explaining why the operating income did
not exceed expectations.
Based on the data provided, prepare a Level 2 Analysis for the Company
for September 2020 highlighting whether the Flexible-Budget and Sales
Volume Variances calculated for each line item were favourable (f) or
unfavourable (u).
(b) What are some of the likely causes of the variances you have reported in
part (a) above?
(c) Briefly explain to the CEO the benefits of comparing actual operating results
against a flexible budget as in a Level 2 Analysis, as opposed to comparing
the actual results with the master budget as in a Level 1 Analysis.
Required:
22
Actual SB Variance Master Budget
Units 23,000u 20,000u
Sales 23000*$38 20000*$40
= $874,000 $ 74,000 f = $800,000
Less VC 23000*27.39 20000*$25
= 630,000 130,000 u = 500,000
CM $ 244,000 56,000 u $ 300,000
Less FC 195,000 5,000 f 200,000
Profit $ 49,000 $ 51,000 u $100,000
Example - Level 0 & Level 1 Analysis
23
Level 0
Actual FBV FB SVV M Budget
Units 23,000 23000 20,000
Sales 23000*$38 23000*$40 20000*$40
= $874,000 46,000 u = $920,000 120,000 f = $800,000
Less VC 23000*27.39 23000*$25 20000*$25
= 630,000 55,000 u = 575,000 75,000 u = 500,000
CM $244,000 101,000 u $345,000 45,000 f $300,000
Less FC 195,000 5,000 f 200,000 0 200,000
Profit $49,000 $96,000 u $145,000 $45,000 f $100,000
Example - Level 2 Analysis
24
New
Column
Total FBV Total SVV
Lecture Exercise 1 - Analysing the SVV
25
1) Total CM calculation
26
Actual Grammar Translation Composition Total
CM/unit $ 75 $ 40 $ 90
x no of units 2,880 990 630 4,500units
= Total CM $216,000 $39,600 $56,700 $312,300
Budget Grammar Translation Composition Total
CM/unit $ 70 $ 37 $ 90
x no of units 3,185 980 735 4,900units
= Total CM $222,950 $36,260 $66,150 $325,360
Static-Budget Variance (in terms of CM)
27
2880 x $75 3185 x $70
$216,000 6,950U $222,950
Grammar:
(AQ x Acm) - (BQ x Bcm)
(Actual sales quantity in units x Actual CM/unit) -
(Static budget sales quantity in units x Static Budget CM/unit)
Recall: the SBV decomposes into the FBV and the SVV
Static-
Actual budget
Product results SBV amount
AQxAcm BQxBcm
Grammar $216,000 $ 6,950 U $222,950
Translation 39,600 3,340 F 36,260
Composition 56,700 9,450 U 66,150
Total $312,300 $13,060 U $325,360
2a) Flexible-Budget Variance
28
Grammar:
Actual FB Static Budget
AQ x Acm AQ x Bcm BQ x Bcm
2880 x $75 2880 x $70
$216,000 14,400F $201,600
FBV = Actual sales quantity in units x (Actual CM/unit - budgeted CM/unit)
Flexible-
Actual budget
Product results FBV amount
Grammar $216,000 $14,400 F $201,600
Translation $ 39,600 $ 2,970 F $ 36,630
Composition $ 56,700 0 $ 56,700
Total flexible-budget variance $17,370 F
FBV (@CM) = $312,300 - $294,930
2b) Sales Volume Variance
29
For each product (i):
(Actual sales quantity in units - Static budget sales in units) x Budgeted
CM/unit
ie., (AQi - BQi) x Bcmi
Product AQi BQi Bcmi
Grammar (2,880 - 3,185) x $70 = $21,350U
Translation ( 990 - 980) x $37 = 370F
Composition ( 630 - 735) x $90 = 9,450U
Total sales volume variance $30,430U
Grammar:
Actual FB Static Budget
AQ x Acm AQ x Bcm BQ x Bcm
2880 x $70 3185 x $70
$201,600 $21,350U $222,950
Flexible Budget and Sales Volume Variances - Worksheet
30
Actual FB (Actual) Static Budget
AQ x Acm FBV AQ x Bcm SVV BQ x Bcm
Grammar $216,000 $14,400F $201,600 $21,350U $222,950
Translation 39,600 2,970F 36,630 370F 36,260
Composition 56,700 0 56,700 9,450U 66,150
Total $312,300 $17,370F $294,930 $30,430U $325,360
Total SBV = $13,060U
T&T Ltd planned to sell 50,000 units at $18 each in March but actually sold
46,000 units at $20 each.
1. The static-budget of revenues is $920,000
2. The flexible-budget of revenues is $900,000
3. The flexible-budget of revenues is $828,000
4. The flexible-budget of revenues is $1,000,000
MCQ 3
3. Sales Variance Analysis:
33
Flexible Budget Variance
Sales Mix Variance
Market Share Variance Market Size Variance
Sales Quantity Variance
Sales Volume Variance
Static Budget Variance
13060 U
17370 F 30430 U
Level 2
Level 3
Level 4
Level 1
3) Sales Mix calculation
34
Actual Grammar Translation Composition Total
CM/unit $ 75 $ 40 $ 90
x no of units 2,880 990 630 4,500units
= Total CM $216,000 $39,600 $56,700 $312,300
Act. Sales mix 64% 22% 14%
Bud. Sales mix 65% 20% 15% Bud Av CM?
Budget Grammar Translation Composition Total
CM/unit $ 70 $ 37 $ 90
x no of units 3,185 980 735 4,900units
= Total CM $222,950 $36,260 $66,150 $325,360
Difference between:
Flexible Budget for actual sales mix (AQt x ASM%i x Bcmi)
Flexible Budget for budgeted sales mix (AQt x BSM%i x Bcmi)
3a) Sales Mix Variance (SMV)
35
Grammar 4,500 (0.64 - 0.65) x $70 = $3,150U
Translation 4,500 (0.22 - 0.20) x $37 = 3,330F
Composition 4,500 (0.14 - 0.15) x $90 = 4,050U
Total Sales Mix Variance = $3,870U
For each product (i):
Actual total units of all products sold x (Actual sales mix percentage i -
Budgeted sales mix percentage i) x Budgeted CM/unit i
SMVi = AQt x (ASM%i – BSM%i) x Bcmi
Difference between:
• Flexible Budget for budgeted sales mix (AQt x BSM%i x Bcmi)
Static budget (BQt x BSM%i x Bcmi)
3b) Sales Quantity Variance (SQV)
36
Grammar (4,500 - 4,900) x .65 x $70 = $18,200U
Translation (4,500 - 4,900) x .20 x $37 = 2,960U
Composition (4,500 - 4,900) x .15 x $90 = 5,400U
Total Sales Quantity Variance $26,560U
For each product(i):
(Actual total units of all products sold – Budgeted total units of all products
sold) x Budgeted sales mix percentage i x Budgeted CM/unit i.
SQVt = (AQt - BQt) x BSM%i x Bcmi
Sales Mix & Sales Quantity Variances
37
FB (Actual) Static Budget
AQ x Bcm SMV SQV BQ x Bcm
Grammar $201,600 3,150U $204,750 18,200U $222,950
Translation 36,630 3,330F 33,300 2,960U 36,260
Composition 56,700 4,050U 60,750 5,400U 66,150
Total $294,930 3,870U 298,800 26,560U $325,360
SVV $30,430U
e.g. Grammar
2880 x $70 3185 x $70
$201,600 3,150U $204,750 18,200U $222,950
(AQt x ASM%i x Bcmi) (AQt x BSM%i x Bcmi) (BQt x BSM%i x Bcmi)
4500 x .64 x $70 4500 x .65 x $70 4900 x .65 x $70
Sales Variance Analysis:
38
Flexible Budget Variance
Sales Mix Variance
Market Share Variance Market Size Variance
Sales Quantity Variance
Sales Volume Variance
Static Budget Variance
13060 U
17370 F 30430 U
3870 U 26560 U
The XTRA Appliance Manufacturing Corporation manufactures two vacuum
cleaners, the Standard and the Super. The following information was gathered about
the two products:
Standard Super
Budgeted sales in units 3,200 800
Budgeted selling price $300 $850
Budgeted contribution margin per unit $210 $550
Actual sales in units 3,500 1,500
Actual selling price $325 $840
What is the total sales-quantity variance in terms of the contribution margin?
1. $110,000 favourable
2. $170,000 favourable
3. $278,000 favourable
4. $448,000 favourable
MCQ 4
39
SQV = Σ(AQt - BQt) x BSM%i x Bcmi
The XTRA Appliance Manufacturing Corporation manufactures two vacuum
cleaners, the Standard and the Super. The following information was gathered about
the two products:
Standard Super
Budgeted sales in units 3,200 800
Budgeted selling price $300 $850
Budgeted contribution margin per unit $210 $550
Actual sales in units 3,500 1,500
Actual selling price $325 $840
What is the total sales-mix variance in terms of the contribution margin?
1. $110,000 favourable
2. $170,000 favourable
3. $278,000 favourable
4. $448,000 favourable
MCQ 5
40
SMV = Σ AQt x (ASM%i - BSM%i) x Bcmi
Sales Variance Analysis:
41
Flexible Budget Variance
Sales Mix Variance
Market Share Variance Market Size Variance
Sales Quantity Variance
Sales Volume Variance
Static Budget Variance
13060 U
17370 F
30430 U
3870 U 26560 U
Level 4
Level 3
Level 1
Level 2
Level 4 variance analysis
• Market Share Variance
• Market Size Variance
Lecture Example extended (new information)
Assume ELI derived its total units sales budget from an estimate of a 20%
market share and a total industry sales forecast of 24,500 units
Actual industry sales = 28,125 units
3. Sales Quantity Variance extended
42
Market Share
• Actual market share (%) = 4,500 / 28,125 = 0.16
• Budgeted market share (%) = 0.20 given (BQt = 24,500 x .20 = 4,900)
Budgeted average CM/unit
Total budgeted CM / budgeted units = $325,360 / 4,900 = $66.40
Market Share Variance
Actual mkt. size x (Actual mkt. share - Budgeted mkt. share) x B Av CM/unit
= 28,125 (.16 - .20) x $66.40 = $74,700U
Market Size Variance
(Actual mkt. size - Budgeted mkt. size) x Budgeted mkt. share x B Av CM/unit
= (28,125 - 24,500) x .20 x $66.40 = $48,140F
3. Sales Quantity Variance extended
43
44
Mkt Sh Var Mkt Size Var
Act Mkt Size
x Act Mkt Sh
x Bud Av cm
Act Mkt Size
x Bud Mkt Sh
x Bud Av cm
Bud Mkt Size
x Bud Mkt Sh
x Bud Av cm
28125 x .16 x
$66.40
= 4500 x $66.40
28125 x .20 x
$66.40
= 5625 x $66.40
24500 x .20 x
$66.40
= 4900 x $66.40
$298,800 $74,700U $373,500 $48,140F $325,360
Sales Quantity
Variance
$298,800 26,560U $325,360
Static Budget
(BQt x BSM%i x Bcmi)
Flexible Budget
for budgeted sales mix
∑(AQt x BSM%i x Bcmi)
Sales Variance Analysis:
45
Flexible Budget Variance
Sales Mix Variance
Market Share Variance Market Size Variance
Sales Quantity Variance
Sales Volume Variance
Static Budget Variance
13060 U
17370 F 30430 U
3870 U 26560 U
Level 4
Level 3
Level 1
Level 2
74700 U 48140 F
➢ Revenue allocation occurs when revenues are related to a particular
revenue object, but cannot be traced to it in an economically feasible way.
➢ Revenue objects
• products, customers, divisions
➢ Stand-alone
• revenue traced
➢ Bundled product
• revenue allocation issues
• stand-alone prices > bundled price
4. Revenue allocation and Bundled Products
46
➢ The stand-alone method - uses product-specific information on the bundle
of products to calculate the weights used to allocate the bundled revenues to
the individual products.
▪ “Stand-alone” refers to the product as a separate (non-bundled) item
▪ Allocation weights: product specific information (e.g., selling prices, unit costs, physical
units)
➢ The incremental method - ranks the individual products in a bundle
according to criteria determined by management.
• allocation based on rank
• primary product, first incremental product, second incremental product etc.
• If bundle selling price > stand alone price
• Primary product allocated 100% stand alone price
• Based on?
Revenue allocation Methods
47
Trio Company sells three products, Do, Ra, and Mi, for prices of $8, $7, and
$5, respectively. They also offer combinations of the products for reduced
overall prices.
If Trio Company uses the stand-alone method (based on selling prices) to
allocate revenues to products, the amount of revenues to be allocated to Do
from a package of all three products sold for $17 would be based on the
following price:
1. $8.00
2. $6.80
3. $5.95
4. $4.25
MCQ 6
Trio Company sells three products, Do, Ra, and Mi, for prices of $8, $7, and
$5, respectively. They also offer combinations of the products for reduced
overall prices.
If Trio Company uses the incremental method (based on selling prices) to
allocate revenues to products, and management determined that the primary
product is Ra, the amount of revenues to be allocated to Ra from a package of
all three products sold for $17 would be based on the following price:
1. $8.00
2. $7.00
3. $5.95
4. $5.00
MCQ 7
49
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