Week 4 Revenue Analysis, Variances

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Week 4 - Revenue Analysis, Variances

• Chapter 16 - Revenues, Sales Variances, and
  Customer Profitability Analysis

2
Learning Objectives

• 1. Give examples of the bundling
• 2. Allocate the revenues of a bundled package to
  the individual products in that package
• 3. Provide additional information about the
  sales-volume variance by calculating the
  sales-mix and sales-quality variance
• 4. Provide additional information about the
  sales-quantity variance by calculating the
  market-share and market-size variance
• 5. Explain what information is pivotal to the
  reliability of market-share and market-size
  variance

3
Learning Objectives, continued

• 6. Discuss why revenues can differ across
  customers purchasing the same product.
• 7. Prepare a customer-profitability report
• 8. Apply the concepts of cost hierarchy to
  customer costing
• 9. Understand mix and yield variances for
  substitutable inputs
• 10. Management accounting profession
• 11. In-class assignment
• 12. Back-of-chapter exercises and problems
• 13. Sizzler Barbecue, case 24 of the casebook

4
Revenue Allocation

• Revenue allocation occurs when revenues, related
  but not traceable to individual products
  (services or customers), are assigned to
  individual products
• A bundled product is a package of two or more
  products or services, sold for a single price,
  each with their own stand-alone prices
• Bundled products are often called suite sales

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Bundled Products, Revenue Allocation

• selling prices
• unit costs
• physical units
• stand-alone product revenues
• incremental revenues

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Revenue Allocation Methods

• WordMaster
• 250

SpreadMaster 300
FinanceMaster 450
Suite price for all three products
760 Allocation based on Stand-Alone
Prices WordMaster 250 / (250 300 450) x
760 190 SpreadMaster 300 / (250 300
450) x 760 228 FinanceMaster 450 /
(250 300 450) x 760 342 760
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Sales Volume Variance

• Static Budget Variance

Flexible Budget Variance
Sales Volume Variance
SalesMix Variance
Sales Quantity Variance
Sales Volume Variance (actual unit sales -
budgeted unit sales) x budgeted contribution
margin per unit
Market Size Variance
Market Share Variance
Pages 558 - 559
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Sales-Mix and Sales-Quantity Variances

• Sales-mix variance
• Actual Actual Budgeted Budgeted
• units of all x sales - sales x contribution
• products sold mix mix per unit

Sales-quantity variance Actual Budgeted Budge
ted Budgeted units of all - units of
all x sales x contribution products
sold products sold mix per unit
Pages 561 - 563
9
Market-Share and Market-Size Variances

• Market-share variance
• Actual Actual Budgeted Budgeted avg
• market size x market - market x contribution
• in units share share per unit

Market-size variance Actual Budgeted Budgeted
Budgeted avg market size - market
size x market x contribution in units in
units share per unit
Pages 563 - 565
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Information Pivotal to the Reliability of
Market-Share and Market-Size Variances

• Market size and market share information is not
  always available
• When available, market size and market share
  information is often late in arriving and subject
  to estimates.
• Thus, market size and market share variances
  often need to be interpreted carefully.

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Customer Profitability Analysis

• Requires understanding the revenue and costs for
  customers or customer groups.
• Allows management to know which customers or
  customer groups to pursue, and under what prices
  .

Pages 566 - 571
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Customer Cost Analysis

• Consider profitability of individual customers
  taking into account the following hierarchy
• customer specific costs
• distribution channel costs
• customer support costs
• corporate sustaining costs
• Note, for manufacturing the hierarchy of costs
  was unit, batch, product-sustaining, and
  facility-sustaining.

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Selling-Related Activities, an example

• Order taking
• Sales visits
• Delivery vehicles
• Product handling
• Expedited deliveries
• These costs can vary by customer or customer
  group.

14
Customer-Profitability Analysis

• Customer revenue
• Less customer costs
• Equals customer specific contribution
• Rank customers by contribution maximize positive
  contributions.

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Assessing Customer Value

• Look at customers in terms of short-run and
  long-run profitability
• likelihood of retention
• growth potential
• increases in overall demand from well-known
  customers
• ability to learn from a customer

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Mix and Yield Variances for Inputs
Mix variance Actual Budgeted Actual
total Budgeted input x input x inputs x price
per mix mix used input unit
Yield variance Actual total Budgeted
total Budgeted Budgeted units of - units
of x input x price per input used inputs
used mix input unit
Pages 576 - 579
17
Management Accounting, Two Aspects

• One is management accounting as a professional
  designation.
• The other is management accounting as a set of
  practices.
• Source Chee W. Chow, president, 2000-2001,
  Management Accounting Section, American
  Accounting Association, Fall, 2000.

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Management Accounting, Changes

• With non-accounting employees increasingly taking
  on functions that had traditionally been
  considered part of management accountants
  domain,and management accountants getting more
  and more involved in what had traditionally been
  considered line responsibilities, whether there
  still is room for management accounting as a
  distinct professional designation may be worth
  discussion.

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Management Accounting, Changes Continued

• But regardless of the outcome of such discussion,
  it seem quite clear that the many functions
  traditionally attributed to management accounting
  practice - including measurement and
  interpretation - still will be performed within
  organizations, perhaps with even greater import
  and broader scope than before. Thus, I have no
  doubt about the continued relevance of our
  specialty. But I also believe that we need to
  examine how environmental, technological, and
  organizational changes are affecting the scope
  and nature of management accounting practices.

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In-class Assignment

• Case 9, Government Services
• Read in class
• What is the issue or what are the issues, why?
• Recommendations

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In-class Assignment, Continued

• Actual solution

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Back-of-chapter exercises and problems

• Exercises 16-16, 16-24, problem 16-34

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Sizzler Barbecue, case 24 of the casebook.

• The case will be read in class
• After each paragraph or exhibit a student will
  identify the issues
• Then the root issue will be determined through
  analysis

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Root Issue or Issues
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Analysis
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Recommendations
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The End