Lecture_11_Revenue_Variances

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					ACCG404 – Lecture 11

Revenue Measurement & Revenue Variances

Lecture Objectives
• Revenue Analysis Revenue Tracing Broad Averaging Via Peanut Butter Revenue Adjustments • Revenue Allocation • Revenue and Sales variances Flexible Budget Variance & Sales Volume Variance Sales VOLUME variance broken down into Sales Mix & Sales Quantity variances Sales QUANTITY variance broken down into Market Share and Market Size variances

Introduction
This lecture deals with REVENUES. Revenues are the lifeblood of most organisations. Companies that prosper make revenue planning and revenue analysis centre stage in how managers allocate their energies. This lecture covers two major areas: 1. 2. Revenue Measurement and Analysis. Revenue and Sales-Mix Analysis.

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Revenue Analysis
Revenues are inflows of assets received in exchange for products or services provided to customers.

Revenue tracing

occurs when revenues can be identified with an individual, product (service or customer, etc.) in an economically feasible (cost effective) way.

Revenue allocation occurs when revenues, related but not traceable to individual products, services, customers etc.) are assigned to those individual products.

Revenue tracing results in a more accurate assignment of revenues to products than does revenue allocation.

Revenue Tracing
The broad averaging of revenue related items across individual products can result in inaccurate revenue amounts being assigned to individual products. By investing in information systems that trace as many revenue items as possible to individual products, managers are able to increase the accuracy of reported product revenues and hence the accuracy of reported profits. Companies that make sales returns adjustments based on broad averaging via peanut butter revenue adjustments reduce the accuracy of the individual product revenue amounts they report.

Broad averaging will result in the under – or overstatement of product revenues.

Revenue Allocation
Revenue allocation problems arise in situations where companies sell BUNDLED PRODUCTS. Bundled Products where two or more products or services, are sold for a single price, where the individual components of the bundle may also be sold as separate items, each with their own standalone price. Microsoft Office – comprising Excel, Word, Access etc., bundled and unbundled price.

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There are two main classes of revenue allocation methods:

1.

Stand Alone Revenue Allocation Method
This method uses product specific information pertaining to products contained in the bundle to determine the weights used to allocate the bundled revenues to individual products. The term stand-alone refers to the product as a separate (non-suite) item.

2.

Incremental Revenue Allocation Method
This method ranks the individual products in a bundle and then uses this ranking to allocate the bundled revenues to the individual products. The first ranked product is termed the primary product and so on. How are rankings decided: 1. 2. 3. Customer surveys Sales history of individual products Management discretion.

Illustrative Example:

Revenue Allocation – Bundled Products

Consider the following bundled package of products: Selling Price $2,500 500 $2,800 Cost $900 $100

Product 1: Product 2:

Laptop Computer 2 year Service Contract Revenue (bundled product – laptop + service)

The Service contract is carried out by independent contract centers. Question? How much of the revenue should go to the retailer and how much should be allocated to the Independent Service Centre using: 1. 2. Stand Alone Revenue Allocation Method Incremental Revenue Allocation Method

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Revenue and Sales Variances
Revenue analysis using variance techniques provides a detailed insight into the reasons behind the difference between ACTUAL REVENUES and BUDGETED REVENUES. The variance analysis comprises:

Level 1

Static Budget Variance

Level 2

Flexible Budget Variance

Sales Volume Variance

Level 3

Sales MIX Variance

Sales QUANTITY Variance

Level 4

Market SIZE Variance

Market SHARE Variance

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Illustrative Example 1:
The following information relates to the operations of GB Company, a retailer of Gloves and Belts.

BUDGETED DATA for 2000
Product Unit Sell Price Unit Variable Unit Sales Volume Cost Contribution In Units Margin $16.00 $12.00 $4.00 2,000 $20.00 $12.00 $8.00 3,000 5,000 Sales Mix Total Based on Contribution Units Margin 40% $8,000 60% $24,000 $32,000

Gloves Belts

ACTUAL DATA for 2000
Product Unit Sell Price Unit Variable Unit Sales Volume Cost Contribution In Units Margin $17.00 $12.00 $5.00 3,000 $18.00 $12.00 $6.00 1,000 4,000 Sales Mix Total Based on Contribution Units Margin 75% $15,000 25% $6,000 $21,000

Gloves Belts

Industry Statistics
Gloves Belts

Budgeted Industry Size 12,500 10,000 22,500

Actual Industry Size 6,000 5,000 11,000

Required:
Using the above information, you are required to calculate: (i) (ii) (iii) (iv) Static Budget Variance Flexible Budget (Price) and Sales Volume Variances Sales Mix and Sales Volume Variance Market Share and Market Size variance Variances are to be reported for individual products and in total.

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Static Budget Variance – Level 1
The static Budget Variance for revenues is the difference between the actual revenues and the budgeted revenues from the static budget.
Product Actual Contribution Margin Static Budget Contribution Margin Static Budget VARIANCE (F) or (U)

Gloves Belts

Actual Contribution Margin

Budget Contribution Margin

Static Budget Variance

The static budget variance may be broken down into: 1. 2. Flexible Budget Variance Sales Volume Variance

to provide more insight into the variance as it relates to the revenues generated by the individual product groups.

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Flexible Budget and Sales Volume Variances – Level 2
The flexible budget simply restates actual sales quantity at budget prices and when compared to: 1. 2. Actual Sales at Actual Prices will yield a FLEXIBLE BUDGET VARIANCE Static Budget Sales at Budget Prices will yield a SALES VOLUME VARIANCE.

The following template will be used to calculate these variances:
Actual Sales Units * Actual Cont Margin Actual Results
Unit Cont. Margin Gloves Belts Total Unit Volume

Actual Sales Units * Budgeted Cont. Margin Flexible Budget

Static Budget Sales Units * Budget Cont. Margin Static Budget for August
Unit Volume Total Contribution Margin

Total Budgeted Actual Cont. Volume Contribution Margin. Margin

Total Unit Cont. Margin Contribution Margin

Flexible Budget Variance

Sales Volume Variance

Static Budget Variance

The FLEXIBLE BUDGET VARIANCE provides information about fluctuations in the UNIT SELLING PRICES.

The SALES VOLUME VARIANCE provides information about the PHYSICAL QUANTITY OF PRODUCTS sold. More information on revenue analysis is obtained by further analysing the SALES VOLUME VARIANCE and breaking it down into: 1. 2. Sales-Mix Variance Sales Quantity Variance

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The Sales Mix and Sales Quantity Variance – Level 3
The sale mix and sales quantity variances require the calculation of a COMPOSITE or AVERAGE CONTRIBUTION MARGIN at the original Static Budget Quantity, which is calculated as follows:
Product Static Budget for August Unit Contribution Margin Gloves Belts Unit Volume Contribution Margin

Composite Average Cont Margin = ($32,000 ÷ 5,000)

The following template will be used to calculate the SALES MIX and SALES QUANTITY variances.

Actual Sales Units * Budget Cont. Margin Flexible Budget for August
Budgeted Cont. Margin Gloves Belts Total Actual Volume Total Cont. Margin

Actual Sales Units * Composite Cont. Margin COMPOSITE C.M
Composite Cont. Margin Actual Volume Revenue

Static Budget Sales Units * Budget Cont. Margin Static Budget for August
Static Unit Volume Budget Cont Margin Revenue

Sales Mix Variance

Sales Quantity Variance

Sales Volume Variance

The SALES MIX VARIANCE provides information about the mix of products sold: ♦ If FAVOURABLE, a greater number of higher priced products were sold than originally budgeted ♦ If UNFAVOURABLE, more lower priced products were sold than originally planned.

The SALES QUANTITY VARIANCE simply tells us whether more units of product were sold than originally planned. If actual total sales units exceed budgeted total sales units, the variance is favourable.

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Actual Sales Units (Total of all products) Static Budget Unit Sales (Total of all products) Unfavourable Sales Quantity Composite Contribution Margin UNFAVOURABLE Sales Quantity Variance

= =

4,000 5,000 1,000 $6.40 $6,400U

More information on revenue analysis is obtained by further analysing the SALES QUANTITY VARIANCE and breaking it down into: 1. 2. Market Share Variance Market Size Variance

Market Size and Market Share Variances – Level 4
The original data relating to market information is repeated for convenience here: Industry Statistics: Product Gloves Belts Total Budgeted Industry Volume 12,500 10,000 22,500 Actual Industry Volume 6,000 5,000 11,000

Additional information required for the analysis is as follows: Composite Unit Contribution Margin $6.40 Budgeted Market Share Actual Market Share
Actual Market Size * Actual Market Share %age * Composite Contribution Margin

= =

5,000 ÷ 22,500 4,000 ÷ 11,000

= =

22.22% 36.36%
Budgeted Market Size * Budgeted Market Share %age * Composite Contribution Margin

Actual Market Size * Budgeted Market Share %age * Composite Contribution Margin

Market Share Variance

Market Size Variance

Total Sales Quantity Variance

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From the above analysis it is possible to conclude that: 1. Our company GAINED market share (going from a budgeted market share of 22.22% to an actual market share of 36.36%) and this increased the company’s contribution margin by $9,957. The overall market decreased by 51.11% (as measured in average unit sales, from 22,500 to 11,000) and the company lost an amount of $16,357, due to the decrease in market size which is represented by the market size variance.

2.

Not all industries publish market size and as a result it is difficult for companies to estimate market share. In those instances, the market size and market size variances are not calculated. A summary of the revenue variances follows:
Static Budget Variance $11,000 U

Level 1:

Level 2:

Flexible Budget Variance $1,000 F

Sales Volume Variance $12,000 U

Level 3:

Sales MIX Variance $5,600 U

Sales QUANTITY Variance $6,400U

Level 4:

Market SHARE Variance $9,957 F

Market SIZE Variance $16,357 U

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Homework Exercises
Question 1:
Atlantis Tours is located in Hong Kong. The company sells vacation travel packages. A travel package is comprised of: Air ravel Lodging Bus tour Each of the three revenue components of travel packages is the responsibility of a different manager. One of Atlantis’s most popular travel packages is the three day, two person “Love in Taipai” package priced at $849.00. This package includes: Two round trip airline tickets to Taipai – separately priced at $330.00 per person. Three nights accommodation – separately priced at $130.00 per night for two. Three day sight-seeing bus tour – separately priced at $125.00 per person. Required: Allocate the $849.00 Taipai package revenue to the three components of the travel package using: (a) (b) The stand alone revenue allocation method. The incremental revenue allocation method (with the bus tour as the primary product, lodging as the 1st incremental product and air travel as the 2nd incremental product.

Question 2:
Software For You encounters revenue-allocation decisions with its bundled product sales. Here, two or more units of the software are sold as a single package. Managers at Software For You are keenly interested in individual product-profitability figures. Information pertaining to its three bundled products and the standalone prices of its individual products is as follows: Stand-Alone Sales Price Word Processing (WP) 125 125 125 SpreadSheet (SS) $150 --150 Accounting Software (AS) --$225 225

Package WP & SS WP & AS All three

Package Price $220 280 380

The unit inventory costs is $18, $20, and $25 for WP, SS, and AS, respectively.

Required: a. b. What is the gross profit per unit for each software under each package using the stand-alone revenue-allocation method? What is the gross profit per unit for each software under each package using the incremental revenueallocation method? Assume the primary product is WP and the secondary product is SS.

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Question 3:
The Omega Corporation manufactures two types of vacuum cleaners- the House Helper for residences, and the ZENITH for commercial building use. Budgeted and actual operating data for the year 2001 were as follows:

Static Budget Zenith House-Helper Number sold Contribution margin 15,000 $3,750,000 60,000 $12,000,000

Total 75,000 $15,750,000

Actual Results Zenith House Helper Number sold Contribution margin 16,500 $6,200,000 38,500 $10,200,000

Total 55,000 $16,400,000

Prior to the beginning of the year, a consulting firm estimated the total volume for vacuum cleaners of the Zenith and House Helper category to be 300,000 units, and actual industry volume was 275,000 units.

Required: (a) (b) Calculate the Static Budget Variance for each product and in total. Break down the static budget variance into the Flexible Budget Variance and the Sales Volume Variance for each product and in total. Break down the Sales Volume Variance into the Sales Mix Variance and the Sales Quantity Variance for each country and in total. Compute the market-share and market size variance.

(c)

(d)

Question 4:
Quality-Bike, Inc., manufactures two products, city-bikes (CB) and mountain-bikes (MB), and sells them to wholesalers (WS) and retailers (RT). The marketing departments provides the following data for the second quarter 1999: Budget List Price Unit Volume $160 2,800 $200 1,200 Actual avg. net selling price $133.12 $168.00

Product: City-bike Mountain-bike

Unit Volume 2,000 1,200

Required: a) Compute the Static Budget variance by product and in total. b) c) Compute the individual product and total flexible budget and sales-volume variances for Quality-Bike, Inc. Compute the individual product and total sales-quantity and sales-mix variances for Quality-Bike, Inc.

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Question 5:
Vista Productions markets movies on behalf of independent production companies. It is currently examining the results for Road Warrior, an action movie made in Australia. Vista has marketing rights in three countries. The budgeted and actual results for these five countries for 1998 are as follows:

Budget for 1998 Country Canada Japan New Zealand Revenue Per Person $2.00 $2.80 $1.80 Tickets Sold 1,800,000 1,200,000 500,000

Actual for 1998 Revenue Per Person $2.05 $3.10 $1.90 Tickets Sold 2,160,000 1,650,000 1,440,000

Required:
(a) (b) Calculate the Static Budget Variance for each country and in total for the Road Warrior movie. Break down the static budget variance into the Flexible Budget Variance and the Sales Volume Variance for each country and in total. Break down the Sales Volume Variance into the Sales Mix Variance and the Sales Quantity Variance for each country and in total. What conclusions do you draw from your analysis of requirements (a) to (c).

(c) . (d)

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Templates for analysis
Static Budget Variance – Level 1
Product Actual Contribution Margin Static Budget Contribution Margin Static Budget VARIANCE (F) or (U)

Actual Contribution Margin

Budget Contribution Margin

Static Budget Variance

Flexible Budget and Sales Volume Variances – Level 2
Actual Sales Units * Actual Cont Margin Actual Results
Unit Cont. Margin Unit Volume

Actual Sales Units * Budgeted Cont. Margin Flexible Budget

Static Budget Sales Units * Budget Cont. Margin Static Budget for August
Unit Volume Total Contribution Margin

Total Budgeted Actual Contribution Cont. Volume Margin. Margin

Total Unit Cont. Contribution Margin Margin

Total

Flexible Budget Variance

Sales Volume Variance

Static Budget Variance

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The Sales Mix and Sales Quantity Variance – Level 3
Product Static Budget for August Unit Contribution Margin Unit Volume Contribution Margin

Composite Average Cont Margin = ($32,000 ÷ 5,000)

Actual Sales Units * Budget Cont. Margin Flexible Budget for August
Budgeted Cont. Margin Gloves Belts Total Actual Volume Total Cont. Margin

Actual Sales Units * Composite Cont. Margin COMPOSITE C.M
Composite Cont. Margin Actual Volume Revenue

Static Budget Sales Units * Budget Cont. Margin Static Budget for August
Static Unit Volume Budget Cont Margin Revenue

Sales Mix Variance

Sales Quantity Variance

Sales Volume Variance

Market Size and Market Share Variances – Level 4
Actual Market Size * Actual Market Share %age * Composite Contribution Margin Actual Market Size * Budgeted Market Share %age * Composite Contribution Margin Budgeted Market Size * Budgeted Market Share %age * Composite Contribution Margin

Market Share Variance

Market Size Variance

Total Sales Quantity Variance


				
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