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Problem 15

How can the sales-quantity variance be decomposed further?

Expert verified
The sales-quantity variance can be decomposed further into sales mix variance and market size variance. The sales mix variance evaluates the impact of differences in the sales mix, calculated using the formula: $$(\text{Actual Quantity Percentage - Budgeted Quantity Percentage})\times \text{Budgeted Quantity} \times \text{Standard Contribution Margin}$$. The market size variance examines differences in the overall market size, calculated using the formula: $$(\text{Actual Total Quantity - Budgeted Total Quantity})\times \text{Budgeted Quantity Percentage} \times \text{Standard Contribution Margin}$$. The decomposition of the sales-quantity variance helps identify the factors contributing to the variance and evaluate the sales department performance.
See the step by step solution

Step 1: Understand Sales-Quantity Variance

Sales-quantity variance is the difference between the actual quantity of products sold and the budgeted quantity of products sold. It is used to evaluate how well the sales department has met sales volume targets, which can be affected by factors like sales mix and market size.

Step 2: Understand Sales Mix Variance

Sales mix variance is a part of the sales-quantity variance which calculates the impact of differences in the sales mix on the overall variance. It compares the proportion of products sold in different categories or price points against the budgeted proportions. If there is an imbalance in the sales mix compared to what was anticipated, it may result in a sales mix variance.

Step 3: Understand Market Size Variance

Market size variance is another part of the sales-quantity variance, which examines the differences in the overall market size as compared to the budgeted expectations. If the market is larger or smaller than anticipated, it can lead to a market size variance.

Step 4: Calculate Sales Mix Variance

To calculate the sales mix variance, use the following formula: Sales Mix Variance = $$(\text{Actual Quantity Percentage - Budgeted Quantity Percentage})\times \text{Budgeted Quantity} \times \text{Standard Contribution Margin}$$ The standard contribution margin is the difference between the selling price per unit and the variable cost per unit. Calculate this variance for each product or category.

Step 5: Calculate Market Size Variance

To calculate the market size variance, use the following formula: Market Size Variance = $$(\text{Actual Total Quantity - Budgeted Total Quantity})\times \text{Budgeted Quantity Percentage} \times \text{Standard Contribution Margin}$$ Calculate this variance for each product or category.

Step 6: Decompose Sales-Quantity Variance

Add up the sales mix variance and the market size variance for each product or category, to obtain the overall sales-quantity variance. The resulting decomposition of sales-quantity variance helps in understanding the performance of the sales department and the factors contributing to the variance.

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