The customer-profitability analysis in the previous section focused on the actual prof- itability of individual customers within a distribution channel (retail, for example) and their effect on Spring Distribution’s profitability for June 2012. At a more-strategic level, however, recall that Spring operates in two different markets: wholesale and retail. The operating margins in the retail market are much higher than the operating margins in the wholesale market. In June 2012, Spring had budgeted to sell 80% of its cases to wholesalers and 20% to retailers. It sold more cases in total than it had bud- geted, but its actual sales mix (in cases) was 84% to wholesalers and 16% to retailers. Regardless of the profitability of sales to individual customers within each of the retail and wholesale channels, Spring’s actual operating income, relative to the master budget, is likely to be positively affected by the higher sales of cases and negatively affected by the shift in mix away from the more-profitable retail customers. Sales-quantity and sales-mix variances can identify the effect of each of these factors on Spring’s profitabil- ity. Companies such as Cisco, GE, and Hewlett-Packard perform similar analyses because they sell their products through multiple distribution channels like the Internet, over the telephone, and retail stores.
Spring classifies all customer-level costs as variable costs and distribution-channel and corporate-sustaining costs as fixed costs. To simplify the sales-variances analysis and cal- culations, we assume that all of the variable costs are variable with respect to units (cases) sold. (This means that average batch sizes remain the same as the total cases sold vary.) Without this assumption, the analysis would become more complex and would have to be done using the ABC-variance analysis approach described in Chapter 8, page 281–285. The basic insights, however, would not change. Recall that the levels of detail introduced in Chapter 7 (pages 230–233) included the static-budget variance (level 1), the flexible-budget variance (level 2), and the sales- volume variance (level 2). The sales-quantity and sales-mix variances are level 3 vari- ances that subdivide the sales-volume variance.
The static-budget variance is the difference between an actual result and the correspon- ding budgeted amount in the static budget. Our analysis focuses on the difference between actual and budgeted contribution margins (column 6 in the preceding tables). The total static-budget variance is $18,960 U (actual contribution margin of $504,360 – budgeted contribution margin of $523,320). Exhibit 14-9 (columns 1 and 3) uses the columnar format introduced in Chapter 7 to show detailed calculations of the static- budget variance. Managers can gain more insight about the static-budget variance by subdividing it into the flexible-budget variance and the sales-volume variance.
The flexible-budget variance is the difference between an actual result and the corre- sponding flexible-budget amount based on actual output level in the budget period. The flexible budget contribution margin is equal to budgeted contribution margin per unit times actual units sold of each product. Exhibit 14-9, column 2, shows the flexible- budget calculations. The flexible budget measures the contribution margin that Spring would have budgeted for the actual quantities of cases sold. The flexible-budget vari- ance is the difference between columns 1 and 2 in Exhibit 14-9. The only difference between columns 1 and 2 is that actual units sold of each product is multiplied by actual contribution margin per unit in column 1 and budgeted contribution margin per unit in column 2. The $7,200 U flexible-budget variance arises because actual contri- bution margin on retail sales of $0.93 per case is lower than the budgeted amount of $0.98 per case. Spring’s management is aware that this difference of $0.05 per case resulted from excessive price discounts, and it has put in place action plans to reduce discounts in the future.
The sales-volume variance is the difference between a flexible-budget amount and the corresponding static-budget amount. In Exhibit 14-9, the sales-volume variance shows the effect on budgeted contribution margin of the difference between actual quantity of units sold and budgeted quantity of units sold. The sales-volume variance of $11,760 U is the difference between columns 2 and 3 in Exhibit 14-9. In this case, it is unfavorable overall because while wholesale unit sales were higher than budgeted, retail sales, which are expected to be twice as profitable on a per unit basis, were below budget. Spring’s managers can gain substantial insight into the sales-volume variance by subdividing it into the sales-mix variance and the sales-quantity variance.
The sales-mix variance is the difference between (1) budgeted contribution margin for the actual sales mix and (2) budgeted contribution margin for the budgeted sales mix.
A favorable sales-mix variance arises for the wholesale channel because the 84% actual sales-mix percentage exceeds the 80% budgeted sales-mix percentage. In contrast, the retail channel has an unfavorable variance because the 16% actual sales-mix percentage is less than the 20% budgeted sales-mix percentage. The sales-mix variance is unfavorable because actual sales mix shifted toward the less-profitable wholesale channel relative to budgeted sales mix.
The concept underlying the sales-mix variance is best explained in terms of compos- ite units. A composite unit is a hypothetical unit with weights based on the mix of indi- vidual units. Given the budgeted sales for June 2012, the composite unit consists of 0.80 units of sales to the wholesale channel and 0.20 units of sales to the retail channel.
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