customer profitability analysis, sales performance ... · customer profitability analysis, sales...

©McGraw-Hill Ryerson Limited, 2001Irwin/McGraw-Hill Ryerson

18-1

Customer Profitability Analysis,Sales Performance Evaluation,

and Income Reporting

Student Tutorial

18


18-2

Chapter Organization

This chapter has been subdivided into threeindependent sections.

Click the section below that you wish to study,or press “Enter” to proceed linearly through

the chapter.!Customer Profitability Analysis"Sales Variance Analysis#Income Reporting Effects of Alternative

Product-Costing Approaches


18-3

Customer Profitability Analysis

Using ABC to determine the activities, costs,and profit associated with serving particular

customers.


customers.

For variousreasons, some

customers simplyare less profitable

than others.



than others.


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customers.


customers.



than others.



than others.

Customer makes frequentorder changes.

Customer needs specialparts.

Customer is difficult toplease.

For

Exa

mpl

e


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Once we know which customers are the leastprofitable, we can modify our relationship to

improve profitability.



I hate to do this, but we

just can’t continue doing

business with you.

Examples:Examples:


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We’ll send a team to your plantnext week and help you set up an

ordering system that gives usmore lead time.

Examples:Examples:


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If you ask forfewer changes,we can charge

you less!

Examples:Examples:


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$ Processing Orders$ Sales Contacts$ Sales Visits$ Processing Shipments

To determine customer profitability, Use ABCbased on the customer-related activity units

used by each customer in question.

To determine customer profitability, Use ABCbased on the customer-related activity units

used by each customer in question.

Typical Customer-Related Activities Include:

$ Billing$ Engineering/Design

Changes$ Special Packaging$ Special Handling


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Customer Profitability AnalysisExample

-$100,000

-$50,000

$0

$50,000

$100,000

$150,000

$200,000

107 108 101 102 114

Cus

tom

er P

rofi

tabi

lity

Customer #

Recall from the example in your text, KoalaCamp Gear looked at 5 customers.

Recall from the example in your text, KoalaCamp Gear looked at 5 customers.

Bar graphsare

commonanalytical

tools.


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Customer #


Note that attention should be focused oncustomer #102 and #114.

Note that attention should be focused oncustomer #102 and #114.

Question:

Why arecustomers#102 and#114 not

profitable?

-$100,000

-$50,000

$0

$50,000

$100,000

$150,000

$200,000

107 108 101 102 114

Cus

tom

er P

rofi

tabi

lity


18-11


Comparing the customer-related costs for eachcustomer to established “norms” should reveal

helpful insights.

Comparing the customer-related costs for eachcustomer to established “norms” should reveal

helpful insights.

For Customer #102, costsof order processing,engineering/design

changes, and specialhandling are above

normal.

For Customer #114,the cost of specialpackaging is 4× thenorm. The cost forspecial handling is

6× the norm.


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Product Life-Cycle CostsProduct Life-Cycle Costs include all costsincurred over all phases of a product’s life

cycle.

Product Life-Cycle Costs include all costsincurred over all phases of a product’s life

cycle.

!Product planning andconcept design.

"Preliminary design.#Detailed design and testing.%Production.&Marketing, distribution, and

customer service.


18-13

Let’s Lookat Sales

Variances.


18-14

Sales Variance Analysis

The company’s overall sales performance canbe analyzed two ways:

1. Focus on sales revenue by analyzing thevariance between actual and budgeted sales

revenue.

Or

2. Focus on contribution margin.

The company’s overall sales performance canbe analyzed two ways:

1. Focus on sales revenue by analyzing thevariance between actual and budgeted sales

revenue.

Or

2. Focus on contribution margin.


18-15

Sales Revenue Variance Analysis

Sales pricevariance

Sales mixvariance

Revenue marketsize variance

Revenue MarketShare Variance

Sales quantityvariance

Salesvolume variance

Revenue Budget Variance


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Revenue Budget VarianceRevenue budget

variance for product x

= (Actual sales revenue for product x

–

Budgeted sales

revenue for product x

)Example

Elf, Inc. sells artificial trees. Budgeted sales for2001 are 65,000 units @ $120. Koala actuallysold 69,000 trees at an average sales price of

$110.

Compute the Revenue Budget Variance.

Example

Elf, Inc. sells artificial trees. Budgeted sales for2001 are 65,000 units @ $120. Koala actuallysold 69,000 trees at an average sales price of

$110.

Compute the Revenue Budget Variance.


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Revenue Budget VarianceExample

$210,000 U = ( $7,590,000 – $7,800,000 )Because actual revenue < budgeted revenue,

the variance is UNFAVOURABLE.

Next, compute the sales price variance and thesales volume variance for the Tree Line Tents.

Because actual revenue < budgeted revenue,the variance is UNFAVOURABLE.

Next, compute the sales price variance and thesales volume variance for the Tree Line Tents.

Revenue budget

variance for product x

= (Actual sales revenue for product x

–

Budgeted sales

revenue for product x

)


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Sales Price VarianceModel

Sales price

variance for

product x

= (Actual sales

price for product x

–

Budgeted sales

price for product x

) ×

Actual sales

volume for

product x

The Sales Price Variance is a measureof how much of the total variance

results from the difference between theBUDGETED sales price and the

ACTUAL sales price.

The Sales Price Variance is a measureof how much of the total variance

results from the difference between theBUDGETED sales price and the

ACTUAL sales price.


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Sales Price VarianceExample

Elf’s budgeted sales for 2001 are 65,000 units@ $120. Koala actually sold 69,000 trees at

an average sales price of $110. What is Elf’sSales Price Variance.

A. $ 10 Unfavourable

B. $ 650,000 Unfavourable

C. $ 480,000 Unfavourable

D. $ 690,000 Unfavourable


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You are onthe right

track, but youneed to try

again!


18-21








Try again.Ask yourselfif you shouldmultiply byactual salesor budgeted

sales.

Try again.Ask yourselfif you shouldmultiply byactual salesor budgeted

sales.


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You are WAYoff base!

Look at themodel and

then tryagain.



then tryagain.


18-23









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Sales Price VarianceModel

Sales price

variance for

product x

= (Actual sales

price for product x

–

Budgeted sales

price for product x

) ×

Actual sales

volume for

product x


18-25

Sales Volume VarianceModel

Sales Volume

Variance = (

Actual unit sales volume

for product x

–

Budgeted unit sales volume

for product x

) ×

Budgeted sales

price for product x

This variance measures howmuch of the total revenue

variance is due to unit salesdiffering from budgeted unit

sales.


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Sales Volume VarianceExample


an average sales price of $110. What is Elf’sSales Volume Variance.

A. $ 4,000 favourable

B. $ 440,000 favourable

C. $ 480,000 favourable









18-27














You are onthe right

track, but youneed to try

again!


18-28














Try again. Askyourself if you should

multiply by actualprice or budgeted

price.

Try again. Askyourself if you should

multiply by actualprice or budgeted

price.


18-29
















then tryagain.



then tryagain.


18-30















18-31

Sales Volume VarianceModel

Sales Volume

Variance = (

Actual unit sales volume

for product x

–

Budgeted unit sales volume

for product x

) ×

Budgeted sales

price for product x


18-32

Sales Mix Variance

Sales Mix

Variance =

Budget sales price

× (Actual sales mix %

–Budget sales mix %

) ×Actual

total unit sales

Example - Refer to the text

Koala originally budgeted for Tree Line Tents tocomprise 60% of sales. By the end of the period,Tree Line Tents represented only 55% of sales.Total unit sales for the period was 55,000 units.

Example - Refer to the text

Koala originally budgeted for Tree Line Tents tocomprise 60% of sales. By the end of the period,Tree Line Tents represented only 55% of sales.Total unit sales for the period was 55,000 units.

For the Sales Mix Variance, sum the sales mixvariances for each product.



18-33

Sales Mix Variance

The variance is UNFAVOURABLE,because Tree Line Tents were a smaller

portion of total sales than originallyplanned.

The variance is UNFAVOURABLE,because Tree Line Tents were a smaller

portion of total sales than originallyplanned.

$495,000 U = $180 × ( 55% – 60% ) × 55,000

Sales Mix

Variance =

Budget sales price

× (Actual sales mix %

–Budget sales mix %

) ×Actual

total unit sales




18-34

Sales Quantity Variance

Example

Koala originally budgeted for Tree Line Tents tocomprise 60% of sales. Koala planned to sell

50,000 Tree Line Tents, but actually sold 55,000Tree Line Tents. Budgeted Sales Price is $180.

Example

Koala originally budgeted for Tree Line Tents tocomprise 60% of sales. Koala planned to sell

50,000 Tree Line Tents, but actually sold 55,000Tree Line Tents. Budgeted Sales Price is $180.


=Budget sales price

× (Actual

unit sales

–Budget

unit sales

) ×Budget Sales %

For the Sales Quantity Variance, sum the salesquantity variances for each product.



18-35



=Budget sales price

× (Actual

unit sales

–Budget

unit sales

) ×Budget Sales %



$540,000 F = $180 × ( 55,000 – 50,000 ) × 60%

The variance is FAVOURABLE, becauseTree Line Tents sold more units that

originally planned.

The variance is FAVOURABLE, becauseTree Line Tents sold more units that

originally planned.


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The resulting variance is favourable, orunfavourable, simply as a function of howthe industry, as a whole, did compared to

expectations.

The resulting variance is favourable, orunfavourable, simply as a function of howthe industry, as a whole, did compared to

expectations.

Revenue Market SizeVariance

Base the Revenue Market Size Variance ontotal production and budgeted market share.

Base the Revenue Market Size Variance ontotal production and budgeted market share.

Revenue market

size variance

=

Budget weighted avg. unit

sales price

× (Actual total

market unit

sales

–

Budget total

market unit

sales

) ×Budget market share %


18-37

Revenue Market Share Variance

Revenue market share

variance

=


sales price

× (Actual market share %

–Budget market share %

) ×

Actual total

market unit

sales

ExampleKoala’s budgeted market share is 5%.

However, Koala only achieved a marketshare of 4%. Weighted average unit sales

price for Koala’s three types of tents is$199. Total industry sales were 1,375,000

units.

ExampleKoala’s budgeted market share is 5%.

However, Koala only achieved a marketshare of 4%. Weighted average unit sales

price for Koala’s three types of tents is$199. Total industry sales were 1,375,000

units.


18-38

Koala’s market share isdown. This particular

variance is likely to be ofgreat concern to

management.

Revenue Market Share VarianceExample

Revenue market share

variance

=


sales price

× (Actual market share %

–Budget market share %

) ×

Actual total

market unit

sales

= $199 × ( 4% – 5% ) × 1,375,000

= $2,736,250 U


18-39


18-40

CM Variance Analysis

CM variance CM sales volume variance

CM Budget Variance

Each of these variances iscomputed the same way as its

revenue counterpart.

Use CM instead of sales price.





18-41


CM variance

CM sales mixvariance

CM Sales quantityvariance

CM sales volume variance

CM Budget Variance








18-42


CM variance

CM sales mixvariance

CM marketsize variance

CM MarketShare Variance

CM Sales quantityvariance

CM sales volume variance

CM Budget Variance








18-43

AbsorptionCosting

VariableCostingVs.

Income Reporting Effects ofAlternative Product-Costing

Approaches


18-44

COGS on IncomeStatement


Absorption Costing

Product cost includes both variable and fixedmanufacturing overhead, in addition to direct

materials (variable) and direct labour (variable).

Product cost includes both variable and fixedmanufacturing overhead, in addition to direct

materials (variable) and direct labour (variable).

Direct Material

Direct labour

ALL Mfg. O/H

Direct Material

Direct labour

ALL Mfg. O/H

WIPInventory

on Bal.Sheet

WIPInventory

on Bal.Sheet

FinishedGoods

Inventoryon Bal.Sheet

FinishedGoods


Costs

incurred

Goods

completed

Goods sold


18-45

Variable Costing

Variable costing uses only the variable portionof manufacturing overhead when computing

product cost.

Variable costing uses only the variable portionof manufacturing overhead when computing

product cost.



Direct Material

Direct labour

Variable Mfg.O/H

Direct Material

Direct labour

Variable Mfg.O/H

WIPInventory

on Bal.Sheet

WIPInventory

on Bal.Sheet

FinishedGoods


FinishedGoods


Costs

incurred

Goods

completed

Goods sold


18-46

Costs

incurredExpenses on Income

Stmt.

Expenses on IncomeStmt.

Variable Costing

With Variable Costing, the Fixed manufacturingoverhead is charged directly to expenses on

the income statement.

With Variable Costing, the Fixed manufacturingoverhead is charged directly to expenses on

the income statement.

FixedManufacturing

Overhead

FixedManufacturing

Overhead


18-47

Alternative Product-Costing

Koala Cooking Gear needs to know how netincome would differ under absorption costing

and variable costing. Use the information in thefollowing table to prepare income statements for

both absorption costing and variable costing.

Koala Cooking Gear needs to know how netincome would differ under absorption costing

and variable costing. Use the information in thefollowing table to prepare income statements for

both absorption costing and variable costing.

Absorption costing will often resultin different net income than variable

costing. Remember, the onlydifference is in how we treat FIXED

manufacturing overhead.


18-48

Production and Inventory data:Beginning Inventory 0Units Produced 18,000Units Sold 13,500Ending Inventory 4,500

Revenue and Cost data:Sales Price per Unit $34Direct Material Cost per Unit $12Direct Labour Cost per Unit $4Variable Manufacturing Overhead per Unit $7Variable SG&A $3Fixed Manufacturing Overhead $81,000Fixed SG&A $45,000

Alternative Product-CostingExample


18-49

Absorption CostingExample

Budgeted annual fixed

overhead

÷Planned annual

production =

Fixed Overhead

Rate

$81,000 ÷ 18,000 = $4.50

Step 1: Compute Fixed Overhead Rate per Unit of Production


18-50


Direct Materials Cost per Unit $12.00Direct Labour Cost per Unit 4.00Variable Overhead Cost per Unit 7.00Fixed Overhead Cost per Unit* 4.50TOTAL COST PER UNIT** $27.50

* Computed in Step 1

** Use to prepare Income Statem ent

Step 2: Compute Absorption Cost per Unit


18-51


Revenue ( 13,500 × $34.00 ) 459,000$ COGS ( 13,500 × $27.50 ) (371,250) Gross Margin 87,750$ SG& A Expenses Variable ( 13,500 × $3.00 ) (40,500) Fixed (45,000) NET INCOME 2,250$

Koala Cooking GearAbsorption Costing Income Statement


18-52

COGS includes only part ofthe fixed overhead incurred

during the period.


Revenue ( 13,500 × $34.00 ) 459,000$ COGS ( 13,500 × $27.50 ) (371,250) Gross Margin 87,750$ SG& A Expenses Variable ( 13,500 × $3.00 ) (40,500) Fixed (45,000) NET INCOME 2,250$

Koala Cooking GearAbsorption Costing Income Statement


18-53

Variable CostingExample

Revenue ( 13,500 × $34.00 ) 459,000$ COGS ( 13,500 × $23.00 ) (310,500)$ Variable SG&A ( 13,500 × $3.00 ) (40,500) Contribution Margin 108,000$ Fixed Expenses SG&A (45,000) Mfg. Overhead (81,000) NET INCOME (18,000)$

Koala Cooking GearVariable Costing Income Statement


18-54

Includes directmaterial ($12), direct

labour ($4) andvariable overhead ($7)





18-55

This includesALL the fixed

overhead for theperiod.





18-56

Absorption vs. Variable CostingReconciling Income

Period-to-Period Income Comparison Income Comparison

No Change in Inventory Absorption = VariableIncrease in Inventory Absorption > VariableDecrease in Inventory Absorption < Variable

Difference in Fixed Overhead Expensed

Under Absorption and Variable Costing

Methods

=Change in Inventory

Units×

Predetermined Fixed-Overhead

Rate Per Unit


18-57

End of Chapter 18

I can’t standit anymore!

Please makeit stop!

customer profitability analysis, sales performance ... · customer profitability analysis, sales...

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