How can the concept of a composite unit be used to explain why an unfavorable total sales mix variance of contribution margin occurs?
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Show CHAPTER 14 COST ALLOCATION, CUSTOMER-PROFITABILITY ANALYSIS, AND SALES-VARIANCE ANALYSIS 14-1Disagree. Cost accounting data plays a key role in many management planning and control decisions. The division president will be able to make better operating and strategy decisions by being involved in key decisions about cost pools and cost allocation bases. Such an understanding, for example, can help the division president evaluate the profitability of different customers. 14-2The salary of a plant security guard would be a direct cost when the cost object is the security departmentof the plant. It would be an indirect cost when the cost object is a product. 14-3 Exhibit 14-1 outlines four purposes for allocating costs: 1. To provide information for economic decisions. 2. To motivate managers and employees. 3. To justify costs or compute reimbursement. 4. To measure income and assets for reporting to external parties. 14-4Exhibit 14-2 lists four criteria used to guide cost allocation decisions: 1. Cause and effect. 2. Benefits received. 3. Fairness or equity. 4.Ability to bear. The cause-and-effect criterion and the benefits-received criterion are the dominant criteria when the purpose of the allocation is related to the economic decision purpose or the motivation purpose. 14-5Using the levels approach introduced in Chapter 7, the sales-volume variance is a Level 2 variance. By sequencing through Level 3 (sales-mix and sales-quantity variances) and then Level 4 (market-size and market-share variances), managers can gain insight into the causes of a specific sales-volume variance caused by changes in the mix and quantity of the products sold as well as changes in market size and market share. 14-6The total sales-mix variance arises from differences in the budgeted contribution margin of the actual and budgeted sales mix. The composite unit concept enables the effect of individual product changes to be summarized in a single intuitive number by using weights based on the mix of individual units in the actual and budgeted mix of products sold. 14-7A favorable sales-quantity variance arises because the actual units of all products sold exceed the budgeted units of all products sold. 14-8The sales-quantity variance can be decomposed into (a) a market-size variance (because the actual total market size in units is different from the budgeted market size in units), and (b) a market share variance (because the actual market share of a company is different from the budgeted market share of a company). Both variances use the budgeted average contribution margin per unit. 14-1 Why a favorable sales quantity variance occurs?A favorable sales-quantity variance arises because the budgeted units of all products sold exceed the actual units of all products sold.
How do you explain sales mix variance?Sales mix variance is the difference between a company's budgeted sales mix and the actual sales mix. Sales mix is the proportion of each product sold relative to total sales. Sales mix affects total company profits because some products generate higher profit margins than others.
What criteria might be used to justify cost allocation decisions which are the dominant criteria?The cause-and-effect criterion and the benefits-received criterion are the dominant criteria when the purpose of the allocation is related to the economic decision purpose or the motivation purpose.
How does variance analysis help in continuous improvement?Variance analysis, by providing information about actual performance relative to standards, can form the basis of continuous operational improvement. The underlying causes of unfavorable variances are identified and corrective action taken where possible.
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