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Good Afternoon John,
Please would you be able to explain simply and briefly how market size and market share variances work and how they may have a similar process to the other variances you have covered in your lectures? Do you think these types of questions are likely to come up in the exam as full essay question?
I am currently looking at the following question:
Leaf Limited has had a mixed year. Its market share has improved two percentage points to 20% but the overall market had contracted by 5% in the same period. The budgeted sales were $504,000 units and the standard contribution was $12 per unit.
Q137 What is the actual level of sales?
For this question the answer was “Up a little over five and a half percent to 132,000 units but I did have not managed to calculate this answer. I have always calculated 531,997.2. Can i assume in this situation that I can check the answers and pick the answer closest to what I have calculated if it is a multiple choice question? If it is not, how do I go about this? I assume as long as the calculation appears to be correct and I have some clue about what I am doing I may still be able to gain some marks.
Q138 The sales market variance is: Here the answer is 302400A.
Please can you also explain how? I apologise if the answer is obvious. I just cannot seem to get my head around the logic of this as variances are probably my weakest topic.
Thank you in advance.
For the first question, either you have not copied the question or answer completely correctly or Kaplans answer is wrong (I do not have the Kaplan book so I cannot check).
The reason is that we need to know what the budgeted sales units are. If it is 504,000 units, then the answer cannot possibly be 132,000 units. If it is $504,000 then we do not know the budget units because we do not know the standard selling price.
However, if it is 504,000 units, the workings are as follows:
The market share was 18% (20% – 2%) and since it has grown to 80% it means that the sales would be 20/18 x 504,000 = 560,000 units
However since the market has contracted by 5% this would reduce the actual sales to 95% x 560,000 = 532,000 units.For the second question, I think they must have actually asked for the market share variance.
If so, then this is the difference between what they would have sold if the market share had stayed at 18% and what they actually sold with a share of 20%.They actually sold 532,000 (as above). This is with a 20% share. If the share had only been 18% then they would have sold 18/20 x 532,000 = 478,800 units. A difference of 53,200 units. So the actual variance is 53,200 x $12 per unit = $638,400 favourable.
(If, on the other hand, they wanted the market size variance, then you would have ignored the change in market share and assumed for this bit that it stayed at 18%.
The budget sales were 504,000 units. The actual sales (ignoring change in market share) would have been 478,800 (as above). Therefore the variance is (504,000 – 478,800) x $12 = 302,400 adverse.)This sort of question could be asked in either Section A or Section B, although it is not the sort of question she is likely to ask very often.
Obviously if it is asked in either section you will hopefully get the right answer. In Section A there are no marks for workings, and so if you don’t get the right answer then guess – firstly it should be obvious whether it is favourable or adverse (which means only 2 to guess from) and then choose the nearest to your answer – you will probably then get the correct answer 🙂
If it is in Section B, then the marks are for the workings rather than for getting the correct answer. So make sure you show your workings clearly. Even if you do something wrong you will still get marks for the bits you did correctly.
Even just stating that it will be adverse of favourable (which should be obvious) will get marks – even if you get all the numbers wrong 🙂Hi John,
Thank you once again. I did copy the answer wrong – it was 532,000. Sorry!
And once again Q137 and Q138 make complete sense to me now.
Practice, practice, practice before Wednesday and I’m confident I can get this question right if it comes up in the exam.
I would be lost without Open Tuition!
🙂
Dear John,
I have seen this topic in BPP Passcard. Should I assume this topic to be highly examinable in the exam (in the syllabus, the examinable point is ‘variance analysis’ but further details are about mix/yeild variances)?
Thanks a lot!
Why do you want to assume it is highly examinable. It has been asked once in the exam. If you read my previous reply you will see that it is not something she is likely to ask often.
It is effectively applying the planning and operational variances approach to sales.
Dear John,
Sorry for inconvenience caused. I have been exempted from F2 so I have not been aware the linkage between F2 and F5.
Thanks a lot!
Am sorry but when finding actual sales,I don’t get why you divide 20% by 18% and multiplied by 504000 units.I am so off.
ThxThe budgeted on selling 504,000 units and on this being 18% share of the market.
That means that the total sales in the market as a whole were expected to be 504,000 / 18% = 2,800,000 units.
They actually had a market share of 20%, and so if the total sales in the market were 2,800,000 units then their sales would be 20% x 2,800,000 = 560,000 units
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