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In the following question could you please explain why the sales volume operational variance has been calculated using the revised budget sale found by adjusting original standard to market size % decrease, according to my knowledge shouldn’t the revised budget sales of 4750 be taken for operational variance calculated by taking market share % decrease into consideration.
PG budgeted sales for 20X8 were 5,000 units. The standard contribution is $9.60 per unit. A recession in 20X8 meant that the market for PG’s products declined by 5%. PG’s market share also fell by 3%. Actual sales were 4,500 units. Calculate planning and operational variances for sales volume.
in the BPP book they have solved the above question as follows:
Planning variance
Units
Original budgeted sales 5,000
Revised budget sales (–5%) 4,750
250 @ Contribution per unit of $9.60 $2400 A
Operational variance
Units Revised budget sales 4,750
Actual sales 4,500
250
@ Contribution per unit of $9.60 $2,400 ANo. The answer is correct.
The size of the market is outside the control of the company and so this is a planning variance. We therefore revise the budget for the change in the market size.
The market share is under the control of the company and so changes in the market share is the operational variance.
Could you please explain why they are not using the market share as the revised budget for the operational variance?
Because market share is something that is under the control of the company and is therefore operational.
The overall size of the market is not something that they control, and is therefore a planning variance.
This comment is in under the answer of this question in BPP text.
The fall in MARKET SIZE is uncontrollable by management of PG and therefore results in PLANNING variance. The fall in MARKET SHARE is controllable and forms part of the OPERATIONAL variance.
This is the part I don’t understand “The fall in MARKET SHARE is controllable and forms part of the OPERATIONAL variance”
I understand how market share fall is caused by operation. But I thought the “market share fall = operational variance”, but thet is not the case as they are saying marketshare fall is only one part of operational variance. So can you help me with it Sir.
What they mean is that although the calculations here are all related to the sales variances, and it is the market share variance that is controllable, there will be other operation variances relating to the costs that will be operational variances (although obviously you are not expected to calculate them for this question).
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