Advanced operating and planning variances - Market size and ...

Learning Outcomes

After reading this article, you will be able to distinguish between market size and market share sales volume variances, calculate each, and interpret their results in performance reporting. You will also learn how these advanced variances improve the analysis of planning versus operational performance and understand their implications for evaluating sales teams and business planning.

ACCA Advanced Performance Management (APM) Syllabus

For ACCA Advanced Performance Management (APM), you are required to understand how advanced variances can provide meaningful information in sales performance management. In particular, focus your revision on:

• The calculation and purpose of market size and market share sales variances
• How to distinguish planning and operational performance using advanced variances
• Evaluating the impact of external market changes versus internal sales efforts
• The application of these variances in the context of strategic and operational control

Test Your Knowledge

Attempt these questions before reading this article. If you find some difficult or cannot remember the answers, remember to look more closely at that area during your revision.

1. Which variance isolates the effect of changes in total market demand on a company's sales?
   1. Sales price variance
   2. Market size variance
   3. Market share variance
   4. Material mix variance

2. True or false? A favourable market share variance always implies overall market growth.

3. Explain in one sentence why analysing market size and market share variances offers more understanding than using only a traditional sales volume variance.

4. If a firm's actual market share increases, but total market volume decreases, what likely happens to its total sales volume variance? Briefly justify your answer.

Introduction

Advanced variance analysis in sales examines not just the difference between planned and actual performance, but also separates the effects of market-wide changes from the company's own actions. Market size and market share sales variances are essential tools for this deeper analysis. By breaking down the classic sales volume variance, managers can better understand whether results are due to factors outside their control (such as changes in overall demand) or due to their own effectiveness in competing for customers.

This article explains how to calculate and interpret market size and market share sales variances, their use in performance reporting, and their importance for evaluating both planning and operational sales performance.

Key Term: Sales Volume Variance
The difference between the expected and actual sales volume, valued at standard contribution or profit per unit.

Key Term: Market Size Variance
The variance that measures the impact on sales of changes in the total size of the market, holding market share constant.

Key Term: Market Share Variance
The variance that measures the impact on sales of changes in a company's share of the market, holding total market size constant.

Market Size and Market Share Sales Variances

Traditional sales volume variance simply compares budgeted to actual sales volume. This can mask important details, especially when market conditions have changed significantly.

Splitting the sales volume variance into market size and market share components allows managers to see:

• How much of the variance is due to the market being larger or smaller than planned (market size)
• How much is due to the company's success or failure in winning customers from competitors (market share)

These distinctions help in separating planning errors from operational performance.

Purpose of Advanced Sales Variance Analysis

Using market size and market share variances helps organisations:

• Clarify the sources of over- or under-performance
• Allocate responsibility correctly between factors beyond the company's control (market trends) and controllable factors (selling effort, marketing)
• Design fair reward systems and plan corrective actions

Key Term: Planning Variance
The part of a variance arising because the original budget or standard was based on assumptions that turn out to be inaccurate (e.g., market growth or shrinkage).

Key Term: Operational Variance
The part of a variance arising from actual performance relative to the revised, achievable standard (e.g., changes in market share due to company actions).

Calculating Market Size and Market Share Variances

Steps for Calculation

1. Find the standard contribution (or profit) per unit.
2. Obtain the following for the period:
   • Budgeted total market size
   • Actual total market size
   • Budgeted company market share (%)
   • Actual company market share (%)

Formulas

• Market Size Variance: $(\text{Actual total market size} - \text{Budgeted total market size}) \times \text{Budgeted market share} \times \text{Standard contribution per unit}$
• Market Share Variance: $(\text{Actual company market share} - \text{Budgeted market share}) \times \text{Actual total market size} \times \text{Standard contribution per unit}$

The total sales volume variance is the sum of the market size and market share variances.

Worked Example 1.1

A company budgets for sales of 20,000 units in a market expected to be 100,000 units (budgeted market share = 20%). Actual sales of the company were 18,000 units, while the actual total market size was 90,000 units, giving an actual market share of 20%. Standard contribution per unit is $6.

Calculate:

• Market size variance
• Market share variance
• Reconcile to the overall sales volume variance.

Answer:

1. Market Size Variance:

(Actual market size – Budgeted market size) × Budgeted share × Contribution per unit
(90,000 – 100,000) × 20% × $6 = (–10,000) × 0.2 × $6 = (–2,000 units) × $6 = $12,000 adverse

2. Market Share Variance:

(Actual share – Budgeted share) × Actual market size × Contribution per unit
(20% – 20%) × 90,000 × $6 = 0 × 90,000 × $6 = 0

3. Sales Volume Variance:

Actual sales – Budgeted sales = 18,000 – 20,000 = –2,000 units × $6 = $12,000 adverse

Confirmation:

Total sales volume variance = Market size variance + Market share variance
($12,000 A) + (0) = $12,000 adverse

Worked Example 1.2

Suppose in the above scenario, actual company sales were 19,800 units (actual market share = 22%).

Calculate the market share variance.

Answer:

Actual share – Budgeted share = 22% – 20% = 2%

Market share variance = 2% × 90,000 × $6 = 1,800 × $6 = $10,800 favourable

Exam Warning

The sales volume variance can mask both good performance in a shrinking market or poor performance in a growing market. Always split it further for meaningful analysis, as expected in ACCA APM.

Practical Use and Interpretation

Performance Reporting

• Market size variance is outside management's control if changes in total demand are driven by economic or industry trends.
• Market share variance reflects sales and marketing effectiveness; management is held directly accountable for this component.

Attribution and Fair Appraisal

Properly splitting variances ensures that bonus or penalty schemes, as well as corrective actions, are based on fair analysis. For example, if the market crashed but the company gained share, the sales team may have actually performed well despite an overall sales drop.

Revision Tip

Prepare summary tables showing all input data (budget, actual market volumes and shares, contribution) before calculating variances in exams. This avoids careless errors.

Summary

Market size and market share variances dissect the traditional sales volume variance. This distinction enables managers to separate changes driven by external market factors from those caused by company actions. Clear understanding of these advanced variances supports better planning, accurate control, and fair performance evaluation.

Key Point Checklist

This article has covered the following key knowledge points:

• Explain the purpose of market size and market share sales variances as a split of the sales volume variance
• Calculate market size variance and market share variance using standard formulas
• Interpret the results and assess whether changes are due to market conditions or company performance
• Apply these variances in sales reporting, planning, and evaluation scenarios
• Recognise their role in differentiating planning and operational variances

Key Terms and Concepts

• Sales Volume Variance
• Market Size Variance
• Market Share Variance
• Planning Variance
• Operational Variance