A bread maker in Ilorin budgets to sell 60,000 loaves a month, which is a 12% share of a market of 500,000. That month, a rise in the price of flour forces many small bakers to close and the whole market shrinks to 430,000 loaves. The company sells 54,000. Against its budget it is 6,000 loaves short and its sales manager is criticised.
But the market was 70,000 loaves smaller than anyone planned, and at 12% that alone explains 8,400 loaves. The sales team actually did better than the market: it won 12.6% of what was left. Judging the sales manager against the original budget is unfair; judging the planners against a market that nobody could foresee is not helpful either.
Planning and operational variances separate what was wrong with the plan from what was wrong with the performance. This topic explains why budgets are revised, ex ante and ex post budgets, how a variance is split into a planning part (uncontrollable by operating managers) and an operational part (controllable), and how the sales volume variance splits into a market size variance (planning) and a market share variance (operational).
It builds on the earlier topic on sales variances: price, volume, mix and quantity. The next topic covers planning and operational variances for materials and labour.
In 30 seconds
Variance analysis is useful only if the budget or standard used for comparison is reliable. If it was unrealistic, the ex ante (original) budget or standard can be replaced, with hindsight, by a revised ex post budget or standard that reflects conditions that actually applied.
Operational variances = actual results compared with the ex post budget (all the variances calculated before are operational, only now against the revised figure); they can be controlled by managers. The planning variance = the difference between the ex ante and the ex post budget for the actual output; it measures the effect of poor planning or unforeseen external change, and operating managers cannot control it.
Operational + planning = the traditional variance. Sales volume can be split: the market size variance = (actual market size − budgeted market size) × budgeted share × standard contribution (a planning variance); the market share variance = (actual share − budgeted share) × actual market size × standard contribution, that is, actual sales − expected sales at the budgeted share (an operational variance). Market size + market share = sales volume variance.
Revise a budget only for good reasons, with justification and approval. Full marks come from correct ex post figures, the split and an explanation of who is responsible.
Planning and operational variances
Why the budget may need to be revised
The aim of variance analysis is to find where performance differs from plan, so that management can correct adverse results or exploit favourable ones. The quality of that information depends on the quality of the budget. If the standard steel for a bulldozer were set at 10 kg, there would be huge adverse usage variances. There would be no point in criticising the production manager: the budget is at fault.
Variances based on an unreliable budget are of little use. A budget may need to be revised because of unforeseen events, performance that has deviated for reasons outside the plan, or a change in the company’s strategic direction.
A revision should follow a process:
- identify the need
- analyse the problem and its impact
- propose adjustments with a justification for every changed figure
- obtain approval from the relevant authority
- then monitor and review
Ex ante and ex post
- The ex ante standard or budget is the original, prepared before the period.
- The ex post standard or budget is the revised, more realistic one, drawn up (with hindsight) for the period that has passed, reflecting what should have been expected given the conditions that actually applied.
Operational and planning variances
- Operational variances compare actual results with the ex post budget or standard. They are calculated exactly as before, with the ex post figure in place of the ex ante. They are the variances that may be controllable by operating managers and give useful control information.
- The planning variance is the difference between the ex ante and the ex post standard cost (or budget) of the actual output. It measures the effect on profit or cost of the plan being unrealistic, or of a major external change such as strikes, market shocks, government policy or errors in the records. It is uncontrollable by operating managers: no control action can remove a weakness in planning. It is not very useful as a control figure, since the fact that it can be calculated means management already knows the budget was wrong; it serves to reconcile actual results with the original budget.
- Planning + operational = the traditional variance that would have been found against the ex ante budget. The total does not change; only the explanation does.
Planning and operational variances can be calculated for any part of a standard or budget: sales prices, sales volumes, material prices and usage, labour rates and hours. The next topic applies them to materials and labour.
An example with the selling price
A product has an ex ante standard price of ₦500 and 2,000 units are budgeted. Early in the month a competitor launches a cheaper rival, and with hindsight the price should have been ₦460. The company sells 2,000 units at ₦470. The traditional price variance is (470 − 500) × 2,000 = ₦60,000 A, which would suggest poor selling.
With the ex post price, the planning variance is (500 − 460) × 2,000 = ₦80,000 A, due to the competitor, and the operational variance is (470 − 460) × 2,000 = ₦20,000 F: the sales team got ₦10 above the market-adjusted price. 80,000 A + 20,000 F = 60,000 A. The sales manager should be congratulated, not blamed.
Market size and market share variances
Sales volume depends on market share and market size. If the budgeted sales volume was derived from a budgeted market size and a budgeted share, the sales volume variance can be split into two.
- Market size variance (planning). The total size of the market is largely outside the company’s control and is estimated at the start. It is a planning variance: with hindsight the budgeted market size would have been the actual size. It is (actual market size − budgeted market size) × budgeted market share × standard contribution per unit (or standard profit in absorption costing). It assumes the company should achieve its budgeted share of whatever the market turns out to be. Favourable if the market is larger than expected.
- Market share variance (operational). The share is under the influence of management through marketing, pricing and service. It compares, in the actual market, the sales expected at the budgeted share with actual sales: (actual sales − actual market size × budgeted share) × standard contribution. Favourable if the company won a larger share than budgeted.
- Market size + market share = total sales volume variance.
The line-by-line check, in units: actual market × actual share (= actual sales); actual market × budgeted share; budgeted market × budgeted share (= budgeted sales). The first difference is the share variance; the second is the size variance.
Using the split
The split changes the judgement of the sales team. A company that missed its budgeted volume in a shrinking market may have outperformed the market (favourable share), while a company that beat its budget in a boom may have lost share (adverse share). Market share also may be a poor measure where the market is hard to define, or where figures for the total market are unreliable or late.
Market size forecasts, being planning, should be reviewed in the next budget.
Layouts for planning, operational, market size and share variances
- Ex post standard for the actual output; ex ante standard for the same output.
- Planning variance = ex ante − ex post (for revenue, the reverse sign convention applies; label F or A by effect on profit).
- Operational variance = actual compared with ex post.
- Market size: (actual market − budgeted market) × budgeted share × contribution.
- Market share: (actual sales − actual market × budgeted share) × contribution.
- Check: planning + operational = traditional; size + share = volume.
Money is in naira and each answer is rounded once, at the end.
Worked examples
Example 1: market size and share. The budget assumed a market of 500,000 loaves and a 12% share (60,000 loaves), at a standard contribution of ₦25. The market was 430,000 loaves and the company sold 54,000. Required: the volume, market size and market share variances.
- Volume.
(54,000 − 60,000) = 6,000 A × 25 = ₦150,000 A. - Market size.
(430,000 − 500,000) × 12% = 8,400 units A × 25 = ₦210,000 A (planning). - Market share.
Expected sales at 12% of 430,000 = 51,600; actual 54,000; 2,400 units F × 25 = ₦60,000 F (operational).
The actual share was 54,000 ÷ 430,000 = 12.56%. - Check.
210,000 A − 60,000 F = 150,000 A. - Comment. The sales manager should not be blamed for the shortfall. The market was much smaller than planned, and in that market the sales team won more than its share.
Example 2: planning and operational for a selling price. As described above: ex ante price ₦500, ex post ₦460, actual ₦470 on 2,000 units. Required: the planning and operational price variances.
- Planning.
(500 − 460) × 2,000 = ₦80,000 A. - Operational.
(470 − 460) × 2,000 = ₦20,000 F. - Check.
Traditional (470 − 500) × 2,000 = 60,000 A = 80,000 A − 20,000 F.
Expect variants: a requirement to say which variances are controllable, a cause for revising the budget, a market size given in value, or a question asking how the results should be reported to the sales manager.
Reading market size and share variances in a declining market
The two variances separate what the company could not control from what it chose. Example. Budget: industry 100,000 units, share 20% (20,000 units), contribution ₦100 a unit. Actual: industry 80,000 units, share 25% (20,000 units). Market size variance = (80,000 − 100,000) × 20% × 100 = ₦400,000 adverse (uncontrollable). Market share variance = (25% − 20%) × 80,000 × 100 = ₦400,000 favourable (the result of the strategy). Sales volume variance in total is nil.
When judging a strategy, set the cost of achieving it (for instance higher material prices, a richer mix or lower waste for better quality, shown by price, mix and yield variances) against its benefits (a higher selling price and a larger share). If the benefits exceed the costs, the strategy was financially successful even though total contribution fell, because the fall came from the shrinking market.
In the decline stage of a life cycle, expect a falling market and look for cost control and cash generation.
Common mistakes
- Using the budgeted market size in the market share variance. Use the actual market.
- Using actual share in the market size variance. Use the budgeted share.
- Calling the planning variance controllable.
- Revising the budget without a justified reason, or to hide poor performance.
- Forgetting the check that the parts equal the traditional variance.
- Wrong sign on the price planning variance.
Quick revision
- Ex ante = original; ex post = revised in hindsight. Planning = ex ante v ex post (uncontrollable). Operational = actual v ex post (controllable).
- Market size (planning) = Δmarket × budgeted share × contribution; market share (operational) = (actual sales − actual market × budgeted share) × contribution.
- Size + share = volume; planning + operational = traditional.
How the marks are earned
- Correct ex post figures and market figures.
- Split with a check to the total.
- Comment on responsibility and reporting.
Practice questions
These are original questions, written in the style of the Skills examination. Work each one before you open the answer.
Recall check: multiple choice
Question 1. The planning variance is the difference between:
- Actual and budget
- Price and usage
- The ex ante and ex post budget or standard
- Sales and costs
Show the answer
C. It reflects an unrealistic plan.
Question 2. Operational variances compare actual results with the:
- Ex post (revised) budget
- Original budget
- Last year
- Competitor
Show the answer
A. They show what managers could control.
Question 3. Planning variances are generally:
- Controllable by operating managers
- Favourable
- Zero
- Not controllable by operating managers
Show the answer
D. Control cannot fix a bad plan.
Question 4. The ex ante budget is the:
- Revised budget
- Original budget
- Actual result
- Flexed budget
Show the answer
B. Ex post is the revised one.
Question 5. The market size variance is a:
- Planning variance
- Operational variance
- Price variance
- Rate variance
Show the answer
A. The market is outside management’s control.
Question 6. The market share variance is a:
- Planning variance
- Cost variance
- Operational variance
- Fixed overhead variance
Show the answer
C. Share is influenced by marketing.
Question 7. The market size variance equals:
- Actual share × market
- (Actual market − budgeted market) × budgeted share × contribution per unit
- Budget × price
- Sales − cost
Show the answer
B. It assumes the budgeted share is achieved.
Question 8. Market size plus market share variances equal the:
- Price variance
- Mix variance
- Cost variance
- Sales volume variance
Show the answer
D. They split the volume variance.
Question 9. A budget should be revised when:
- Unforeseen events or a change in strategy make it unrealistic
- Managers dislike it
- Profit is high
- It is easy to do
Show the answer
A. With justification and approval.
Question 10. Planning and operational variances together equal:
- Zero
- The price variance
- The traditional variance
- The quantity variance
Show the answer
C. Only the explanation changes.
Section B style: written questions
Question 11 (10 marks). (a) Explain planning and operational variances and who can control each. (5 marks) (b) State THREE reasons for revising a budget. (3 marks) (c) Explain why planning variances are of limited use for control. (2 marks)
Question 12 (15 marks). A budget assumed a market of 800,000 units and a 15% share (120,000 units), with a standard contribution of ₦12. The actual market was 900,000 units and the company sold 126,000.
(a) Calculate the sales volume variance. (3 marks) (b) Calculate the market size variance. (4 marks) (c) Calculate the market share variance. (4 marks) (d) Comment on each. (4 marks)
Question 13 (20 marks). The standard price is ₦1,000 and 3,000 units were budgeted. A competitor’s cut means that the price should have been ₦940. The company sold 3,100 units at ₦920. The standard contribution is ₦300. The budgeted market was 40,000 units with a 7.5% share; the actual market was 38,000 units.
(a) Calculate the traditional, planning and operational sales price variances. (8 marks) (b) Calculate the market size and market share variances. (8 marks) (c) Discuss who is responsible for each. (4 marks)
Model answers
Show the model answer to Question 11
(a) Operational variances compare actual results with a revised, ex post budget and are controllable by operating managers (2). The planning variance is the difference between the original (ex ante) and the revised budget or standard for the actual output; it arises from poor planning or unforeseen external change and is not controllable by operating managers (3).
(b) Any three: unforeseen events; deviations outside management’s control; a change in strategy; an unrealistic original standard (3).
(c) It shows only that the plan was wrong, which management already knows, and no control action can remove it (2).
Show the model answer to Question 12
(a) (126,000 − 120,000) = 6,000 F × 12 = ₦72,000 F (3).
(b) (900,000 − 800,000) × 15% = 15,000 units F × 12 = ₦180,000 F (4).
(c)
- Expected at 15% of 900,000 = 135,000; actual 126,000; 9,000 A × 12 = ₦108,000 A.
- Check 180,000 F − 108,000 A = 72,000 F (4).
(d) The market grew, which was not controllable and gave a favourable planning variance; but the company’s share fell from 15% to 14%, an adverse operational variance, so the sales team lost ground and the headline favourable volume variance hides this (4).
Show the model answer to Question 13
(a)
- Traditional.
(920 − 1,000) × 3,100 = ₦248,000 A. - Planning.
(1,000 − 940) × 3,100 = ₦186,000 A. - Operational.
(920 − 940) × 3,100 = ₦62,000 A. - Check 186,000 + 62,000 = 248,000 (8).
(b)
- Budgeted sales 40,000 × 7.5% = 3,000.
- Volume (3,100 − 3,000) × 300 = 30,000 F.
- Size.
(38,000 − 40,000) × 7.5% = 150 units A × 300 = ₦45,000 A. - Share.
expected 38,000 × 7.5% = 2,850; actual 3,100; 250 F × 300 = ₦75,000 F. - Check 75,000 F − 45,000 A = 30,000 F (8).
(c) Planning variances (the competitor’s cut and the smaller market) are outside the sales team’s control. The operational variances are theirs: they sold ₦20 below the revised price, which is adverse, but won a larger share than budgeted, which is favourable (4).
Pathfinder on Planning and operational variances
These are the ICAN Pathfinder questions that test this topic. ICAN owns the questions and the suggested solutions, so we point you to them and do not copy them. Open your Pathfinder, attempt each question under exam conditions, then check your answer against the notes above.
Sales price and volume contribution variances; material price planning and operational variances; labour rate and efficiency; why management cares.
Revise first: Layouts for planning, operational, market size and share variances
Price, mix, yield, sales price, market size and share variances; strategy in a declining market.
Revise first: Layouts for planning, operational, market size and share variances
Source: ICAN Pathfinder, Performance Management. Diets covered: March/July Diet, 2020 to May Diet, 2026. All 13 diets in the Pathfinder are mapped.
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