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© Copyright 2011 – Bruno THIONNET – Le contrôle de gestion opérationnel

3. Margin analysis

 

B

efore discussing the principles relating to the margins variances analysis, we need first to consider how information should be organized in order to produce all required data. We are going to take the example of a processing company which sells its products to retail customers. However, this method could be applied to other economic models.

 

         3.1. Data sourcing

 

        As shown in the chart below, statistics are provided by the data flows recorded on IT systems, from purchasing to sales delivery. Information is collected and organized into files in order to perform margin variances analysis. Joint Marketing efforts (JME = sales deals) with distributors must be integrated into the analysis process.

 

      

 

 

Before starting margin analysis, we need to know the right levels on which we are going to carry out the calculations. Most of the time, they are product families, brands, sales networks or countries i.e. the best way to describe the business of a company. This stage is really important in order to have a clear view of the margin analysis. In that way, some mix effects are not really relevant. Particularly we will try to avoid consolidate dissimilar activities. The example below is based on a company organized around two different sales networks, two product families and for each one: company brand, private labels and first prices:

 

¨     Sales Network A

·        Products family 1                                                        

-      Branded products

-      Private labels

-      First prices

 

·        Products family 2

-      Branded products

-      Private labels

-      First prices

 

¨     Sales Network B    

·        Products family 1                                                        

-      Branded products

-      Private labels

-      First prices

 

·        Products family 2

-      Branded products

-      Private labels

-      First prices

-       

¨     And so on…

 

 

3.2. Margin variances analysis

 

Margin variances come from a comparison between actual figures and budget or previous year data. They are divided in four levels:

 

·        Sales volumes variances

·        Net selling price variances

·        Mix effects

·        Standard costs variances

 

 

In the following development the budget will be used for comparison. But we could as well use the previous fiscal year, and even better. However a comparison with previous year needs some IT adjustments and particularly the introduction of ‘master references’ in order to link new articles with ‘old’ items still in use.

 

 

3.2.1. Sales volume variances

 

Sales volume variances must be calculated for each selected group (network / products family / brand). The formula is really easy to implement:

 

                           

                                               Δ Sales volume  = (Actual Qties  – Budget Qties) * €/kg margin of selected Group

 

        

                  

                   3.2.2. Net selling price variances

 

The net selling price (NSP) variance (price net of rebates and JME = sales deals) must be calculated item per item, using the following formula:

 

 

                                                        Δ NSP =

 

        

        

Most of the time, some references are not budgeted. For these items the NSP variance should be at a zero value. It is then necessary to perform the calculations by using a similar article. This adjustment (arbitration) must be done manually.

                  

                   3.2.3. Mix effect

 

 

The mix effect is the most difficult variance to calculate. Actually mix comes both from changes in products proportion inside one aggregate (a product family for instance) and different profitability levels of references.

 

                                              

                   Δ mix =  [(Actual volume of article  - budget volume article / budget volume of the family of the article  *  actual volume of the family)

                                                                   * (€/Kg budget margin of article - €/kg budget margin of the family of article)]

        

 

 

The first member of the equation (Actual volume of article  - budget volume article / budget volume of the family of the article  x actual volume of the family) is called adapted volume on budget proportions. The second member of the equation (€/kg budget margin budget of article - €/kg budget margin of the family of the article) is related to the various profitabilities of articles.

 

The following table should give a better understanding of the formula above:

           

 

                  

 

 

                           

 

 

In fact, a mix calculation is not just a simple formula to use. Most of the time some articles are not budgeted (new items), it is then necessary to proceed to manual adjustments. These new items have to be linked to a similar reference (raw     in our example). But sometime, it is not possible at all to link new articles to any ‘old’ item. In that case it is possible to use the actual or estimated margin of these new references. This way to proceed can introduce a slight approximation in the calculation but anyway this will give a better appreciation of the products mix effect.

 

The ‘link’ principle is also possible for the net selling prices (NSP) variance calculation as well as the costs of products variance of which the formula will be detailed further down.

 

Under normal conditions, the mix effect will be calculated only when a detailed analysis is necessary. Thus for each item, negative and positive effects will be determined with accuracy. But generally, the mix variance will be calculated by difference as shown below:

 

 

 


                                                                       Δ Mix = Δ Total Margin – Δ Sales Volume - Δ Net selling prices – Δ COSTS

 

           

Some people could be amazed, but mix calculations can be time consuming both for development and analysis, particularly when a product family is composed with several hundreds of articles. We always try to shorten the closing time, but of course without undermine the quality level of analysis.

 

           

                   3.2.3. Costs variances

 

 

The costs variance is broken down as follows:

 

-      Purchase price differences

-      Yield and productivity variances

-      Hourly rate variations

-      Standards actualisation effects

-      Temporary standard costs adjustments

 

 

In practice, only purchase prices variations can be incorporated into the stock entries valuation. For other variances, in one hand it depends on their significance level and in the other hand on the possibilities of the computer data processing. The variances, which are not included into production batches valuation, will be taken into account later in the reconciliations margins ‘controlling <-> accounting' (cf. § 3.4)

 

 

         The calculation formula for the variance of costs is the same like sales price ones. She must be calculated item per item:

        

                                               Δ Costs=

 

 

           

            Arbitrations have to be done for new references created during the current period because it could not be budgeted (same approach versus N-1)

           

 

           

3.3. Table of Margin variances

 

When calculations and adjustments have been done, margin variances can be synthesized in a table, as shown below:

 

 

 

           

 

In this example, the analysis is organized along three axes:

 

-      The first one for product family

-      The second one for sales network

-      The third one related to brands

 

Generally speaking, it is better when the variances are calculated in YTD position and the month deducted by difference. Thus the emergence of a referent product on a certain month allows the possibility for a global recalculation. Moreover, the sum of the month variances is not equal to the calculation in cumulative terms. Some transfers exist between the different margin compounds.

 

 

 

3.4. Margin reconciliation between cost accounting and statistical position

 

 

Some differences are not taken into account by statistical approach. It is therefore necessary to make reconciliation with the cost accounting:

 

                                               BUDGET MARGIN                                                             ACTUAL STATISTICAL MARGIN

 

 


                                                                                              Δ MARGIN STATS

 

 


                                                                                               RECONCILIATION

        

 

                                                                                        Δ MARGIN ACCOUNTING

                                                                                             

 

                                               BUDGET MARGIN                                                             ACTUAL ACCOUNTING MARGIN

 

 

         They are two types of variances which are not integrated into statistical margins approach:

 

Ø The differences that we decided not to include because they are considered not really significant,

Ø The differences that we do not know integrate (or difficult to integrate in the stats for technical reasons)

 

 

         Among the differences that we decided to include or not in the statistical models, we can mention:

 

§  differences in productivity (labor) and yields (material)

§  hourly rate variances

§  differences of raw material hedging

§  exchange rate differences

§  discounts on purchases

§  subcontracting supplementary costs

§ 

§   

Variances, which are difficult to integrate in the statistical models, are mostly related to accounting entries not reflecting an actual physical flow:

 

§  accruals for credit notes

§  accruals for credit notes receivable not related to physical flows

§  invoices to be issued

§  Differences of stock inventory

§  invoicing for various products and services (called ‘out of stats’)

§ 

           

These lists are of course not exhaustive.

 

The table below allows you to group the various kinds of margin differences. In the first part, we can find differences related to statistical margin analysis (Δ sales volume, sales prices, mix and costs) and in the second part, the complementary variances to ensure the reconciliation of the margin difference of the management P & L between 'Actual' and 'Referent' (the budget in our example):

 

 

                       

                       

 

It is very difficult to ensure a complete reconciliation of the margin difference. Most of the time, there remains a residual gap but that must still be the lowest possible. This reconciliation difference is also called ‘system gap’. This variance reflects the efficiency of your model, the lower it is, and the better your system is performing.

 

© Copyright 2011 – Bruno THIONNET – Le contrôle de gestion opérationnel

 

 

 

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