## **Learning Outcomes**

After reading this article, you will be able to explain and calculate market size and market share variances in sales volume analysis. You will understand how to split sales volume variances into uncontrollable (planning) and controllable (operational) elements for fair manager appraisal. You will be able to apply these variances to reconcile operating statements and interpret their impact on performance.

## **ACCA Performance Management (PM) Syllabus**

For ACCA Performance Management (PM), you must be able to analyse sales variances in detail to support responsibility accounting and performance appraisal. A key focus is understanding how to split variances to reflect factors within and beyond the manager’s influence. Relevant areas for this topic include:

- Identifying and explaining the importance of splitting the sales volume variance into market size and market share variances
- Calculating market size and market share variances using standard profit or contribution per unit
- Classifying variances as planning or operational and justifying their use in manager performance review
- Reconciling profit using all variance components in an operating statement
- Interpreting what each variance reveals about sales strategies and external market changes

## **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. Why is the sales volume variance split into market size variance and market share variance in performance management?
2. How do you calculate the market share variance for a company if given its actual sales, the actual market size, and its budgeted market share?
3. Which variance is generally considered controllable by sales managers: market size or market share variance?
4. In an operating statement reconciliation, how would you label market size and market share variances regarding manager controllability?

## **Introduction**

Traditional sales variance analysis measures the impact on profit when sales quantities differ from budget. However, this approach can be misleading if market conditions change because some factors are outside management’s control. To provide fairer appraisal, ACCA PM requires splitting the sales volume variance into **market size variance** (planning) and **market share variance** (operational). This ensures external factors are taken into account and only those variances that managers influence are used for performance assessment.

> **Key Term: market size variance**
> The portion of the sales volume variance that measures the effect on profit of changes in the overall market size, assuming the company's market share is unchanged.
>
> **Key Term: market share variance**
> The portion of the sales volume variance that measures the effect on profit due to changes in the company’s share of the total market, for the actual market size.
>
> **Key Term: standard margin**
> The budgeted profit or contribution per unit, used as the value driver in sales variance calculations.

## REASONS FOR SPLITTING THE SALES VOLUME VARIANCE

The sales volume variance shows the total profit effect of selling a different quantity than budgeted. However, the actual number of units sold can be affected by two factors:

- Changes in the overall market size (e.g., due to economic conditions)
- Changes in the company’s market share (reflecting its competitive performance)

By splitting the sales volume variance:

- The **market size variance** highlights the effects of external factors on total sales
- The **market share variance** isolates the company’s effectiveness in winning or retaining customers compared to rivals

This distinction is fundamental in responsibility accounting for performance appraisal because managers should only be held accountable for what they can control.

## HOW TO CALCULATE MARKET SIZE AND MARKET SHARE VARIANCES

Both variances use the **standard margin** per unit.

**Formulae:**

- Market size variance  
  = Budgeted market share × (Actual market size – Budgeted market size) × Standard margin

- Market share variance  
  = (Actual sales – Budgeted market share × Actual market size) × Standard margin

All figures should refer to units sold unless a contribution/profit per unit in revenue is specified.

### **Worked Example 1.1**

_A company budgets to sell 2,000 units in a market of 10,000 units (20% share), with standard margin \$8. The market expands to 13,000 units and the company sells 2,600 units. Calculate the market size and market share variances._

> **Answer:**
>
> Budgeted market share = 20%
> Increase in market size = 13,000 – 10,000 = 3,000 units
>
> Market size variance:  
> 3,000 × 20% × \$8 = 600 units × \$8 = \$4,800 Favourable
>
> Budgeted share of new market: 13,000 × 20% = 2,600 units
> Actual sales = 2,600 units
>
> Market share variance: (2,600 – 2,600) × \$8 = 0 × \$8 = \$0
>
> The company fully maintained its market share, so all extra profit is due to market growth.

### **Exam Warning**

> Be careful: market share variance always uses actual market size to calculate the expected sales at budgeted share. Never use the original static budget quantity.

## PLANNING (MARKET SIZE) VS OPERATIONAL (MARKET SHARE) VARIANCES

- **Market size variance** is usually considered a **planning** variance – due to external factors like economy or demand changes. It is generally uncontrollable by managers and should not affect their performance evaluation.
- **Market share variance** is an **operational** variance – it reflects the manager’s actions such as pricing, promotion, and customer service. This variance is controllable and is appropriate for performance appraisal.

Only the operational (market share) variance should typically be linked to bonuses or rewards.

### **Worked Example 1.2**

_A firm budgets for 6,000 units in a market of 30,000 (20% share; standard margin \$5). The market shrinks to 27,000, but the firm achieves a 22% share, selling 5,940 units. Calculate both variances._

> **Answer:**
>
> **Market size variance:**  
> Market change = 27,000 – 30,000 = –3,000  
> 20% × (–3,000) × \$5 = –600 units × \$5 = \$3,000 Adverse
>
> **Market share variance:**  
> Budgeted share of actual market: 27,000 × 20% = 5,400 units  
> Actual sales = 5,940 units  
> (5,940 – 5,400) × \$5 = 540 units × \$5 = \$2,700 Favourable
>
> The adverse market size variance is due to market contraction (planning), while the favourable market share variance shows the company captured more customers than rivals (operational).

## PRESENTING RECONCILIATION STATEMENTS

You may be required to reconcile budgeted profit to actual profit, breaking out each variance clearly. The best practice is to display:

|                  |             |
| ---------------- | ----------- |
| Budgeted profit  | \$XX,XXX    |
| Market size var  | \$X,XXX F/A |
| Market share var | \$X,XXX F/A |
| Other variances  | ...         |
| Actual profit    | \$YY,YYY    |

Always label market size variance as "planning/uncontrollable," and market share variance as "operational/controllable."

### **Worked Example 1.3**

_A retailer budgets for profit of \$54,000 (standard margin \$6 per unit) at sales of 9,000 in a market of 45,000 (share 20%). The market grows to 60,000, and the company sells 10,800 units. Calculate both variances and show the profit reconciliation._

> **Answer:**
>
> **Step 1: Market size variance**  
> Market increase = 60,000 – 45,000 = 15,000  
> 20% × 15,000 × \$6 = 3,000 units × \$6 = \$18,000 Favourable
>
> **Step 2: Market share variance**  
> Expected at new market: 60,000 × 20% = 12,000 units  
> Actual = 10,800 units  
> (10,800 – 12,000) × \$6 = (–1,200) × \$6 = \$7,200 Adverse
>
> **Reconciliation:**

|                       | Amount     |
| --------------------- | ---------- |
| Budgeted profit       | \$54,000   |
| Market size variance  | \$18,000 F |
| Market share variance | \$7,200 A  |
| (Other variances)     | ...        |
| Actual profit         | \$64,800   |

## INTERPRETING MARKET SIZE AND MARKET SHARE VARIANCES

- **Market size variance (planning):**
  - Favourable if the market expands
  - Adverse if the market shrinks
  - Usually uncontrollable and not used for manager appraisal

- **Market share variance (operational):**
  - Favourable if the company captures a larger proportion of the market
  - Adverse if market share falls
  - Used for performance review because it depends on competitive strategy and execution

### **Revision Tip**

> In an exam question, always state whether each variance is planning (uncontrollable) or operational (controllable) when writing on manager performance.

## **Summary**

Splitting sales volume variance into market size and market share elements provides meaningful, fair, and actionable analysis for performance management. This ensures only controllable operational factors are used to assess managers, while planning factors reflect broader market events outside their control.

## **Key Point Checklist**

_This article has covered the following key knowledge points:_

- Market size and market share variances split the sales volume variance for fair performance assessment
- Market size variance reflects external (planning/uncontrollable) factors using actual and budgeted market sizes
- Market share variance shows controllable (operational) effects from changes in competitive position
- Both variances rely on the standard profit or contribution per unit
- Reconciliations should clearly label variances as planning or operational in exam answers

## **Key Terms and Concepts**

- market size variance
- market share variance
- standard margin


Advanced variances and reconciliation - Market size and market share variances