Accountants use numerous methods when analyzing and assessing the performance of companies and organizations. Among these methods are market share variance and market size variance. These two phrases share two out of three words. However, market share variance and market size variance differ significantly when it comes to application and calculation. The two measure different things and require divergent mathematical processes to calculate.
Market Share Variance
Market share means the percentage of the market that a company or organization claims. For instance, assume Company Y sells yams. If total annual sales of yams in the United States equal $500,000, and Company Y sells $50,000 worth of yams, it maintains a 10 percent market share. Market share variance occurs when a difference exists between the actual market share of a company and the expected/budgeted market share. For instance, if Company Y budgets for a 10 percent market share and ends up with an 8 percent market share, this constitutes a market share variance.
Market Size Variance
Market size describes the entire scope of a single market. For instance, if Company Y sells yams, it constitutes one part of the yam market. If the total sales of yams in the United States equal $500,000, this constitutes the market size. Market size variance helps a company determine whether a decrease or increase in sales stems from an increase or decrease in the size of the market. For instance, assume Company Y maintains a 10 percent market share in Year 1 and an 8 percent market share in Year 2. It uses market size variance to determine whether the total market for its product grew, or whether the company’s share of that market shrank.
Differences in Application
Market size variance and market share variance play off one another in a distinct way. Market size variance helps determine whether the market share variance stems from a company or from the market itself. However, these methods ultimately measure different things. Market share variance looks exclusively at the change in a company or organization’s percentage of the market. Market size variance examines the relationship between a company or organization’s percentage of a market and the overall size of that market.
Mathematically speaking, market size variance and market share variance differ greatly from one another. The formula for calculating market share variance reads |(Actual Market Share Percentage – Budgeted Market Share Percentage) x Actual Industry Sales in Units| x Budgeted Average Unit Contribution Margin. The straight lines -- | -- in this equation indicated an absolute value, or the difference between the number and zero. For instance, the absolute value of -11, which reads |-11|, is 11.
The formula for calculating market size variance reads [(Actual Industry Sales in Units – Budgeted Industry Sales in Units) x Budgeted Market Share Percentage] x Budgeted Average Unit Contribution Margin.