Sales variance is the difference between the standard or expected revenue and the actual revenue.
It is different from cost variances because cost variances occur when costs deviate from the budgeted amounts. Investigation of what caused the variance is crucial to understand in order to make management decisions such as buy or make a decision or continue or discontinue a product line.
Why Do Sales Variance Arise?
One reason why sales variance may arise is changes in market conditions. For example, a sudden change in consumer behaviour or preferences can result in a decline in demand for certain products or services, leading to lower-than-expected sales figures. Additionally, economic factors such as inflation or recession can also affect purchasing power and ultimately impact overall sales performance.
Another factor contributing to sales variance is internal business decisions or factors such as pricing strategies and promotional activities. Ineffective pricing strategies that do not align with customer expectations can lead to reduced demand and lower revenue streams. Likewise, promotional campaigns that do not resonate with target customers may also fail to generate anticipated levels of interest and revenue.
What are the Types of Sales Variances?
There are two factors that might have caused the total variance: either a difference in the number of units that were sold or in the selling price.
Because two different factors are affecting the total sales variance, they must be divided into the following 2 types:
Sales Volume Variance
Sales volume variance calculates the effect of actual sales volume is different from the budget, sales volume using standard profit, on profitability. Please note that sales price variance takes account of the difference between actual and budget selling prices.
(Budget sales price – budget cost) x budget quantity (Less) (Budget sales price – budget cost) x actual quantity
While this variance has been used to isolate the effect of volume variations on profit, it still does not provide a great deal of information about the performance of products on the market. As a result, additional investigation is required.
Sales Price Variance
The impact on the profitability of the actual selling price is different from the budgeted selling price is calculated using the sales price variance (SPV). Sales volume variance should be taken into consideration in conjunction with this variance.
The following are the formulas for calculating each of these variances:
Sales volume variance:
Standard selling price x (Actual number of units sold – Standard number of units sold)
Sales price variance:
The actual number of units sold x (Actual selling price – Standard selling price)
Total sales variance:
Sales volume variance + Sales price variance
For example, the following information is given about a product:
- The actual number of units sold: 4800
- The standard number of units sold: 5000
- Actual sales at a standard selling price: $192,000
- Actual sales at an actual selling price: $187,200
- Actual selling price: $39
- Standard selling price: $40
The sales volume variance = $40(4800 – 5000) = $8000 adverse (as the actual sales volume was lower than the standard sales volume)
The sales price variance = $187,200 – 192,000 = $4800 adverse
The direct material cost variance = $12,00 adverse