Sales volume variance is an important concept in accounting and finance that helps businesses understand how their sales performance differs from their original expectations. In this blog post, we will explain sales volume variance, why it is important, and how it is calculated.
What is Sales Volume Variance?
Sales volume variance measures the difference between actual sales volume and the expected sales volume for a particular period. It is a calculation that shows whether a company’s sales performance is better or worse than expected.
To calculate sales volume variance, you need to know the expected and actual sales volumes for a given period. The expected sales volume is typically determined based on past sales trends, market conditions, and other relevant factors. The actual sales volume is the actual amount of sales generated during the period.
Why is Sales Volume Variance Important?
Sales volume variance is important because it helps businesses understand how their sales performance differs from their original expectations. It can also help them identify the factors contributing to the difference and take corrective action if necessary.
For example, if a company expected to sell 1,000 units of a product but only sold 800 units, the sales volume variance would be negative. This could indicate that the company did not effectively market the product, that the product was priced too high, or that increased competition affected sales. Understanding the factors that contributed to the negative variance can help the company adjust its marketing strategies, pricing, or other factors to improve sales performance.
Calculating Sales Volume Variance
To calculate sales volume variance, you need to know the expected and actual sales volumes. The formula for sales volume variance is:
(Sales volume variance = (Actual sales volume – Expected sales volume) x Standard margin per unit)
The standard margin per unit is the difference between the sales price per unit and the variable cost per unit. This is the profit the company would expect to earn on each unit sold.
For example, let’s say a company expected to sell 1,000 units of a product at a price of $50 per unit, with a variable cost of $25 per unit. The standard margin per unit would be $25 ($50 – $25).
During the period, the company sold 800 units instead of the expected 1,000 units. The actual sales volume variance would be:
(Sales volume variance = (800 – 1,000) x $25)
Sales volume variance = -$5,000
The negative variance indicates that the company sold fewer units than expected, which decreased profit.
Interpreting Sales Volume Variance
Sales volume variance can be interpreted in a number of ways, depending on the circumstances. A positive variance indicates that the company sold more units than expected, which can be a positive sign. However, it is important to consider whether the increase in sales volume was accompanied by an increase in expenses or a decrease in profit margins.
A negative variance indicates that the company sold fewer units than expected, which can be a negative sign. However, it is important to consider whether the decrease in sales volume was due to factors outside the company’s control, such as changes in market conditions or increased competition.
In general, sales volume variance should be interpreted in conjunction with other financial metrics and factors, such as gross profit margin, net profit margin, and cash flow. By looking at these metrics together, businesses can gain a better understanding of their financial performance and make more informed decisions about future operations and investments.