A sales variance is the monetary difference between actual and budgeted sales. It is used to analyze changes in sales levels over time. There are two general reasons why a sales variance can occur, which are:
- The price point at which goods or services sell is different from the expected price point. For example, an increased level of competition forces a company to reduce its prices. This is known as the selling price variance.
- The number of units sold varies from the expected amount. For example, a company begins selling in a new region, and expects to sell 100,000 in its first year, but only sells 80,000 units. This is known as the sales volume variance.
These two reasons for a sales variance can interrelate. For example, management may decide to keep the budgeted price point throughout the measurement period, despite the price being clearly higher than that of a competing product. The result is no sales variance due to price, but a large negative variance due to the number of units sold being far lower than expected.
Management typically pays considerable attention to these components of the sales variance, in order to see if prices, product features, or marketing must be adjusted to optimize total sales and profits. Here are several actions that can be taken:
- Issue a limited-time coupon offer that is effectively a price cut; this approach will reduce short-term profits on a per-unit basis, but should increase the number of units sold.
- Cut back on the number of product features and sell the product at a lower price point; this approach can boost volume while still retaining profitability.
- Reposition advertising to show a product as high-end, which may allow for a price boost.
A sales variance can be caused by corporate strategy. For example, management may decide to keep prices low in order to deter potential competitors from entering the market. If so, and the budget does not reflect this strategy, there could be a large sales variance.
To make variances reporting effective, it is essential that following conditions are fulfilled:
(i) The variances arising out of each factor should be correctly segregated so that there may be correct reporting to the management. For example volume variance arising on account of change in production should be correctly segregated into capacity variance, calendar variance and efficiency variance.
(ii) Authority and responsibility of each employee should be clearly laid down so that responsibility for negative variances may be fixed and corrective action may be taken. This will avoid shirking of responsibility.
(iii) Variances should be divided into controllable and uncontrollable variances. Uncontrollable variances are beyond the control of the organisation, so on employee can be held responsible for these variances. But controllable variances should be reported with no loss of time so that responsibility may be fixed and action may be taken against the individuals who are responsible for such variances.
(iv) Reporting of variances to the top management should contain broad details only whereas reporting of variances to the lower levels of management should be a detailed one showing the causes of each variances alongwith the persons who may be held responsible for each variance.
Accounting Entries:
Following is the accounting treatment in connection with standard costs:
(i) Debit Work-in-Progress Account at standard cost.
(ii) Credit All Expenses Control Account at actual cost.
(iii) Keep all variances under separate accounts and close them by transferring to Costing Profit and Loss Account. Favourable variances are credited under their respective accounts and unfavourable variances (being loss) are given debit under their respective accounts.
Profit Method of Calculating Sales Variances:
The sales variances according to this method can be analysed as:
(1) Total Sales Margin Variance (TSMV)
Actual Profit – Budgeted Profit
or Actual Quantity of Sales x Actual Profit per unit- Budgeted Quantity of Sales x Budgeted Profit per unit
(2) Sales Margin Variance (SMV) Due to Selling Price:
It is that portion of total sales margin variance which is due to the difference between the actual price of quantity of sales effected and the standard price of those sales.
It is calculated as:
Actual Quantity if Sales (Actual Selling Price per unit – Standard Selling Price per unit).
(3) Sales Margin Variance (SMV) Due to Volume:
It is that portion of total sales margin variance which arises due to the number of articles sold being more or less than the budgeted quantity of sales.
It is calculated as:
Standard Profit per unit (Actual Quantity of Sales – Budgeted Quantity of Sales)
Sales margin variance due to volume can be divided into two parts as given below:
(i) Sales margin variance due to sales mixture.
(ii) Sales margin variance due to sales quantities.
Value Method of Calculating Sales Variances:
Sales variances calculated according to value method show the effect on sales value and enable the sales manager to know the effect of the various sales efforts on his overall sales value figures.
Sales variances according to this method may be as follows:
(1) Sales Value Variance (SW):
It is the difference between the standard value and the actual value of sales effected during a period.
It is calculated as:
Sales Value Variance = Actual Value of Sales – Budgeted Value of Sales.
Sales value variance arises due to one or more of the following reasons:
(i) Actual selling price may be higher or lower than the standard price. This is expressed in sales price variance.
(ii) Actual quantity of goods sold may be more or less than the budgeted quantity of sales. This is expressed in sales volume variance.
(iii) Actual mix of various varieties sold may differ from the standard mix. This is expressed in sales mix variance.
(iv) Revised standard sales quantity may be more or less than the budgeted quantity of sales. This is expressed in sales quantity variance.
(2) Sales Price Variance (SPV):
It is that portion of sales value variance which arises due to the difference between actual price and standard price specified.
The formula for the calculation of this variance is:
Sales Price Variance = Actual Quantity Sold (Actual Price – Standard Price)
(3) Sales Volume Variance (S.Vol. V):
It is that portion of the sales value variance which arises due to difference between actual quantity of sales and standard quantity of sales.
The variance is calculated as:
Sales Volume Variance = Standard Price (Actual Quantity of Sales – Budgeted Quantity of Sales)
Sales volume variance can be divided into two parts as follows:
(a) Sales Mix Variance (SMV):
It is a part of sales volume variance and arises due to the difference in the proportion in which various articles are sold and the standard proportion in which various articles were to be sold.
It is calculated as:
Sales Mix Variance = Standard Value of Actual Mix – Standard Value of Revised Standard Mix.
(b) Sales Quantity Variance (SQV):
It is that part of sales volume variance which arises due to the difference between revised standard sales quantity and budgeted sales quantity.
It is calculated as:
Standard Selling Price (Revised Standard Sales Quantity – Budgeted Sales Quantity).
Profit and Loss Variance:
Profit or loss variance is defined as the difference between the budgeted profit (or loss) and the actual profit (or loss). This will include the total of variances appropriate to standard cost of sales, the sales margin variances and variances due to any changes which have not been included in standard cost of production.
Variance Analysis:
Analysis of variances is most important step in standard costing. It is very important tool for exercising cost control.
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