What Are Sales Variances?
Changes in price and sales volume give rise to sales variances. There are two ways to calculate sales variances:
- Turnover method
- Profit method
1. Turnover Method
Several variants of the turnover method exist, namely:
(a) Value variance
This is the difference between budgeted sales and actual sales.
(b) Volume variance
This is the variation represented by the total sales (i.e., the difference between standard sales and actual sales). Thus:
Volume variance = (Budgeted sales – Actual sales)
(c) Quantity variance
Sometimes, standard sales differ from budgeted sales. This is known as quantity variance. It can be expressed as follows:
Quantity variance = (Budgeted sales – Revised standard sales)
(d) Mix variance
This is popularly known as the difference between revised standard sales and standard sales. It shows that the actual mix of sales has not been in the same ratio as was specified in budgeted sales. Mix variance is expressed as follows:
Mix variance = (Revised standard sales – Standard sales)
2. Profit Method
The profit method of calculating sales variances also has several variants, namely:
(a) Value variance
This difference is calculated based on the difference in budgeted profit and actual profit. It is calculated as:
Value variance = (Budgeted profit – Actual profit)
(b) Price variance
Price variance concerns the difference between standard profit and actual profit. This type of variance is the same as price variance in the turnover technique. It is assumed that price change will influence turnover and profit equally. Thus:
Price variance = (Standard profit – Actual profit)
(c) Volume variance
Volume variance concerns the difference in profit calculated from standard profit to budgeted profits. It is popularly known as quantity variance. It is calculated as follows:
Volume variance = (Budgeted profit – Revised standard profit)
(d) Mix variance
The difference between revised standard profit and standard profit is the mix variance, which is calculated as:
Mix variance = (Revised standard profit – Standard profit)
Problem
The details below are from John Trading Co. for January 2019.
Budgeted Sales | Product | Sales Qty. | Sales Price per Unit |
A | 1,200 | 15 | |
B | 800 | 20 | |
C | 2,000 | 40 | |
Actual Price | |||
A | 880 | 18 | |
B | 880 | 20 | |
C | 2,640 | 38 |
Required: Calculate the following variances:
- Sales quantity variance
- Sales mix variance
- Sales price variance
- Total sales variance
Solution
Basic calculations:
Product | Budget | Actual | ||||
Qty. (unit) | Rate ($) | Amount ($) | Qty. (unit) | Rate ($) | Amount ($) | |
A | 1,200 | 15 | 18,000 | 880 | 18 | 15,840 |
B | 800 | 20 | 16,000 | 880 | 20 | 17,600 |
C | 2,000 | 40 | 80,000 | 2,640 | 38 | 100,320 |
Total | 4,000 | 114,000 | 4,400 | 133,760 |
Calculations for standard sales:
Product | Actual Qty. (A) | Budgeted Price (B) | Standard Sales ($) (A x B) |
A | 880 | 15 | 13,200 |
B | 880 | 20 | 17,600 |
C | 2,640 | 40 | 105,600 |
4,000 | 136,400 |
Calculations for revised standard quantity:
Revised standard qty. = (Total AQ / Total SQ) x St. quantity
A = (4,400 / 4,000) x 1,200 = 1,320
B = (4,400 / 4,000) x 800 = 880
C = (4,400 / 4,000) x 2,000 = 2,200
Calculation for variances
(i) Sales value variance
= Actual sales – Budgeted sales
= 1,33,760 – 1,14,000 = $19,760 (F)
(ii) Sales price variance
= (AP – SP) x AQ
A = (18 – 15) x 880 = $2,640 (F)
B = (20 – 20) x 880 = Nil
C = (38 – 40) x 2,640 = $5,280 (A)
Total = $2,640 (A)
(iii) Sales volume variance
= (AQ – BQ) – SP
A = (880 – 1,200) x 15 = $4,800 (A)
B = (880 – 800) x 20 = $1,600 (F)
C = (2,640 – 2,000) x 40 = $25,600 (F)
Total = $22,400 (A)
(iv) Sales mix variance
= (AQ – RSQ) x SP
A = (880 – 1,320) x 15 = $6,600 (A)
B = (880 – 880) x 20 = Nil
C = (2,640 – 2,200) x 40 = $17,600 (F)
Total = $11,000 (F)
(v) Sales quantity variance
= (RSQ – BQ) x SP
A = (1,320 – 1,200) x 15 = $1,800 (F)
B = (880 – 800) x 20 = $1,600 (F)
C = (2,220 – 2,000) x 40 = $8,000 (F)
Total = $11,400 (A)
Verification
(i) Sales Value Variance = Price Variance + Volume Variance
19,760 (F) = 2,640 (A) + 22,400 (F)
(ii) Sales Volume Variance = Mix Variance + Quantity Variance
22,400 (F) = 11,000 (F) + 11,400 (F)