What Are Sales Variances?

Changes in price and sales volume give rise to sales variances. There are two ways to calculate sales variances:

  1. Turnover method
  2. 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)

Frequently Asked Questions

What is a sales variance?

A sales variance refers to the difference between actual and standard sales. It tells us if the company has been able to achieve its targets or not. If actual sales are higher than standard sales, it implies that the company has done better than expected. On the other hand, a low sales variance would indicate poor performance as the company has not been able to achieve the expected sales figures.

What is a sales value variance?

A sales value variance, also known as a budgeted profit variance, concerns the difference in budgeted and actual cost of production. It is calculated by subtracting Standard Costs from actual costs, which gives us the net impact on profit.

What is a sales mix variance?

A sales mix variance concerns the difference between standard profit and actual profit, which is caused by changes in the product's Contribution Margin. It can be calculated as: sales mix variance = (revised standard profit – standard profit) x actual quantity

What is a sales price variance?

A sales price variance refers to the difference between standard profit and actual profit because of changes in pricing. It is calculated by subtracting actual costs from Standard Costs, which gives us the net impact on profit caused by variations in prices. This can be calculated as: sales price variance = (standard profit – actual profit) x standard quantity.

What is a sales volume variance?

A sales volume variance refers to the difference between standard profit and actual profit because of changes in quantities. It can be calculated by subtracting Standard Costs from actual costs, which gives us the net impact on profit caused by variations in volume. This can be calculated as: sales volume variance = (Standard Cost – actual cost) x standard quantity.

True is a Certified Educator in Personal Finance (CEPF®), author of The Handy Financial Ratios Guide, a member of the Society for Advancing Business Editing and Writing, contributes to his financial education site, Finance Strategists, and has spoken to various financial communities such as the CFA Institute, as well as university students like his Alma mater, Biola University, where he received a bachelor of science in business and data analytics.

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