Sales Volume Variance

Sales Volume Variance

Businesses work with budgets to plan for future period operations. In very rare circumstances what was budgeted for and what actually happened are the same. In reality, more often than not there is a difference, a variance between budgeted figures and actual figures. The process of Variance analysis drills down into the numbers to find the source of the variance. One of the many variances that are calculated through variance analysis is sales volume variance.

What is sales volume variance

The sales volume variance is the difference between the actual and expected number of units sold, multiplied by the budgeted price per unit. The point of calculating the sales volume variance is to understand how much of the variance in the sales revenue is a result of the number of units or volume sold. This information is useful to management for various reasons. Let’s look at the sales revenue variance as a whole first.

Sales revenue variance is the difference between budgeted sales and actual sales. This represents the total monetary difference between budgeted sales and actual sales. There two possible reasons for this variance, whether it is positive or negative. Let’s use a positive variance to understand these differences. Our sales revenue may be higher than budgeted because we sold more units (a volume variance), we sold for a higher price than budgeted (a price variance) or a combination of both these factors.

 

Why Calculate Sales Volume Variance?

If the variance is due to a selling price variance it may signal that we budgeted a lower selling price than was available in the market for our product. It may also inform that the position of our product with customers is such that they feel there is more value on offer than the price we had budgeted. For management, this may mean more profitability can be unlocked in future.

For contrast’s sake let also look at what a negative sales price variance could indicate to management. It could indicate that management overestimated the product itself or the market for the product as a whole in the budgeting process. Another possibility is that marketing efforts may have let down product demand and resulted in the product having to be sold off at a lower price to move. With this information, management can then interrogate policies around product pricing and demand to understand what can be done to change the variance in future.

If our variance is due to sales volume it may indicate that our marketing and selling policies worked out much better than we thought they would initially. It may also inform management that the market is wider than initially anticipated when budgeting. Another possibility is that our product is being used by another market which we initially did not expect to buy the product. This volume variance is what we are interested in.

A negative sales volume variance, on the other hand, may be caused by demand factors. Perhaps the market is not as interested in the product as we initially hoped and this crippled demand. Perhaps prospective clients have a preferred alternative. Management may also want to interrogate the product distribution channels. Perhaps the typical customers for the product prefer an online selling platform however management had opted for a physical distribution network approach.

 

Calculating Sales Volume Variance

The formula to calculate the sales volume variance is as follows

(Actual units sold – Budgeted units sold) x Budgeted price per unit = Sales volume variance.

Our business expected to sell 20000 in the year but sold 22000. The budgeted price was $5 per unit.

(Actual units sold – Budgeted units sold) x Budgeted price per unit. = Sales volume variance.

(22000 – 20000)*5=10000 Sales Volume Variance.

A negative variance example

In another period the same business expected to sell 17000 units at a budgeted price of $5. The business actually sold 16500 units.

(Actual units sold – Budgeted units sold) x Budgeted price per unit. = Sales volume variance.

(16500-17000)*5=-2500 Sales volume Variance

 

Why use budgeted price?

You may have asked yourself why the sales volume variance uses the budgeted sales price instead of the actual selling price. In variance analysis, we compare actual figures to budgeted figures. In the sales volume variance, the goal is to isolate the impact that sales volume had on the variance between our budgeted and actual sales figures. Our initial budget or benchmark was prepared using the budgeted price therefore it is commensurate to maintain the budgeted price to isolate the part of the variance that is related to sales volume. We, therefore, employ budgeted price in sales volume variance because we already have a budgeted sales revenue calculated using the budgeted price.

Note in both the examples that the variance is expressed in monetary terms even though we are looking a volume variance. To understand why this is so we have to take a step back to the budgeting process. A budget is essentially a business operations plan that is expressed in numerical, monetary terms. Remember the goal is to compare against budgeted performance. The point of the sales volume variance is to calculate in monetary and comparable terms the impact that the difference in sales volume had on the actual performance.

 

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