Explain what is Sales Price Variance & Sales Volume Variance

November 12th, 2007 Comments off
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Management besides reviewing all the expenditure variance also take great care to investigate any variances in sales revenue.

This is because any variances in sales revenue has a direct impact upon the contribution and profitability of the business.

In a marginal cost system, the variances are calculated in contribution terms whereas:

In an absorption costing system, the sales variances are determined in terms of profit.

The TOTAL Sales Variance are segregated into the following two(2) variances:

Sales PRICE Variance
  • Measures the effect of the difference between the standard selling price per unit and the actual selling price.
  • Formula:

[Standard selling price per unit-Actual selling price per unit] x Actual quantity of units sold

Sales VOLUME Variance

· Measure the effect on contribution or profit of the divergence between actual sales and the budgeted level of sales.

· In a marginal costing system the difference between the actual and budgeted sales is multiplied by the standard contribution per unit.

· In an absorption system this difference is multiplied by the standard profit per unit.

· Formula:

[ Budgeted Sales level-Actual Sales level]x Standard Contribution or profit per unit

Illustration:

Company A budgeted sales are 3,500 Product A per month at a standard price of $70 each against their unit cost of $35. At the end of the third month, the actual sales revenue was $780,000 and 12,000 Product A had been sold.

Further details:

Volume Unit selling price Profit per unit

Budget 10,500 70          35

Actual 12,000 65 30

Required:

Compute:

(a) the sales VOLUME profit variance;

(b) the sales PRICE variance.

Solution:

(a) The Sales VOLUME variance is:

[Actual units sold-budgeted units sold]x Standard profit per unit

=(12,000-10,500]x$35

=$52,500F

(b) The Sales PRICE variance is:

[Actual selling price-budgeted selling price]x actual sales volume

=[$65-$70] x 12,000

=$60,000A

To recheck:

Total PROFIT Variance= Sales Price Variance + Sales Volume Variance

Budgeted profit

=10,500 x $35=$367,500

Less:

Actual profit

=12,000 x $30=$360,000

Total PROFIT variance=$367,500-$360,000= $7,500A

From solution a & b:

Sales VOLUME variance($52,500F) +Sales PRICE variance($60,000A)= $7,500A

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Financial Accounting

 
 

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