# Explain what is Sales Price Variance & Sales Volume Variance

November 12th, 2007 Comments off

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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