Sales volume variance
Sales volume variance reports the difference between actual and budgeted sales priced at the budgeted contribution per unit. This variance merely indicates whether sales volume is greater or less than expected. It does not indicate how well sales management has performed. In order to appraise the performance of sales management, actual sales volume should be compared with an ex-post estimate that reflects the market conditions prevailing during the period^{[1]}
The favourable sales volume variance indicates that profit was better than budget because on balance more units were sold than budgeted. However the favourable variance may be due to selling a larger proposition of the more profitable product (sales mix variance) or selling more units in total (sales quantity variance)^{[2]}.
Profit Variance Analysis for a single product
Profit variance analysis is simplest in a single product firm - there is only one sales price, one set of costs (or cost price), and a unitary sales volume. The total volume variance is the difference between the sales volume variance and the cost volume variance^{[3]}:
- sales price variance = (actual cost - budget or standard cost) x actual sales
- cost price variance = (actual cost - budget or standard cost) x actual sales
- sales volume variance = (actual sales - budget or standard sales) x budget or standard price
- cost volume variance = (actual sales - budget or standard sales) x budget or standard cost per unit
- total volume variance = sales volume variance - cost volume variance
Calculation of variances for multiproduct firms
When a firm produces more than one product, there is a fourth component of the profit variance. This is the sales mix variance, the feet on profit of selling a different proportionate mix of products have different contribution margins. In a multiproduct firm, actual sales volume can differ from that budgeted in two ways. The total number of units sold could differ from the target aggregate sales. In addition, he mix of the products actually sold may not proportionate to the target mix. Each of these two different types of changes in volume is reflected in a separate variance.
The total volume variance is divided into the two: the sales mix variance and the sales quantity variance. These two variances should be used to evaluate the marketing department of the firm. The sales mix variance shows how well the department has done in terms of selling the more profitable products, while the sales quantity variance measures how well the firm has done in terms of its overall sales volume^{[4]}.
Examples of Sales volume variance
- Sales volume variance can be seen when comparing the actual sales of a product to the budgeted sales of that product. For example, if a company budgeted for 10,000 units of a particular product to be sold in a given month, but only 8,000 were sold, the sales volume variance would be - 2,000.
- Another example of sales volume variance is when a company is comparing the actual sales volume of one product to the sales volume of another product. For instance, if a company budgeted for 5,000 units of one product and 10,000 units of another, but only sold 4,000 of the first product and 8,000 of the second, the sales volume variance would be - 1,000 for the first product and - 2,000 for the second product.
- Finally, sales volume variance can also be seen when comparing actual sales of one product to a competitor's sales of the same product. For example, if a company budgeted for 10,000 units of a particular product to be sold, but its competitor sold 15,000 of the same product, the sales volume variance would be - 5,000.
Advantages of Sales volume variance
Sales volume variance provides a useful tool for managers to assess the performance of their sales team. It helps to identify areas that are underperforming and provides a basis for corrective action. The advantages of sales volume variance include:
- Increased visibility of sales performance: Sales volume variance helps to identify sales performance trends, providing valuable insights into areas which are underperforming. This can be used to set more realistic sales goals and ensure that sales strategies are tailored to meet them.
- Improved cost control: Variance analysis can help to identify areas of inefficiency and waste, and provide the opportunity for cost savings and improved profitability.
- Improved customer satisfaction: By identifying areas of underperformance, sales volume variance can help managers to adjust their sales strategies to better meet customers’ needs and expectations. This can help to improve customer satisfaction and loyalty levels.
Limitations of Sales volume variance
Sales volume variance reports are limited in their ability to assess the performance of sales management. The following are some of the limitations of this type of report:
- They do not take into account the market conditions that prevailed during the period, which can affect sales performance.
- They are unable to assess the effectiveness of sales strategies and techniques used by sales management.
- They are not able to capture the impact of external factors such as competitor actions and customer preferences on sales performance.
- They do not account for changes in product pricing or other pricing strategies that may have affected sales volume.
- They do not provide insight into customer buying behavior or customer loyalty.
- They do not provide an accurate analysis of the effectiveness of promotional activities.
The following are other approaches related to Sales volume variance:
- Price variance analysis: This approach assesses the difference between actual and budgeted sales price. This analysis can be used to identify opportunities to increase sales revenue and understand how price changes affect sales volume.
- Promotion analysis: This approach looks at how price promotions and other marketing initiatives have impacted sales volume. It helps to identify areas where promotions have had a positive effect and areas that need improvement.
- Market share analysis: This approach looks at how the company's sales compare to its competitors. It can help identify areas where the company is losing market share and areas where it is gaining market share.
- Customer segmentation analysis: This approach looks at how different customer segments are buying the company's products. It can help to identify which customer segments are more profitable and which need more attention.
Overall, these approaches can be used to more accurately assess sales performance and identify areas for improvement.
Footnotes
Sales volume variance — recommended articles |
Sales mix — Percentage of sales — Sales price variance — Variable Cost Ratio — Market growth — Sales target — Sales history — Negative correlation — Capture rate |
References
- ACCA Skills Performance Management Study, (2014), BPP Learning Media, London.
- Drury C.M., (2013), Management and cost accounting, Springer, Hong Kong.
- Shim J.K., Siegel J.G., Shim A.I., (2012), CFO Fundamentals: Your Quick Guide to Internal Controls, John Wiley & Sons, New Jersey.
- Shim J.K., Siegel J.G., Shim A.I., (2008), Corporate Controller's Handbook of Financial Management, CCH, New York.
Author: Sylwia Jurkowska