Variance analysis involves calculating the difference between planned and actual outcomes in sales, expenses, profits and other operational metrics. It also involves analyzing the reasons for the variances and responding appropriately to improve operational performance as required. Positive variance means that the actual results are greater than the budgeted results.
Definition
Sales variance is the difference between actual and budgeted sales. Sales volume variance is the difference between the actual and budgeted number of units sold multiplied by the budgeted price per unit. Selling price variance is the difference between the actual and budgeted price per unit multiplied by the number of units sold.
For example, if the company budgets for unit sales of 1,000 units at an average selling price of $20 per unit, its budgeted sales are $20 multiplied by 1,000, or $20,000. If it sells 1,200 units instead at $20 each, the positive sales variance is equal to $20 multiplied by 200 units (1,200 minus 1,000), or $4,000. This is an example of positive sales volume variance. If the company achieves a higher average selling price, it would realize a positive selling price variance. The total sales variance is a combination of price and volume variance.
Significance
Sales prices and volumes are usually interdependent. Lowering prices might lead to higher sales volumes, which could mean a positive sales volume variance but potentially a negative selling price variance. On the other hand, increased consumer demand could result in both positive sales volume variance and positive selling price variance. Positive sales variance is the result of several factors, including superior products, competitive prices, higher-than-expected demand for the products and better sales execution. Seasonal factors may also play a role. For example, a retail operation may budget for Christmas sales based on historical data but a resurgent economy or a very successful new product launch could generate higher sales and, thus, a positive sales variance.
Negative Sales Variance
Negative sales variance means that actual results are less than budgeted results. For example, if a company budgets for $1 million in sales but achieves only $800,000, the sales variance is $800,000 minus $1 million, which is a negative $200,000. Poor execution, changing customer behavior and competitive pressures are some of the reasons for a negative variance.
Considerations
Small businesses may not always have the resources to implement a real-time sales tracking system that provides management up-to-date sales volume information. Without this information, management might not be able to make the necessary adjustments in time to improve sales performance.
Tags: volume variance, difference between, price variance, sales variance, actual budgeted, between actual, between actual budgeted