by Sales variances are the differences between the budgeted (standard) sales and the actual sales achieved by an organization. These variances help management analyze the reasons for deviations in sales performance and take corrective actions to improve profitability and efficiency.
Sales variances may arise because of changes in:
- Selling price
- Sales volume
- Sales mix
- Sales quantity
- Market conditions
Sales variance analysis is an important tool of standard costing and budgetary control because it helps management evaluate the effectiveness of sales policies and marketing strategies.
Classification of Sales Variances
Sales Value Variance (SVV)
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↓ ↓
Sales Price Sales Volume
Variance (SPV) Variance (SVV)
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Sales Mix Variance Sales Quantity Variance
Sales Value Variance (SVV), also known as Sales Margin Variance, is the difference between the budgeted sales value and the actual sales value achieved during a particular period.
It measures the overall effect of changes in selling price and sales volume on total sales revenue. Sales Value Variance helps management determine whether the business has generated more or less sales revenue than expected and assists in evaluating the effectiveness of sales and marketing activities.
Definition
Sales Value Variance is the difference between:
Actual Sales Value – Budgeted Sales Value
Formula
SVV=Actual Sales Value−Budgeted Sales Value
or
SVV = (AQ×AP) − (BQ×SP)
Where:
- AQ = Actual Quantity Sold
- AP = Actual Selling Price
- BQ = Budgeted Quantity
- SP = Standard Selling Price
Alternative Formula
SVV = SPV+SVV(Volume)
Where:
- SPV = Sales Price Variance
- SVV (Volume) = Sales Volume Variance
Interpretation of Sales Value Variance
Favourable Variance (F)
When:
Actual Sales > Budgeted Sales
This means the company has generated more revenue than expected.
Adverse or Unfavourable Variance (A)
When:
Actual Sales < Budgeted Sales
This means the company has generated less revenue than expected.
Example 1
Budgeted Sales
- Quantity = 1,000 units
- Selling Price = ₹100 per unit
Budgeted Sales Value:
1,000×100=₹1,00,000
Actual Sales
- Quantity = 1,200 units
- Selling Price = ₹95 per unit
Actual Sales Value:
1,200×95=₹1,14,000
Sales Value Variance
SVV = ₹1,14,000−₹1,00,000
Thus, the company has a Favourable Sales Value Variance of ₹14,000.
Causes of Favourable Sales Value Variance
- Increase in market demand.
- Higher sales volume.
- Effective advertising and promotion.
- Better product quality.
- Introduction of new products.
- Improved customer service.
- Expansion into new markets.
- Efficient sales force performance.
Causes of Adverse Sales Value Variance
- Decline in market demand.
- Increased competition.
- Ineffective marketing strategies.
- Higher selling prices reducing demand.
- Poor product quality.
- Economic recession.
- Supply shortages.
- Inefficient sales management.
Importance of Sales Value Variance
- Measures overall sales performance.
- Helps evaluate marketing effectiveness.
- Assists in profit planning.
- Improves sales forecasting.
- Helps control sales activities.
- Facilitates managerial decision-making.
- Identifies deviations from budget.
- Supports performance evaluation.
- Strengthens budgetary control.
- Improves profitability.
Advantages of Sales Value Variance Analysis
- Provides better sales control.
- Helps identify problem areas.
- Improves sales planning.
- Assists in pricing decisions.
- Facilitates corrective action.
- Enhances decision-making.
- Supports profit maximization.
- Improves organizational efficiency.
Limitations of Sales Value Variance
- Depends on accurate budgets.
- Influenced by external market conditions.
- Requires detailed sales records.
- Time-consuming process.
- Difficult to isolate all causes of variance.
- May ignore qualitative factors.
2. Sales Price Variance (SPV)
Sales Price Variance (SPV) is the difference between the actual selling price and the standard or budgeted selling price of the products sold. It measures the effect on sales revenue caused by selling products at prices different from those originally planned.
Sales Price Variance helps management determine whether changes in selling prices have increased or decreased the company’s sales revenue and profitability.
Definition
Sales Price Variance is the portion of Sales Value Variance that arises because the actual selling price differs from the standard selling price.
Formula
SPV = AQ(AP−SP)
Where:
- AQ = Actual Quantity Sold
- AP = Actual Selling Price per Unit
- SP = Standard Selling Price per Unit
Alternative Formula
SPV = Actual Sales Value − Standard Sales Value of Actual Quantity
or
SPV = (AQ×AP) − (AQ×SP)
Interpretation of Sales Price Variance
Favourable Variance (F)
When:
AP > SP
The actual selling price is higher than the standard selling price.
Adverse or Unfavourable Variance (A)
When:
AP < SP
The actual selling price is lower than the standard selling price.
Example 1
Standard Data
- Standard Selling Price = ₹100 per unit
Actual Data
- Actual Quantity Sold = 1,200 units
- Actual Selling Price = ₹95 per unit
Sales Price Variance
SPV = 1,200(95−100)
Thus, the company has an Adverse Sales Price Variance of ₹6,000.
Causes of Favourable Sales Price Variance
- Increase in market demand.
- Superior product quality.
- Strong brand reputation.
- Limited market competition.
- Effective marketing strategies.
- Increase in customer preference.
- Introduction of premium products.
- Economic conditions supporting higher prices.
Causes of Adverse Sales Price Variance
- Intense market competition.
- Price reductions and discounts.
- Decline in customer demand.
- Poor product quality.
- Government price controls.
- Excess supply in the market.
- Economic recession.
- Ineffective pricing policies.
Importance of Sales Price Variance
- Measures pricing efficiency.
- Evaluates pricing policies.
- Assists in revenue management.
- Helps determine market competitiveness.
- Supports managerial decision-making.
- Improves sales planning.
- Assists in profit analysis.
- Strengthens budgetary control.
- Helps formulate pricing strategies.
- Enhances profitability.
Advantages of Sales Price Variance Analysis
- Improves pricing decisions.
- Helps evaluate market conditions.
- Assists in revenue planning.
- Facilitates corrective action.
- Supports profit maximization.
- Improves sales control.
- Strengthens decision-making.
- Enhances organizational efficiency.
Limitations of Sales Price Variance
- Depends on accurate standards.
- Influenced by external market conditions.
- Difficult to isolate causes.
- Requires detailed sales records.
- Time-consuming analysis.
- Ignores qualitative factors affecting demand.
3. Sales Volume Variance (SVV)
Sales Volume Variance (SVV) is the difference between the budgeted sales quantity and the actual sales quantity, valued at the standard selling price or standard profit margin. It measures the effect on sales revenue or profit caused by selling more or fewer units than originally planned.
Sales Volume Variance helps management evaluate the effectiveness of sales efforts and determine whether changes in sales quantity have positively or negatively affected the company’s performance.
Definition
Sales Volume Variance is the portion of Sales Value Variance that arises because the actual quantity sold differs from the budgeted quantity.
Formula
SVV = SP(AQ−BQ)
Where:
- SP = Standard Selling Price per Unit
- AQ = Actual Quantity Sold
- BQ = Budgeted Quantity Sold
When profit margins are used:
SVV = Standard Profit Per Unit × (AQ−BQ)
Alternative Formula
SVV = Standard Sales Value of Actual Quantity − Budgeted Sales Value
or
SVV = (AQ×SP) − (BQ×SP)
Interpretation of Sales Volume Variance
Favourable Variance (F)
When:
AQ > BQ
The actual quantity sold exceeds the budgeted quantity.
Adverse or Unfavourable Variance (A)
When:
AQ < BQ
The actual quantity sold is less than the budgeted quantity.
Example
Budgeted Data
- Budgeted Quantity = 1,000 units
- Standard Selling Price = ₹100 per unit
Actual Data
- Actual Quantity Sold = 1,200 units
Sales Volume Variance
SVV = 100(1,200−1,000)
Thus, the company has a Favourable Sales Volume Variance of ₹20,000.
Causes of Favourable Sales Volume Variance
- Increase in market demand.
- Effective advertising and promotion.
- Improved product quality.
- Better customer service.
- Expansion into new markets.
- Efficient sales force performance.
- Introduction of new products.
- Strong economic conditions.
Causes of Adverse Sales Volume Variance
- Decline in market demand.
- Increased competition.
- Poor marketing strategies.
- Economic recession.
- Supply shortages.
- Inferior product quality.
- Changes in customer preferences.
- Inefficient sales management.
Importance of Sales Volume Variance
- Measures sales performance.
- Evaluates market demand.
- Assists in sales planning.
- Helps assess marketing effectiveness.
- Supports managerial decision-making.
- Improves profit planning.
- Facilitates performance evaluation.
- Strengthens budgetary control.
- Helps identify market trends.
- Improves profitability.
Advantages of Sales Volume Variance Analysis
- Improves sales control.
- Helps evaluate marketing strategies.
- Assists in forecasting demand.
- Supports corrective action.
- Enhances decision-making.
- Improves resource planning.
- Facilitates profit analysis.
- Increases organizational efficiency.
Limitations of Sales Volume Variance
- Depends on accurate budgets.
- Influenced by external factors.
- Difficult to isolate causes.
- Requires detailed sales records.
- Time-consuming analysis.
- May ignore qualitative factors affecting sales.
4. Sales Mix Variance (SMV)
Sales Mix Variance (SMV) is the portion of Sales Volume Variance that arises because the actual proportion of different products sold differs from the budgeted or standard sales mix.
It is applicable when a company sells more than one product. Even if the total quantity sold remains the same, a change in the proportion of products sold can affect the company’s overall sales revenue and profitability.
Sales Mix Variance helps management determine whether changes in the product mix have increased or decreased profits.
Definition
Sales Mix Variance is the difference between:
The standard value of the revised standard mix and the standard value of the actual mix.
Formula
SMV = SP(AQ−RSQ)
or
SMV = ∑SP(AQ−RSQ)
Where:
- SP = Standard Selling Price or Standard Profit per Unit
- AQ = Actual Quantity Sold
- RSQ = Revised Standard Quantity
Calculation of Revised Standard Quantity (RSQ)
RSQ = (Total Actual Sales Quantity / Total Budgeted Sales Quantity) × Budgeted Quantity of each product
Interpretation
Favourable Variance (F)
When the actual sales mix produces more revenue or profit than the standard mix.
Adverse or Unfavourable Variance (A)
When the actual sales mix produces less revenue or profit than the standard mix.
Example
Budgeted Sales Mix
| Product | Quantity | Standard Price | Sales Value |
|---|---|---|---|
| A | 600 units | ₹20 | ₹12,000 |
| B | 400 units | ₹30 | ₹12,000 |
| Total | 1,000 units | ₹24,000 |
Actual Sales Mix
| Product | Quantity |
|---|---|
| A | 500 units |
| B | 500 units |
| Total | 1,000 units |
Step 1: Calculate Revised Standard Quantity
Since total actual quantity equals total budgeted quantity:
- Product A = 600 units
- Product B = 400 units
Step 2: Calculate Sales Mix Variance
Product A
SMV = 20(500−600)
Product B
SMV = 30(500−400)
Total Sales Mix Variance
SMV = ₹3,000(F) − ₹2,000(A)
Therefore, the Sales Mix Variance is ₹1,000 Favourable.
Example
Budgeted Sales Mix
| Product | Quantity | Standard Price | Sales Value |
|---|---|---|---|
| A | 600 units | ₹20 | ₹12,000 |
| B | 400 units | ₹30 | ₹12,000 |
| Total | 1,000 units | ₹24,000 |
Actual Sales Mix
| Product | Quantity |
|---|---|
| A | 500 units |
| B | 500 units |
| Total | 1,000 units |
Step 1: Calculate Revised Standard Quantity
Since total actual quantity equals total budgeted quantity:
- Product A = 600 units
- Product B = 400 units
Step 2: Calculate Sales Mix Variance
Product A
SMV = 20(500−600)
Product B
SMV = 30(500−400)
Total Sales Mix Variance
SMV = ₹3,000(F) − ₹2,000(A)
Therefore, the Sales Mix Variance is ₹1,000 Favourable.
Advantages of Sales Mix Variance Analysis
- Identifies profitable products.
- Helps improve product strategies.
- Assists in sales planning.
- Facilitates corrective action.
- Supports profit maximization.
- Improves decision-making.
- Strengthens budgetary control.
- Enhances organizational efficiency.
Limitations of Sales Mix Variance
- Requires accurate sales standards.
- Difficult to isolate causes.
- Influenced by market conditions.
- Time-consuming analysis.
- Requires detailed product-wise records.
- Ignores qualitative factors affecting demand.
