Variance analysis is a technique used in managerial accounting. It allows companies to calculate the difference between expected and actual figures. Consequently, they can investigate how those variances occurred. Variance analysis can apply to various areas if a company has a budget. One of these includes sales and revenues. Among the sales variance, the sales volume variance is crucial for companies.
What is the Sales Volume Variance?
Sales volume variance refers to the difference between expected sales and actual performance. However, it does not measure that difference through price. Instead, it compares the number of products or services sold during a period. Sales volume variance gauges a company’s sales performance. It allows managers to assess whether the company has sold more or fewer items than estimated.
Sales volume variance is critical in measuring how efficient a company has been in selling its products. Item prices may change over a period, causing sales price variance. However, sales volume does not get affected by these prices. While the former may not be in a company’s control, the number of products sold is. It is a part of the sales variance analysis performed by companies.
How to calculate the Sales Volume Variance?
Companies can use the following formula for sales volume variance.
Sales volume variance = (Actual units sold – Budgeted units sold) x Standard price per unit
In the above formula, actual units sold refer to the number of product sales during a period. Budgeted units sold come from a sales or marketing budget calculated before the actual performance. Lastly, the standard price is a value set beforehand. Companies must keep this price at a standard to reach the volume variance.
Companies can use the sales volume variance to calculate their performance for several products. On top of that, it also helps identify the differences in overall sales volumes during a period. Consequently, companies will reach a favourable or adverse sales volume variance. Each of these can occur due to various reasons.
Example
A company, Red Co., budgeted to sell 10,000 units of its primary product. The company set a standard price of $10 in the budget for that product. During the year, Red Co. only sold 9,500 product units. Therefore, the sales volume variance for the company will be as follows.
Sales volume variance = (Actual units sold – Budgeted units sold) x Standard price per unit
Sales volume variance = (9,500 – 10,000) x $10
Sales volume variance = -$5,000
Red Co. has sold 500 units less than it expected in its budget. Therefore, it has suffered an adverse sales volume variance of $5,000. It implies the difference in the sales volume impacted sales for that amount.
What are the reasons for Sales Volume Variance?
One of the primary reasons for a sales volume variance is the market demand for the underlying product. If this demand increases, a company will sell more products. Therefore, it will cause a favourable sales volume variance. On the other hand, if the demand decreases, it will result in an adverse sales volume variance.
Sales volume variance may also reflect on a company’s efficiency in production. If a company produces more items during a year, it may sell more. Therefore, it will cause a favourable sales volume variance. If it fails to maintain its production capacity, it will incur an adverse variance. Companies can examine this variance further through volume mix and volume quantity variances.
Conclusion
Companies budget how much sales they will make before a period. However, these sales may differ based on the price and volume. Sales volume variance calculates why sales vary based on the number of products sold. Usually, it occurs due to a change in demand or efficiency. There are two types of sales volume variance, including mix and quantity variances.
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