The primary purpose why businesses exist is to generate profit. How this profit is earned is primarily through sales of the business’s offering.
It is, therefore, essential for every organization to carry out a variance test of its sales price. In this article, we’ll consider everything you need to know about sales price variance.
If this sounds like something you are ready to learn about.
Without much ado, let’s get started.
Definition Of Sales Price Variance
It measures the difference between the standard selling price of a business’s product and what it actually sells them for.
The variance analysis of sale price would result in either a favorable or adverse result. It is favorable when the company sells at a higher price than it expects to. It is adverse if the standard sale price is higher than the actual sale price.
How To Analyse The Variance Result
Each time you encounter a sales price variance scenario-based question. Have it at the back of your mind that your answer can be interpreted in just two ways
The analysis of sales price variance would be favorable if the actual selling price is greater than the standard price estimated.
On the other hand:
An unfavorable result is obtained where the standard sales price is greater than the actual.
The following are the likely reasons why you may achieve a favorable sales price variance analysis.
- Decreased demand for a product
- Improved Sales effort
- General inflation,
- A surge in demand.
Unfavorable analysis will result from the following:
- Better product offering by a competitor
- Reduction in demand for the product
- Deflationary tendencies,
- Unfavorable government policies,
- Obsolescence of product.
Sale Price Variance Formula With Worked Example.
(Actual Selling Price − Standard Price )× Units Sold
Dave Plc is a company engaged in the business of glass manufacture. It currently has two glass products, one premium the other regular. You are required to compute each of the product’s sales price variance (SPV) using the following information:
|Product||Quantity||Actual Sale Price||Standard price|
SPV = (Actual Selling Price − Standard Price )× Units Sold
For Product G: ($15-$20) x 1000 = $5,000 Adverse.
FOR Product X: ($60 – $40) x 2000 = $40,000 Favorable.
Interpretation: Dave Plc sells product G below the actual sale price, the impact of this is that the company will incur a loss on the product. However, its product X is selling far above the standard price. Hence, Dave plc will earn more profit.
What Are The Importance?
- It helps the management to cut off unprofitable products from its product line.
- Helps the management team in budgeting and forecasting.
- Quite easy to understand, interpret, and compute.
- Management uses this variance to analyze the impact of differences in sales price on the performance of the business.
- This variance is controlled by factors that are beyond the control of the company e.g the demand for the product.
In this article, we have been able to establish what you need to know about sales price variance.
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