Sales is the most important source of revenue for any company. It is, therefore, germane for every business to carry out variance tests on its sales.
There are different variance analyses that a business can conduct on its sales effort.
Examples include sales quantity variance, sales margin price variance, and so on.
In this post, I will guide you through the meaning of sales quantity variance with illustrations to explain the calculation aspect.
The Definition Of Sales Quantity Variance.
Sales quantity variance (SQV) measures the difference between the actual quantity of products sold and the budgeted sales quantity at the standard margin per unit. SQV isn’t the same as sales volume variance.
The standard margin in this case depends on the costing technique adopted by the business.
For absorption costing, the formula is:
(Budgeted sales – Actual Sales) x Standard Profit
For marginal costing:
(Budgeted sales – Actual Sales) x Standard Contribution*
Standard contribution = Selling price – Variable cost
Standard profit = contribution – fixed cost.
Adeola Plc manufactures a product T which is highly sought after in the market due to its exceptional quality. The sales department estimates that 100,000 units would be sold in the coming season but eventually only 110,000 units were sold. The variable cost per unit is $30, fixed cost per unit is $20 and selling price is pegged at $100. Calculate the SQV.
- Using both marginal and absorption costing technique
SQV = (Budgeted sales – Actual Sales) x Standard Profit
Where standard profit = $100 – $30 – $20 = $50.
SQV = (100,000 – 110,000) x $50 = $50,000 F avourable.
Using margnal costing, standard profit willl be replaced by standard contribution in the above formula, the contribution = $100 – $30 = $70
Therefore, SQV = (100,000 -110,000) x $70 = $70,000 Favourable
Interpretation Of The Answers Obtained Above.
The value for the sales quantity variance obtained above is favourable because Adeola Plc was able to sell more than its budgeted units. If the adctual units sold were less than the quantity budgeted the interpretation of the result would have been adverse or unfavourable.
How To Achieve Favourable Sales Quantity Variance.
- The company should increase its marketing and advertising spending to increase awareness which may results in higher sales.
- Increased demand for the product.
- The management should adopt more efficient production processes.
- Training the staff so they can become more efficient.
- Replacing worn-out machines with newer ones.
Not doing any of these as and when due would result in adverse sales quantity variance.
Advantages of Sales Quantity Variance
- SQV aids management in assessing the reason for the company’s ability to achieve or fail to achieve its budget.
- It assists the management in evaluating performance.
- It helps the management in evaluating the forces of demand and supply in relation to the company’s sales result.
- It helps to assess the company’s pricing policy.
Disadvantages of Sales Quantity Variance
- SQV is not a suitable variance for a company producing more than one product.
- In the bid to attain favorable variance, management may produce more without having the capacity to sell what’s produced.
- It has limited use in the sense that companies without standard costing methods with uniform and standardized production prices may find it difficult to implement the system.
- It is not suitable for all companies.
- It is prone to manipulation.
The Difference Between Sales Quantity Variance And Sales Volume Variance
In simple terms, SQV is a sub-varaince to sales volume variance. Sales volume variance comprises of sales mix variance and sales volume variance.
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Have a great day lovelies!