Sales volume variance is a concept you should be concerned about since sales are the most important means by which any business generates money.
Without sales, it is impossible for businesses to remain in business.
If you are a student of accounting, a business owner, an accountant, or even a salesperson, you must understand that steady sales in the right volume are proof that a business is built on a viable idea. Hence, all mentioned above must constantly look for means of helping the company make more sales (excluding students).
In this article, you will learn about sales volume variance, an important analysis for gauging the selling performance of the business.
Sales volume variance signifies the impact on the profitability of a company as a result of the differences between the quantity budgeted to be sold and the actual units sold.
Absorption Costing Or Marginal Costing Techniques
There are two techniques for calculating sales volume variance. It all depends on whether your business uses absorption costing or marginal costing techniques.
For businesses leveraging marginal costing, the difference between budgeted and actual units sold would be multiplied by standard contribution per unit. Absorption costing on the other hand would replace standard contribution per unit with standard profit per unit.
This is because Absorption costing implies: Sales – all expenses (both fixed overheads and direct costs) while Marginal costing implies variable costs deducted from sales.
Therefore sales volume variance can be computed using,
(Actual units sold – Budgeted units to be sold) X Standard profit per unit
(Actual units sold – Budgeted units to be sold) X Standard contribution per unit.
Afolabi Inc. is a registered company in the manufacturing of plastic cups. The sales manager estimated sales for 2011 to be 400,000 units but at the end of the year, just 300,000 units were sold. The selling price per unit is $200. Calculate the sales volume variance for the year using absorption costing and marginal costing techniques.
- The variable cost per unit is $50.
- The fixed overhead per plastic cup is $70.
- For absorption costing, sales volume variance for Afolabi inc. would be :
(Actual sales – Budgeted Sales) x Standard profit per unit
Where standard profit per unit = (selling price – variable cost +fixed overhead)
= $200 – $(50+70) = $80
(300,000 – 400,000) x $80 = $800,000 Adverse
Let’s go on:
- For marginal costing, Sales volume variance;
(Actual sales – Budgeted Sales) x Standard contribution per unit
Where Standard contribution per unit = SP – Variable cost = $200 – $50 = $150
(300,000 – 400,000)units x $150 = $15,000,000 Adverse
TIP: Adverse are interpretations for instances where the actual units sold are lower than the budgeted units while the company would interpret results of sales volume variance as favorable when the budget is lower than the actual units sold.
Advantages Of Sales Volume Variance.
- Sales volume variance makes budgeting easier for the sales department.
- It aids the management in assessing the performance and efficiency of the salespeople.
- The results obtained are used in overall organizational financial planning.
- It aids the management in understanding how the forces of demand and supply in the market affect its sales.
Limitations Of Sales Volume Variance
The limitations of sales volume variance are not limited to the following:
- It is not a stand-alone basis for making decisions.
- Sales volume variance may cause the management to increase production to achieve favorable balances, which may amount to a waste of resources.
- The process may be complex especially when more than one product is involved.
- All standards involve forecasting which is subjective with the inherent possibility of error.
It is important to know that we only considered scenarios where a company is engaged in the production of a single product. Where the company has more than one product, standard mix variance would be used in calculating its sales volume variance.
The formula is:
Actual Units Sold x (Actual Sales Mix Percentage — Budgeted Sales Mix Percentage) x Standard Profit or Contribution Per Unit.
- Actual units sold refers to the number of a particular product that’s sold by the
- Actual sales mix percentage refers to the actual quantity of product sold divided by the total quantity of all products sold by the business.
- Budgeted sales mix percentage refers to estimated/budgeted/standard units of a product expected to be sold divided by the budgeted total units expected to be sold for all products.
- You can use either Standard Profit or Contribution Per Unit depending on your costing technique.
Without ado let’s quickly run over a calculation question taking into consideration a company with more than one product.
Assuming No Vex Inc., a reputable indigenous company in the manufacturing of fertilizers releases two new products, products A and B.
The company has decided on using marginal costing as its default costing technique and has tasked you, the accounting manager to calculate the sales mix variance using the following information:
Selling Price: $30
Standard Variable Cost: $10
Estimated units to be sold: 1,000
Actual units sold: 500
Standard Variable Cost: $35 Budgeted units to be sold: 2,000
Actual units sold: 2,600
The solution will be as follows.
- Calculate ratio for the two fertilizers in terms of actual units sold:
Fertilizer A = 1000/3000 x 100% = 33.3%
Fertilizer B = 100% – 33.3% = 66.67%
- Calculate the actual units sold to the sales mix.
Fertilizer A = 3100 x 33.3% = 1033 units
Fertilizer B = 3100 x 66.67% = 2067 units
- Compute the difference between budgeted units sold and sales mix units.
Fertilizer A = 1033 – 1000 = 33 units Favourable.
Fertilizer B = 2067 – 2000 = 67 units Favourable.
- Compute the standard contribution per unit.
Fertilizer A = $(30 – 10) = $20 per unit
Fertilizer B = $(50 – 35) = $15 per unit.
- The final step is to multiply the sales mix variance (units) with the contribution per unit
Fertilizer A = $20 x 33 units = $660 F
Fertilizer B = $15 x 67 units = $1005 F
For both fertilizer A and B, it can be deduced from the Favorable results obtained that the company sold more than its budget. Hence, the sales volume variance is favorable.