Sale Price Variance
Sale price variance is the difference between the actual selling price and the standard selling price set by company. It is the difference between the actual sale amount and budget due to the change in selling price.
The standard selling price is the price that management has estimated during the production process. They predetermine the selling price before the product hit the market. It is the basic which help to support their decision in producing units and profitability.
The management has already estimated the product price in advance, however, during a product launch, they have set a different price. The market price change all the time due to supply and demand which increase or decrease the price. There are various reasons such as competition, change in demand, inflation, and so on. By the time product is ready to sell, the market has moved. Company needs to adjust the price, they can’t go against the market otherwise the products will not be sold.
Sale price variance is the difference between the standard price and the actual price that the company has sold the product.
The difference can be favorable or unfavorable. Favorable means that the actual price is higher than budgeted so company makes more revenue than expected. Unfavorable means the actual price is lower than our estimate. Both variances are not providing any benefit to the company. We expect the price to stay the same or slightly different from the standard price.
In this circumstance, we assume that the sale quantity is not changed. however, in real life, the selling price and quantity are closely related. The selling quantity will increase if we decrease the price and vice versa.
Sale price variance = (Actual Units sold * Actual Selling price) – (Actual Units Sold * Standard price)
Company A produces product X and Y which has the standard price of $5 and $8 respectively. During the year, the actual quantity and price can be found as follows:
|Product||Actual sale quantity (units)||Actual selling price (USD)||Total (USD)|
|Product X||100,000||$ 6||$ 600,000|
|Product Y||120,000||$ 7||$ 840,000|
Calculate the sale price variance
Sale price variance = (100,000 units * $ 6) – (100,000 * $ 5) = $ 100,000 favorable because the company can sale at a higher than standard rate.
Sale price variance = (120,000 units * $ 7) – (120,000 units * $ 8) = $ 120,000 unfavorable because the company sale a lower than standard rate.
Cause of Sale Price Variance
|Cause of Adverse Variance|
|High competition||The high competition will lead to lower price. It happens when our products are similar to the competitors, the customers can’t differentiate our products from others. It also happens to other suppliers. Sooner or later they will go into a price war.|
|Decrease in demand||The market demand suddenly decreases, and the manager decides to lower the price to keep up with the target sale and target contribution.|
|Product obsolete||The product will be obsoleted based on its lifetime, expiration, and fashion. Sometimes our product unexpectedly expires the new technology/feature introduced by the competitor. Due to these reasons, the company may force to sell at a discount rate before those products become useless.|
|Deflation||Deflation will bring down the price of products or services. Our product will become cheaper too.|
|Government||If our products have a huge impact on society, the government can impose the price ceiling which is the maximum price we can sell. If our standard price is higher than the price set, we need to decrease it.|
|Cause of Favorable Variance|
|Decrease in competition||The competition will decrease due to various reasons such as the bankruptcy of major competitors. Our market share will increase, and we will have a great chance to increase the price for additional margin.|
|High-quality product||The company may realize the product’s potential after it launches into the market. Its quality and features are far ahead of the other competitor, management will decide to increase the price from the standard rate.|
|Inflation||Inflation will decrease the purchasing power of any specific currency, so we need to increase our prices to keep up with the economy.|
|Increase in demand||With the unexpected increase in demand for the products, there will be a shortage. Based on the law of demand and supply, the company will be able to increase prices and sell the same quantity of products.|
|Effect market campaign||A successful marketing campaign will attract so many customers, that they will need a huge quantity of products.|
How to Deal with Unfavorable Sale Price Variance?
|Solution to Unfavorable Sale Price Variance|
|Market research||We need to conduct proper market research in order to understand the consumer’s attitudes and their reaction toward price.|
|Estimate product life cycle||The production quantity must depend on the product life cycle. It should be maximum during the product peak and decrease when it reaches the end of life. We will be able to reduce the obsolete product at the end of its cycle.|
|Be aware of competitors||We must keep our eyes open when the competitors release new products as it will affect our products’ selling.|