Sales Volume Variance
Sale volume variance (also known as Sales Quantity Variance) is the difference between actual sale amount and the budget with the same standard price. It will tell us the difference between budgeted and actual sale due to a change in sales quantity. The variance can be positive or negative. Positive variance means that the actual sales are greater than budgeting, so the profit is higher than expected. On the other hand, negative variance shows that the profit is lower than expected. These assumptions only correct if the other factors such as selling price, cost of goods sold, and other expenses remain the same.
There is always a variance between the estimate and actual sales, but we try to reduce it to the minimum level. Both favorable (positive) and unfavorable (negative) is not a good sign to the company. If there is a big favorable variance, we will not have enough inventory to sell, it is too expensive to produce in a short time due to labor, and raw material. A big unfavorable variance will reduce our profit. Long outstanding stock will be outdated.
So the company wishes to have a small variance only, as it will not impact the whole strategies. The actual result is almost the same as what we have planned.
Sale Volume Variance Formula
Sale Volume Variance = (Actual quantity * Standard price) – (Budgeted quantity * Standard price)
Company A produces manufacturing Shirts and Trousers for the US market. Based on their annual business plane, the company expects to sale the following quantity:
- Shirt : 100,000 units @ $ 20
- Trouser: 85,000 units @ $ 40
However, during the year, the company can only 90,000 units of the shirt and 100,000 units of trousers.
Calculate the sale volume variance
Sale volume variance = (90,000 units * $ 20) – (100,000 units * $ 20)
= $ 200,000 unfavorable because of the company revenue less than expected.
Sale volume variance = (100,000 units * $ 40) – (85,000 units * $ 40)
= $ 600,000 favorable because of the company revenue more than expectation.
Cause of Sales Volume Variance
|Favorable||Our product becomes a popular trending after release to the market. So the actual sale quantity just increases unexpectedly.|
|The product’s feature bypasses the competitors’ products. It took the competitors some time to figure out.|
|The price is competitive in the market. The customers are highly likely to turn to the lower products with similar quality.|
|The competitors left the market; we grape the remaining market share.|
|Unfavorable or adverse||The actual sale quantity is less than expected due to various reasons such as product features, new trending, and better competitive products.|
|Change in law or regulation which push our product to the bottom.|
|The production cost may increase, so it will lead to an increase in selling price. Then the sale quantity will drop as the customers switch to substitute products.|
|In a competitive market, competitors always release new products which try to beat us, so our product can go down at any time.|
If we want to analyze the sale price variance, please check the following article.