What Is Sales Volume Variance?
Sales volume variance is a metric that organizations use to evaluate their sales performance by computing the difference between the number of actual and budgeted units sold at a particular price during a certain duration. It helps businesses optimize their sales, marketing, and production strategies to maximize future profits.
Organizations can compute this metric to know whether they fulfilled their budgeted sales goals. Moreover, accountants use it to determine the total increase or decrease in profit during a particular timeframe. They often utilize this information to prepare a more meaningful annual operating statement. A favorable sales volume variance indicates that an organization is on the right track.
Table Of Contents
- The sales volume variance definition refers to the difference between the actual and budgeted sales volume for a specific period.
- Businesses can compute it to create more effective price points, monitor product sales, and optimize budget strategies.
- An unfavorable variance means the business must analyze why it could not achieve the projected sales target. On the other hand, a favorable variance means that an organization has exceeded its budgeted sales target, and it may keep things as they are.
- Some causes of sales volume variance are product cannibalization, trade restrictions, and competition.
Sales Volume Variance Explained
The sales volume variance definition refers to the metric businesses utilize to measure the deviation of the actual number of units sold from the budgeted units sold at a given price within a particular period. Also known as sales quantity variance, this metric is fundamental to tracking a company’s sales performance. In addition, it offers the insight required to formulate better strategies businesses use to determine price points and budget sales.
Companies can use this metric to monitor the success of both individual products and campaigns. To achieve organizational objectives, sales managers must comprehensively understand this concept to analyze wins and losses efficiently and report back.
When the sales quantity variance is negative, it is an unfavorable variance. This indicates that the business must reassess why it could not achieve the sales target and change its product, pricing, or projections to maximize profits.
On the other hand, when the sales quantity variance is favorable, the organization is on the right track. In other words, it indicates that the company does not need to make changes.
Also, one must note that when a business exceeds its sales forecast, it could mean significant demand in the market for its products. In this case, businesses can conduct a competitor analysis to check if there is scope to increase the product price while keeping it more affordable than competitors’ offerings.
The causes of sales volume variance are as follows:
- Change In Product Price: If a business alters its product’s price, it may lead to a change in the unit sales volume.
- Product Recall: Product-related issues may force a business to recall the product. This leads to the loss of consumer confidence, which in turn causes a significant decline in sales quantity.
- Product Cannibalization: A business may launch a new product in the market that competes with its existing product. The sales of the former will cannibalize the latter’s sales.
- Trade Restrictions: A foreign country may impose trade restrictions, altering the barrier to competition. This can result in decreased sales volume for a business.
- Competition: If a business’s competitor launches a more appealing product, the business’s sales volume will decrease significantly.
Organizations can use the following formula to calculate sales volume variance:
Sales Volume Variance = (The Total Number of Units Actually Sold – Projected Units Sold) x The Price of Each Unit Sold
Let us look at a few sales volume variance examples to understand the concept better.
Suppose Magic Tees, Inc. is a t-shirt retailer. It wants to know whether its projected sales for the launch of a new product were accurate. After reviewing the financial forecast, it found that the overall projected units sold were 5,000 during the launch’s first week. During this timeframe, the actual units sold were 7,500, and the price per t-shirt sold was $30. The organization’s accountant used the above formula to compute the sales quantity variance.
Sales Volume Variance = (7,500 – 5,000) x $30, i.e., $75,000
The sales quantity variance for the new t-shirt launch of Magic Tees was $75,000. In other words, the company earned $75,000 more in revenue than it initially predicted. This positive figure denoted that the company was on the right track.
Suppose Grip Master is a tire manufacturing company. It expects to sell 300 units of a particular product in a month. However, it managed to sell only 220 units at $350 per unit. To calculate sales quantity variance, the organization can use the above formula.
Sales Quantity Variance = (220 – 300) x $350, i.e., – $28,000
Since the figure is negative, the volume variance is unfavorable. As a result, the business must take the necessary steps, for example, adjusting the pricing to make a more accurate prediction.
Sales Volume Variance vs Sales Price Variance
The meaning of sales price variance and sales volume variance can be confusing for individuals unfamiliar with the concepts. That said, to avoid confusion, one must know their differences. Hence, the table below highlights their distinct characteristics.
|Sales Volume Variance
|Sales Price Variance
|This metric measures the difference between the actual number of products sold and the projected units sold at a particular price during a specific duration.
|The sales price variance is the difference between a business’s actual and expected selling price per unit.
|This metric helps businesses determine whether they have been able to fulfill their sales target. Additionally, it can help them improve their marketing, sales, and production strategies to strengthen the bottom line.
|It helps organizations know which products have the highest contribution toward the overall revenue. Moreover, it helps them identify the products that must be subject to a price cut or discontinued.
Frequently Asked Questions (FAQs)
Sales quantity variance tells a business about the deviation of the actual sales volume from the projected sales volume at a certain price and during a particular duration. It is a key metric a business can utilize to monitor its sales performance.
The sales mix variance indicates what portion of a business’s sales quantity variance is because of an alteration in the product mix. On the other hand, the sales volume variance shows the difference between a company’s expected and actual sales volume at a certain price.
Their critical differences are as follows:
– A favorable variance is positive, while an unfavorable variance is negative.
– An unfavorable variance indicates that a business must make certain changes to the product, its price, or the sales projections. In contrast, a favorable variance indicates that a business does not need to change.
This metric helps businesses assess their sales performance and improve their sales and marketing strategies to maximize profit.
This article has been a guide to what is Sales Volume Variance. We explain its formula, examples, causes, and differences with sales price variance. You may also find some useful articles here –