Answer
What are Sales Variances?
The change in price and change in sales quantity give birth to sales variances. There are two approaches to compute sales variances that are explained below:
1. Turn over method
2. Profit method
1. Turn Over method
The turn over method can be :
(i) Value variance
This is the difference between budgeted Sales and Actual Sales.
(ii) Volume variance
This is the variation which is represented by the amount of sales thus, the difference between standard sales to the amount of actual sales. thus :
Volume variance = (Budgeted Sales – Actual Sales)
(iii) Quantity variance
Sometimes standard sales differ from actual budgetary sales. This is known as quantity variance. Thus :
Quantity variance = (Budgeted Sales – Revised Standard Sales)
(iv) Mix variance
This is popularly known as the difference between revised standard sales and standard sales. Thus it shows that the actual mix of sales has not been in the same ratio as was specified in budgeted sales. Thus it can be:
Mix variance = (Revised Standard Sales – Standard Sales) Or (RSS – SS)
2. Profit Method
Profit method of computing sales variances can be:
(a) Value variance
(b) Price variance
(c) Volume variance
(d) Mix variance
(a) Value Variance
This difference is arrived due to the difference in budgeted profit to actual profit. Thus:
(Budgeted profit — Actual Profit)
(b) Price Variance
It is represented by the difference between Standard Profit and Actual profit. Thus, variance is same as price variance in turnover technique. It is assumed that price change would affect turnover and profit equally. Thus:
Price variance = (St. profit – Actual Profit)
(c) Volume variance
It is represented by the amount of difference in profit calculated from standard profit to budgeted profits, popularly known as quantity variance. Thus:
Volume variance = (Budgeted profit – Revised St. profit)
(d) Mix variance
The difference between revised standard profit and standard profit is the mix variance. Thus it can be :
Mix variance = (Revised St. Profit – St. profit)
Problem
John Trading Co. Furnishes the following details for January 2019:
Budgeted Sale | Product | Sales Qty. | Sales Price per unit |
A | 1,200 | 15 | |
B | 800 | 20 | |
C | 2,000 | 40 | |
Actual Price | |||
A | 880 | 18 | |
B | 880 | 20 | |
C | 2,640 | 38 |
Required:
Calculate the following variances:
(i) Sales Quantity Variance, (ii) Sales Mix Variance, (iii) Sales Price Variance, (iv) Total Sales Variance
Solution:
Basic Calculations
Product | Budget | Actual | ||||
Qty. (unit) | Rate ($) | Amount ($) | Qty. (unit) | Rate ($) | Amount ($) | |
A | 1,200 | 15 | 18,000 | 880 | 18 | 15,840 |
B | 800 | 20 | 16,000 | 880 | 20 | 17,600 |
C | 2,000 | 40 | 80,000 | 2,640 | 38 | 1,00,320 |
Total | 4,000 | 1,14,000 | 4,400 | 1,33,760 |
Calculaltion for standard sales
Product | Actual Qty. (A) | Budgeted Price (B) | Standard Sales ($)(A x B) |
A | 880 | 15 | 13,200 |
B | 880 | 20 | 17,600 |
C | 2,640 | 40 | 1,05,600 |
4,000 | 1,36,400 |
Calculation for revised standard quantity
Revised Standard Qty. = (Total AQ / Total SQ) x St. quantity
A = (4,400 / 4,000) x 1,200 = 1,320
B = (4,400 / 4,000) x 800 = 880
C = (4,400 / 4,000) x 2,000 = 2,200
Calculation for variances
(i) Sales value variance
= Actual sales – Budgeted sales
= 1,33,760 – 1,14,000 = $19,760 (F)
(ii) Sales price variance
= (AP – SP) x AQ
A = (18 – 15) x 880 = $2,640 (F)
B = (20 – 20) x 880 = Nil
C = (38 – 40) x 2,640 = $5,280 (A)
Total = $2,640 (A)
(iii) Sales volume variance
= (AQ – BQ) – SP
A = (880 – 1,200) x 15 = $4,800 (A)
B = (880 – 800) x 20 = $1,600 (F)
C = (2,640 – 2,000) x 40 = $25,600 (F)
Total = $22,400 (A)
(iv) Sales mix variance
= (AQ – RSQ) x SP
A = (880 – 1,320) x 15 = $6,600 (A)
B = (880 – 880) x 20 = Nil
C = (2,640 – 2,200) x 40 = $17,600 (F)
Total = $11,000 (F)
(v) Sales quantity variance
= (RSQ – BQ) x SP
A = (1,320 – 1,200) x 15 = $1,800 (F)
B = (880 – 800) x 20 = $1,600 (F)
C = (2,220 – 2,000) x 40 = $8,000 (F)
Total = $11,400 (A)
Verification
(i) Sales Value Variance = Price Variance + Volume Variance
19,760 (F) = 2,640 (A) + 22,400 (F)
(ii) Sales Volume Variance = Mix Variance + Quantity Variance
22,400 (F) = 11,000 (F) + 11,400 (F)