Q. 10. How to compute sales variances?

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:

Also Check:  Q. 8. Standard Costing practical problems and solutions

(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 SaleProductSales Qty.Sales Price per unit
A1,20015
B80020
C2,00040
Actual Price
A88018
B88020
C2,64038

Required:

Calculate the following variances:

(i) Sales Quantity Variance, (ii) Sales Mix Variance, (iii) Sales Price Variance, (iv) Total Sales Variance

Solution:

Basic Calculations

Also Check:  Q. 2. What are the advantages of standard costing ? Discuss its limitations.
ProductBudgetActual
Qty. (unit)Rate ($)Amount ($)Qty. (unit)Rate ($)Amount ($)
A1,2001518,0008801815,840
B8002016,0008802017,600
C2,0004080,0002,640381,00,320
Total4,0001,14,0004,4001,33,760

Calculaltion for standard sales

 

ProductActual Qty. (A)Budgeted Price (B)Standard Sales ($)(A x B)
A8801513,200
B8802017,600
C2,640401,05,600
4,0001,36,400

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

Also Check:  Q. 7. What are the similarities and differences between budgeting and standard costing?

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)

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