How to calculate sales quantity variance?

Introduction:

A sales volume variance arises when there is a deviation between the actual number of units sold and the estimated number of units that were expected to be sold.

This could be due to various reasons as listed below:

  • Changes in the price of a substitute good would affect the demand for goods of the company as per the law of demand.
  • Changes in the price of complementary goods would affect the demand for goods as well.
  • A reduction in the quality of goods would harm customer loyalty and affect the demand for goods negatively.
  • Demand for a particular good can also be affected by changes in trends and fashion.

A sales quantity variance analysis is performed because even though it’s almost impossible for the company to achieve the targeted sales, the company needs to keep on improving its operations for the business to prosper.

Through the variance analysis, companies depict the reasons behind deviations between standard/ideal data and actual data.

The reasons are then improved or eliminated to try harder to achieve the targeted data.

A sales quantity variance is performed when more than one commodity is sold by an entity.

It is an extension of the sales volume variance which reflects the changes in standard contribution or profit due to variation in budgeted unit sales and actual units sold.

Sales volume variance = Sales quantity variance + Sales mix variance

Formula:

Sales quantity variance can be calculated through the following formula:

Marginal costing:

(Budgeted sales – Sales at standard mix)  Standard contribution

Absorption costing:

(Budgeted Sales – Sales at standard mix)  Standard profit

How to calculate sales quantity variance?

Step#1 Find out the standard mix ratio the sales should be in.

Step#2 Proportion of the actual units sold by the company in the standard mix ratio.

Step#3 Apply the formula.

Step#4 Add both the variances.

Let me illustrate these steps through an example below,

Illustration:

DDphones Inc is a company that manufactures two products as follows:

  • Earphones – to be inserted inside the ears for audibility sold at a selling price of $5
  • Headphones – must be worn overhead for audibility sold at a selling price of $10

DDphones had expected to sell 3500 units of earphones and 1500 units of headphones at a standard contribution of $6 and $8 respectively.

However, at the end of the year, it had managed to sell 4200 units of earphones and 1800 units of headphones. Calculate the sales quantity variance.

The sales quantity variance can be calculated as follows:

Step#1 Standard Mix Ratio:

The standard ratio of the number of earphones and headphones sold is 70:30

 Earphones = 4,200 units

 Headphones = 1,800 units

Step#2 Proportion actual sales into the standard mix:

This step involves the calculation of the number of units of each commodity that should have been sold for achieving the targeted profit. It can be done as shown below.

Actual total sales = 4,200 + 1,800 = 6,000

Sales at standard mix (earphones) = 6,000  70% = 4200

Sales at standard mix (headphones) = 6,000  30% = 1800

Step#3 Apply the formula:

Calculate the sales quantity variance of both the commodities separately as follows:

(3,500 – 4,200) * $6 = $4,200 (F) for earphones

(1,500 – 1,800) * $8 = $2,400 (F) for headphones

 Step#4 Add variances of both commodities:

Sales quantity variance = $4,200 + $2,400 = $6,600 (F)

Analysis:

A favorable sales quantity variance occurs when the budgeted sales is less than actual sales at standard mix meaning that company earned more contribution than expected.

An unfavorable quantity variance occurs when the budgeted sales are more than actual sales at standard mix meaning that the company earned less contribution than expected.

Importance and Limitation of Sales Quantity Variance

Introduction:

Sales Quantity variance is the difference between actual quantity and budgeted quantity of unit sold during a specific time and multiply the resulted quantity with standard price.

The formula for calculating sales quantity variance is simple and easy to understand,

Sales quantity variance= (Expected Quantity – Actual Quantity) × Standard Rate

Example to Understand the Concept:

The following example will help you to understand the phenomena easily,

Actual Sales Quantity = 70,000 Unit

Expected Sales Quantity = 60,000

Standard Price = $18

Solution:

The formula to calculate the quantity variance will be

Sales quantity variance= (Expected Quantity – Actual Quantity) × Standard Rate

Put the Values from the question:

Sales quantity variance = ($60,000-$70,000) × $18

= $18 × 10,000

=$180,000 Favorable

Importance of Sales Quantity Variance:

These reports fall under the category of managerial accounting. As the name suggests, this branch of accounting is used by the company’s managers to evaluate the performance of different departments…

The sales quantity variance is an important management tool which gives information to the managers about the previous performance of the company.

On the basis of this information, you can easily compare, what is planned and what is achieved.

The result coming out from the formula is term as favorable or unfavorable. Hence the organization managers or directors can analyses what needs to be done.

Before going deep let’s learn what is favorable what unfavorable result is. It mainly depends on the two components of the formula.

Like if the budgeted sales quantity is less than the actual sales achieved it will be called as favorable and if the budgeted sales quantity is greater then what is achieved, the result will be termed as unfavorable sales quantity variance.

The performance of one of the most important department can be easily summarized by this one thing.

As the targets allocated to the sales team are matched with the actual targets achieved. If the result is favorable it means that the team has completed their target with proficiency and vice versa.

The results of sales quantity variance are dependent on the basis of estimations. It means, at the year end you will compare your planning with actual.

In this way, the budget should be made on the basis of the previous record taking all the seasonal effect and other factors also..

Limitation of Sales Quantity Variance:

Change In Law:

Generally, change of law or other regulations by the government or responsible authority may affect the actual sales of the company.

In this situation, the organization should revise their sales budget according to the situation.

If the company does not update accordingly, the result may not be able to give you the actual image of the company’s performance…

Change In Price:

This is the other limitation of sales Quantity variance as the formula for sales quantity variance needs a constant fixed price throughout the period.

Otherwise, change in production or purchasing price force the management to change the selling price for the commodity.

Change in selling price always has a bad or good effect on the company’s total sales.

Change in Market Competition:

 The basis for sales quantity variance results will be affected when there is an unanticipated competition comes in the market.

It may be in the form of a big organization or may be the introduction of large numbers of entities.

So the increase in competition have always an adverse effect on the actual sales volume of the company.

So to get an accurate result from sales quantity variance, there should be a constant competition or the company should have taken into consideration the new competition when making the expected quantity sales.

Sales Quantity Variance

Definition:

A difference between the number of units used/sold and the number of units that were anticipated to be used/sold is known as a quantity variance. Hence, the sales quantity variance assesses the increase or decrease in budgeted profit occurring due to a variation between the actual and budgeted number of units sold.

Formula:

There are two formulas to calculate the sales quantity variance:

(actual sale in standard mix – budgeted sales) * budgeted profit per unit/contribution margin per unit

(actual sales – budgeted sales) * weighted average profit per unit/ weighted average contribution margin per unit

Contribution margin per unit is the difference between selling price per unit and variable cost per unit and is used in marginal costing.

Profit per unit is the difference between the contribution margin per unit and fixed cost per unit and is used in absorption costing.

The actual sale in standard mix is defined as the actual volume of sales proportioned into standard ratio.

Explanation:

A “variance” in cost accounting is defined as the difference between the budgeted or standard cost/revenue and actual cost/revenue. Its ultimate objective is to help the company analyze how costs can be minimized or reduced.

Likewise, the sales quantity variance illustrates how a change in quantity of units sold can impact the profitability of the business.

The sales quantity variance is an extension of the sales volume variance. The distinction between the two is that sales volume variance measures the effect on budgeted profit due to the difference between the volume of actual sales and budgeted sales whereas the quantity variance measures the effect on profit of the company due to a difference between the actual sales mix and the budgeted sales mix.

This only happens when the company is selling two or more products at different prices and is irrelevant in case of one product which is when we use the sales volume variance only.

Analysis:

A variance can be positive or negative. When the profit at standard mix is less than the budgeted profit, this means that the company has earned less than what was expected and impacts the financial statements negatively. Such a variance is referred to as an unfavorable variance.

However, when the profit at standard mix is more than the budgeted profit it is called a favorable variance since the company has earned more than what was anticipated.

Example:

A company sells coffee tables as well as dining tables and earns a standard profit per unit of $25 and $50 on each type of table respectively. As per the budget the company had anticipated that it would sell 100 coffee tables and 60 dining tables for the current period.

However, this is not what happened and the company ended up selling 90 coffee tables and 80 dining tables. According to the budget, the company was supposed to sell a total of 160 units at a ratio of 100:60 for coffee tables and dining tables.

This would have earned them a total budgeted profit of $5,500 (100*25 + 60*50). On the contrary, though, the company earned a profit of $6,250 (90*25 + 80*50).

The variance of $750 (F) arises due to a difference between the budgeted and actual profit. This is the volume variance.

The actual sales were not in the same ratio of 100:60 as was expected instead it was at a ratio of 90:80.

If we sold the actual sales volume at the budgeted ratio what would the profit be? Let me calculate it for you. The actual total sales volume is of 170 units.

The standard mix of these 170 units would be 106.25 units of coffee tables and 63.75 units of dining tables. This would have earned the company a profit of $5,843.75 (106.25*25 + 63.75*50).

The difference between the budgeted profit and actual profit at standard mix is $343.75 (F).

This is represented by the name of sales quantity variance. Even though both the variances are favorable but the amount differs because the actual sales were not made in the same ratio as expected.

The dining tables were sold more than the standard quantity and earn a higher profit whereas the coffee tables were sold less than the standard quantity and earn a lower profit.