A sales volume variance arises when there is a deviation between the actual number of units sold and the estimated number of units 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 also affect the demand for goods.
- Reduced quality of goods would harm customer loyalty and negatively affect the demand for goods.
- 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, it needs to keep 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 an entity sells more than one commodity.
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
Sales quantity variance can be calculated through the following formula:
(Budgeted sales – Sales at standard mix) Standard contribution
(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 variances.
Let me illustrate these steps through an example below,
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 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 to achieve 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)
A favorable sales quantity variance occurs when the budgeted sales are less than actual sales at the standard mix meaning that the company earned more contribution than expected.
An unfavorable quantity variance occurs when the budgeted sales are more than actual sales at the standard mix meaning that the company earned less contribution than expected.