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 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 variations 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 and 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 calculating 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 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 contributions 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.
Is Sales Volume Variance the Same as Sales Quantity Variance?
Sales volume variance and sales quantity variance are two different types of metrics used when measuring the performance of a business’s sales strategy.
While they are related, some distinct differences between the two terms should be understood by those evaluating them.
Volume variance is a measure of how successful a company’s pricing strategy was during a particular period, based on the volume of sales achieved relative to the number of units sold.
This can give insight into whether customers found the price attractive enough to purchase more or if it was too high for them to purchase.
On the other hand, quantity variance measures how well a company has sold enough units regardless of price.
This metric looks at how close actual sales were to expected results, which can help identify areas where improvements need to be made in either processes or products.
While volume and quantity variances involve evaluating sales performance over time, they measure different aspects and provide different insights into the factors at play in any given situation.
By understanding what each type can tell you about your own business you can use them together to maximize profits and gain detailed insights into customer behavior over time.
Advantages of Using Sales Quantity Variance Analyses
Sales quantity variance analysis is a useful tool for businesses looking to gain insight into the effectiveness of their sales strategies.
This type of analysis focuses on whether or not companies are selling enough units relative to their expectations and can help them identify areas of improvement. Here are some advantages of using sales quantity variance analyses:
- Provides an accurate picture of actual performance – Not only does this type of analysis measure how to close sales were to projections, but it also takes into account any pricing changes that may have occurred, giving a complete picture of what happened.
- Highlights potential issues quickly – By tracking sales quantity variance over time, businesses can quickly recognize problems in their strategy or product quicker to adjust as needed.
- Helps ensure efficient use of resources – By understanding where the demand lies and discrepancies between expected results and reality, companies can allocate resources most effectively to maximize profits.
Overall, a comprehensive sales quantity variance analysis provides valuable insight into customer behavior which helps companies make better decisions about pricing strategy and product development.
With the ability to react and adjust quickly to changing conditions, organizations can remain ahead of their competition and stay profitable.
Limitations of Sales Quantity Variance Analysis
Sales quantity variance analysis is a powerful tool for analyzing sales performance, but it has limitations.
While this type of analysis can help businesses identify areas of improvement and where the demand lies, it cannot provide a complete picture of customer behavior.
Some key limitations to consider when using this form of analysis include the following:
- Does not take into account other factors – Variance analysis measures discrepancies between projected sales and actual performance based on the number of units sold, but it does not take into account any other factors that may affect buyer decisions such as discounts or promotions.
- Not always an accurate reflection – Since variance analyses compare expected results to actual outcomes, there could be issues with the assumptions made about the demand, resulting in an inaccurate reflection of what occurred.
- Difficult to interpret – As variance analyses rely heavily on numerical data, they can be difficult to interpret correctly without careful consideration and a thorough understanding of the metrics involved.
While sales quantity variance analysis is a valuable tool for evaluating performance and customer behavior, it should not be used in isolation as it may lead to inaccurate conclusions or missed opportunities due to its inherent limitations.