Sales Price Variance occurs when the actual selling price of a commodity or service differs from the standard selling price set by the management, which is an estimated selling price decided beforehand.
It is not possible that businesses will always attain the standard and budgeted sales data.
The actual price can vary due to market conditions and changes in the competition, changes in the profit margin or offering customer unplanned discounts.
Sales price variance is a helpful set of calculation for businesses to be aware of their products success in the market and how much they contribute in the overall sales revenue.
It helps them plan whether to provide discounts or to raise the prices of the product.
To calculate the variance, the actual revenue and the revenue generated from the actual quantity if sold at the standard price is compared, which means the sale price variance is the difference between the revenue actually generated with the actual selling price and the revenue that should have been generated with the standard selling price.
Standard sales quantity of shirts is 500 units and the standard selling price is set at $50 whereas the actual quantity sold is 550 units at a selling price of $52, the sale price variance will be as follows
Variance can be favorable or it can be adverse; sales price variance is favorable when the actual sales price is greater than the standard sales price.
This can be because of high demands of the product, aggressive marketing campaigns leading to higher prices in the market, few competitors available in the market or the actual cost of the product of the item is greater and to cover the profit margin manufactures have raised the actual price of the item.
As shown in the example above the actual price is $52 whereas the standard price is $50, since the actual price is greater that is why the actual revenue generated is more than the standard revenue the variance of $1,100 is in the favor of the producers.
In conclusion, they have earned more than the expected, standard revenue which they decided before selling the items.
Sales price variance is adverse when the actual selling price is less than the standard selling price.
For instance, the standard quantity of mugs to be sold is 300 units at a standard selling price $20 but the actual quantity sold is 250 units at an actual selling price of $16, the calculation of the variance is below
Since the actual price $16 of the mug is below the standard price $20, the variance is adverse.
The reasons can be a decline in the demand of the certain mugs and the producers are trying to clear their stock of mugs by offering the consumers discounts on the prices or there are new entrants in the market of the mugs.
However, if the variances that occurred are huge this can be due to poor planning of budgeted data and unrealistic study about the market of the product and the competitors.