Importance and Limitation of Sales Price Variance

Sales Price Variance

Sales price variance emerges when the actual selling price in dollars of a commodity varies from the budgeted or standard unit price in dollars. 

In simple words, we can say that the net difference in value by comparing the actual selling price with the budgeted selling price of a commodity.

Or we can say it is the difference between total sales amount for the specific period at the actual sales price and total sales at the budgeted at the actual sales units or quantity.

Sales Price Variance Formula:

The selling price variance is the difference between the real sales at the real price and the real sales at the standard price.

You can derive the formula as:

 Actual Sales Revenue = Actual Sales Units × Actual Price

Actual Sales at budgeted Price = Actual Sales Units × Budgeted Price

So the taking actual sales as common we get the result as,

Actual Sales Units × (Actual Sales Price – Standard Price)   

Example:

The following is the sales information of ABC company. The information including budget actual sales, standard price dand sales revenues at standard price.

ProductABC
Sales Revenue $12,000 $17,000 $11,100
Actual Units    3,0003,4003,700
Standard Price $4$5$3

During the year, company could sales the products as its plan. There are many reasons contributed to this. One of those is new competitor coming in to the market.

In average, Product A sales at $3.33 per unit, Product B sales at $3.53 per unit, and product C is sales at the $3.78 per unit.

Solution

Based on the above information, we have all the necessary information in order to calculate sales price variance.

Those information including actual sales price of each product, budget sale price of each product and the actual sales unit.

To find how much change in sales price between actual and budget make cause the actual sales revenues variance, first we need to find how much is the sales revenue at the actual price.

Then, we compare actual sales at actual price with actual sales at budget price.

The calculation of actual sales at actual price is very simple. Just multiple actual unit sales at the actual price.

After comparing, we will get the variance and for those products that actual selling price is higher than budget, the variance will be favorable.

And for those product that actual selling price is lower than budget. The variance will be unfavorable.

The following table is the result of calculation:

Product A B C
Actual Units  3,000 3,400 3,700
Standard Price $4 $5 $3
Actual price $3 $4 $2
Sales revenues at standard price $12,000 $17,000 $11,100
Sales revenues at actual price ($9,000) ($13,600) ($7,400)
Sales Price Variance $3,000 $3,400 $3,700

Importance of Sales Price Variance:

Like every internal managerial report, the sales price variance is an important report for future decision making by analyzing the previous data of the organization.

Management can easily calculate the net positive or negative effect in values come out due to the differences in actual and budgeted price.

The following are the key importance and limitation of sales price variance,

Helps in Decision Making:

Organizations can compare the net impact of price change with other companies to identify the amount of effect.

On the basis of these results, management can decide whether the impact of change is normal in percentage or it has more or less impact as compared to the other same entities in the industry.

The sales price variance results can be helpful in making decisions about to maintain the changed prices or company should do something to achieve the expected price.

As the higher selling price may bring high profit to the company, but at the same time, it may result in declining total sales in numbers.

So these calculations need to analyze in the right direction to get the best results.

Helps in Controlling Cost:

 Generally, one can say that the increase in selling price will also result in an increase in the profit margin of the company.

Yes, this theory might be true if all the other factors remain the same.

But in the real world, you may set a price on the basis of your calculations, but due to competition and other market factors you may not get your desired price, and you have to adjust the price accordingly.

To achieve the target profit you may want to control your cost of production or cost of purchasing so that the price variance change from unfavorable to favorable.

Limitations of Sales Price Variance:

Change in Demand and Supply:

The results of sales price variance are mainly depended on the other factors which are not in control of the company’s management.

If there is no change in demand and supply of your product during the required period, then the variance you will get at the end will give you a true picture.

But if there is a change in normal demand and supply of the product it will affect the actual price, in this situation, without updating your budget you cannot get the actual information.

Change in Laws:

The sale price variance formula would not give you a true picture even if you have calculated all the components correctly.

Because you may get an inflated result due to change in government laws or the introduction of new taxes which give rise to selling prices and raw material prices.

So to overcome this limitation of sales price variance, organizations should have revised their budgeted pricing with the changes so that at the end you will get a true and fair picture of your business.

See also  What is Variance Analysis? Definition, Explanation, 4 Types of Variances
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