What is the Importance and Limitation of Sales Quantity Variance?

Sales quantity variance is the difference between actual quantity and budgeted quantity of units sold during a specific time and multiplying the resulting quantity with the 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 that 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 analyze what needs to be done.

Before going deep let’s learn what is favorable and what is unfavorable. 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 favorable and if the budgeted sales quantity is greater than what is achieved, the result will be termed unfavorable sales quantity variance.

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

The targets allocated to the sales team are matched with the targets achieved. If the result is favorable, the team has completed their target with proficiency and vice versa.

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

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

Limitation of Sales Quantity Variance:

Change In Law:

Generally, a 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 its 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, a 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 unanticipated competition comes into the market.

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

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So the increase in competition has always hurt the actual sales volume of the company.

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