What Are the Importance and Limitation of Sales Volume Variances?

Introduction:

Sales volume variance is the difference between actual sales volume and budgeted sales volume during a specific time and multiply the resulted quantity with standard price.

This variance is calculated when management wants to assess how the actual sales volume affects the expected sales amounts at the standard sales price.

The company might have many different products and selling of some products were performed very well and sales of some of the products were not performing well during the period.

For the products that sold more than the plan, budget, or expectation, then variance should be favorable of management. And for those products that the actual sales are below the plan, then the result will be unfavorable variance.

Sales volume variance= (Expected sales volume – Actual sales volume) × Standard Rate

The formula for calculating sales quantity variance is simple and easy to understand.

  • Expected sales volume is the budget volume that management plan to sell in their business plan or budget plan.
  • Actual sales volume is the actual sale units that company sold during the period.
  • Standard rate of sales price is the price that company management set to sell at the beginning of the period.

Example to Understand the Concept:

Read the following example to understand the concept

Actual Sales Quantity = 50,000

Expected Sales Volume = 40,000

Standard Price = 20

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

= ($50,000-$40,000) × $20

= $20 × $10,000

=$200,000 Favorable

1) Importance of Sales Volume Variances:

Calculation of variances is as useful as any other report generated in any organization. It gives information about what was planned at the start and what was achieved during the period.

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Sales volume variances are a management tool used to evaluate the performance of the sales team and make the necessary decisions.

2) Tool for Performance Evaluation:

All the companies evaluate their employee performances after a certain period of time, to look at whether the company machinery works according to plan or there is something to get corrected.

The sales volume variance is an important tool to evaluate the performance of the sales team. As it shows how much target is achieved by the team in the specific period of time as compared to the initial target set by the management.

By analyzing the results generated from sale volume variance if needed, the company may consider investing more in advertisement and sales team training.

3) Important in Decision Making:

The results originated from sales volume variances, are very important for decision making. As it provides information to management about the overall achievement of the sales team in context to the targets set by management.

For example, If the sales volume variance is unfavorable for a long time the management may take a decision to lower the production quantity or may decide to invest further in the advertisement or increase the selling area for their product.

So this volume variance is very important for decision-making in any organization.

4) Limitation of Sales Volume Variances:

The sales volume variance has some limitations, due to which the results may not be useful as they could be. Companies always try their best to overcome these limitations, but due to limited resources or any other uncontrollable issue, they may not be able to fully overcome these limitations.

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5) Mistakes in Planning:

While making budget estimations for the next periods, sometimes management ignores a lot of previous calculations. This makes the budget estimation very unreal in nature, and when then you compare the budget with the actual data, you find a lot of unfavorable results.

So if you do not update your estimation from time to time there is a great chance that you will not get the true picture of your business.

6) Difficulties in Obtaining Financial Data:

After the completion of the financial year, the organization takes a lot of time to gather and summarize all the financial data. And you cannot compare the budgeted data with actual calculations until all the financial data get combined and organized in the form o report.

So when the actual data arises for analyses, there may be a time gap that may affect the usefulness of analyses.

Conclusion:

The sales volume variances give all the information to the management which is necessary to make decisions. The organization should consider all the factors which might affect the results of variance calculations.

Along with updating their estimations whenever they anticipate any major change in the course of business that will affect the product price.