Sales price variance measures the increase or decrease in revenue due to a difference in the standard selling price and actual selling price. Standard price is the price at which the business expects to sell its products.
In cost management accounting, variance analysis is performed each year with the aim of keeping costs and revenues under check.
It is a method for limiting expenditure or period costs before they are incurred with a focus on maximum profitability.
The sales price variance can be calculated through the following formulas:
- (Actual selling price – standard selling price) * Actual units sold
- Actual sales revenue – Actual sales at a budgeted price
At the end of the year, the business has to prepare a budget plan for the following accounting period.
Several lower-level budgets are prepared to estimate the purchase price of goods, how much goods shall be purchased, how much production is required, what is the market demand for the product, at what price shall the finished goods be sold, etc.
All of these budgets are then compiled together in a master budget which is also referred to as the final plan. This financial plan is then remodeled into budgeted financial statements.
The entire budget plan is a track that the company follows throughout the budgeted accounting period in order to achieve maximal profitability.
Hence we draw the inference that the standard selling price is determined at the yearend in light of the expected number of units that are going to be demanded or sold, earning the maximum amount of revenue for the business.
However, the expenses and revenues are not always as expected and end up differing. This difference between budgeted and actual cost/revenue is known as variance.
The sales price variance assists us in analyzing how the distinction in standard selling price and actual selling price had an impact on the annual turnover and how the situation can be improved for the coming years.
The selling price may have varied due to a change in market competition or an inferior quality of the product.
Whatever the reason may be, the repercussions of change in selling price are then analyzed by the budgeting department that further advises the relevant department regarding the quality/competition/demand/cost of the commodity for the purpose of increasing the profitability or reducing costs.
The selling price variance would be Favorable (F) when the actual selling price is greater than the standard selling price.
This obviously results in excess actual revenue than the budgeted revenue. An increase in selling price could be due to any of the following reasons:
- The decrease in the price of complementary good
- Elimination of substitute
- Trend change
On the contrary, the selling price variance would be unfavorable or Adverse (A) when the actual selling price is less than the budgeted selling price.
The aftermath is a lower amount of turnover than what was expected. A decrease in price could be due to the following reasons:
- Increase in competition
- Lower quality goods
- The decrease in the price of a substitute good
Ally and Co. is a manufacturing company that produces the best quality jeans in town. Its budgeting department expects to sell 1000 pairs of jeans in the coming year for $7 each.
However, at the beginning of the accounting period, a new store commenced its business selling jeans at a 50% discount.
Ally and Co. had to discount their price to $5 in order to sell out the entire stock. Calculate the sales price variance for Ally and Co.
Sales price variance = (actual SP – standard SP) Actual units sold
Sales price variance for Ally and Co. = (7 – 5) 1000 = – 2,000 (A) Ally and Co. has an adverse selling price variance of $2,000 since it earned only $5,000 as compared to the expected $7,000.