Sales Volume Variance

Definition

Sales Volume Variance is the measure of change in profit or contribution as a result of the difference between actual and budgeted sales quantity.

Formula

Sales Volume Variance (where absorption costing is used):

=

(Actual Unit Sold - Budgeted Unit Sales)

x

Standard Profit Per Unit

Sales Volume Variance (where marginal costing is used):

=

(Actual Unit Sold - Budgeted Unit Sales)

x

Standard Contribution Per Unit

Explanation

Sales Volume Variance quantifies the effect of a change in the level of sales on the profit or contribution over the period.
Sales volume variance differs from other volume based variances such as material usage variance and labor efficiency variance in that it calculates not just the variance in sales revenue as a result of the change in activity but it quantifies the overall change in the profit or contribution.
The nature of the sales volume variance helps in forming a more meaningful analysis of other variances in the preparation of the operating statement. For example, the material usage variance needs to take into account only the difference between the actual consumption of material and the standard consumption of material for the actual number of units sold since the sales volume variance already takes into account the variation in material cost caused by the difference between budgeted and actual sales volume.
Sales volume variance should be calculated using the standard profit per unit in case of absorption costing whereas in case of marginal costing system, standard contribution per unit is to be applied.

Example

Wrangler Plc is a manufacturer of jeans trousers and jackets.

Information relating to Wrangler Plc's sales during the last period is as follows:

	Trousers Units	Jackets Units
Budgeted	12,000	5,000
Actual	10,000	8,000

Standard costs and revenues per unit of trouser and jacket are as follows:

	Trousers Rs.	Jackets Rs.
Revenue	20	50
Direct labor	5	10
Direct Material	6	15
Variable Overheads	4	10
Fixed Overheads	2	5

Wrangler Plc uses marginal costing to prepare its operating statement.

---

Sales Volume Variance shall be calculated as follows:

Step 1: Calculate the standard contribution per unit

As Wrangler Plc uses marginal costing system, we need to calculate the standard contribution per unit. Allocation of the fixed overheads may therefore be ignored.

	Trousers Rs.	Jackets Rs.
Revenue	20	50
Direct labor	(5)	(10)
Direct Material	(6)	(15)
Variable Overheads	(4)	(10)
Standard contribution per unit	5	15

Step 2: Calculate the difference between actual units sold and budgeted sales

	Trousers Units	Jackets Units
Actual	10,000	8,000
Budgeted	(12,000)	(5,000)
Difference	(2,000)	3,000

Step 3: Calculate the variance for each product

	Trousers	Jackets
Standard contribution per unit (Step 1)	Rs.5	Rs.15
Actual Units Sold - Budgeted Sales (Step 2)	x (2000 units)	x 3000 units
Variance	Rs.10,000 Adverse	Rs.45,000 Favorable

Step 4: Add the individual variances

Sales Volume Variance (Rs.10,000 - Rs.45,000)

=

Rs.35,000 Favorable

Note: If Wrangler Plc used absorption costing, sales volume variance would be calculated based on the standard profit per unit (i.e. fixed costs per unit of output will need to be deducted from the standard contribution calculated in Step 1).

Analysis

Favorable sales volume variance suggests a higher standard profit or contribution than the budgeted profit or contribution.

Reasons for favorable sales volume variance include:

• Favorable sales quantity variance (i.e. higher total number of units sold than budgeted)
• Favorable sales mix variance> (i.e. higher proportion of the more profitable products sold than planned in the budget)

Adverse sales volume variance indicated a lower standard profit or contribution than the budgeted profit or contribution.

Causes for an adverse sales volume variance include:

• Adverse sales quantity variance (i.e. lower total number of units sold than budgeted)
• Adverse sales mix variance (i.e. higher proportion of the less profitable products sold than anticipated in the budget)

Favorable sales volume variance can be achieved in case of a favorable sales mix variance even if the total number of units of all products sold during the period are lower than the total budgeted units (and vice versa).

It is therefore important to investigate the sales volume variance by analyzing it further into sales quantity and sales mix variances in case where an organization sells more than one product.