Sales Volume Variance
Sales Volume Variance Overview
The sales volume variance is the difference between the actual and expected number of units sold, multiplied by the budgeted price per unit. The formula is:
(Actual units sold - Budgeted units sold) x Budgeted price per unit
= Sales volume variance
An unfavorable variance means that the actual number of units sold was lower than the budgeted number sold.
The budgeted number of units sold is derived by the sales and marketing managers, and is based on their estimation of how the company's product market share, features, price points, expected marketing activities, distribution channels, and sales in new regions will impact future sales. If the product's selling price is lower than the budgeted amount, this may spur sales to such an extent that the sales volume variance is favorable, even though the selling price variance is unfavorable.
There are a number of possible causes of a sales volume variance. For example:
- Cannibalization. The company may have released another product that competes with the product in question. Thus, sales of one product cannibalize sales of the other product.
- Competition. Competitors may have released new products that are more attractive to customers.
- Price. The company may have altered the product price, which in turn drives a change in unit sales volume.
- Product recall. Product flaws trigger a recall of the product, which causes a loss of customer confidence and a massive decline in units sold.
- Trade restrictions. A foreign country may have altered its barriers to competition.
Sales Volume Variance Example
The marketing manager of Hodgson Industrial Design estimates that the company can sell 25,000 blue widgets for $65 per unit during the upcoming year. This estimate is based on the historical demand for blue widgets, as supported by new advertising campaigns in the first and third quarters of the year.
During the new year, Hodgson does not have a first quarter advertising campaign, since it is changing advertising agencies at that time. This results in sales of just 21,000 blue widgets during the year. Its sales volume variance is:
(21,000 Units sold - 25,000 Budgeted units) x $65 Budgeted price per unit
= $260,000 Unfavorable sales volume variance
Episode 111 of the Accounting Best Practices podcast discusses variance analysis. Listen now.
The sales volume variance is also known as the sales quantity variance.