Revenue variances
/What are Revenue Variances?
Revenue variances are used to measure the difference between expected and actual sales. This information is needed to determine the success of an organization's selling activities and the perceived attractiveness of its products. There are three types of revenue variances, which are noted next. All three of these variances can be used to develop insights into the reasons why actual sales differ from expectations.
Sales Volume Variance
The sales volume variance is the difference between the actual and expected number of units sold, multiplied by the budgeted price per unit. The intent of this variance is to isolate changes in the number of units sold.
Selling Price Variance
The selling price variance is the difference between the actual and budgeted unit price, multiplied by the actual number of units sold. The focus here is on the price that the company has been forced to accept in order to generate customer orders. When prices are driven lower than expectations, one may surmise the existence of considerable competitive pressure.
Sales Mix Variance
The sales mix variance is the difference between the actual and budgeted number of units sold, multiplied by the budgeted contribution margin. This measure is used to determine the impact on the overall sales margin of differences in the expected mix of units sold. This is a particularly important variance when the products sold have widely differing margins.
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The Reasons for Revenue Variances
There are several reasons why revenue variances occur, including the following items.
Cannibalization
A new product generates sales at the expense of an older product. This typically occurs when the newer product has a better value proposition than the older product.
Competition
Competitors may have introduced products at attractive prices that have similar or better features than the company's own products.
Price Changes
A price increase could dramatically reduce the number of units sold, while a price reduction may have the reverse effect. This depends on the price elasticity of a product.