Selling price variance definition
/What is the Selling Price Variance?
The selling price variance is the difference between the actual and expected revenue that is caused by a change in the price of a product or service. The expected revenue for each unit of product or sales is developed by the sales and marketing managers, and is based on their estimation of future demand for these products and services, which in turn is affected by general economic conditions and the actions of competitors. The expected revenue may also be influenced by the pricing strategy of the business, which could involve price skimming or penetration pricing. If the actual price is lower than the budgeted price, the result may actually be favorable to the company, as long as the price decline spurs demand to such an extent that the company generates an incremental profit as a result of the price decline.
How to Calculate the Selling Price Variance
To calculate the selling price variance, subtract the budgeted price of an item from its actual price, and then multiply by the actual number of units sold. The formula is as follows:
(Actual price - Budgeted price) x Actual unit sales = Selling price variance
An unfavorable variance means that the actual price was lower than the budgeted price, while a favorable variance arises from the reverse condition.
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Why the Selling Price Variance is Important
The selling price variance is a useful tool for determining which products and services are selling in accordance with their budgeted price points. If they are selling at a higher price point, then this indicates that there is an unusually high level of underlying demand. Conversely, if they are selling at prices below budget, it is likely that the organization is needing to offer discounts to generate sufficient customer demand. This information can be used to make adjustments to standard prices, to bring them more into line with actual customer demand.
Example of the Selling Price Variance
The marketing manager of Hodgson Industrial Design estimates that the company can sell a green widget for $80 per unit during the upcoming year. This estimate is based on the historical demand for green widgets. During the first half of the new year, the price of the green widget comes under extreme pressure as a new supplier in Ireland floods the market with a lower-priced green widget. Hodgson must drop its price to $70 in order to compete, and sells 20,000 units during that period. Its selling price variance during the first half of the year is:
($70 Actual price - $80 Budgeted price) x 20,000 units = $(200,000) Selling price variance