Overview
In this article, we will cover the market size variance or sales volume planning variance and market share variance or sales volume operational variance. This will include the key definition, formula, examples, analysis and interpretation. In addition, the later section also includes the important of sales volume planning and operational variances. Before diving into detail, let’s understand the overview and some basic concepts in relation to the market size and market share variances.
Typically, variance analyses are an important tool in performance measurement and controls. Studying the drivers causing a variance in standards and actual results is even more important. Sales variance comprises of sales price and sales volume variances. Considering the factors causing deviations in the variances directly relate to the planning and operational factors.
In simpler terms, selling more product units increases sales volumes and affects the market size and share variances. Companies cannot control few factors in macroeconomic terms such as the entry of new competitors, which affects the company’s sales. Revising the budgets and closing the gap between planned and actual budgets can increase the planning and operating variances favorably. Both market size (Planning) and Market share (operational) variances are closely linked and can be described in terms of variances as:
Planning Variance: Planning variance makes a comparison between the planned original budget and the revised budget
Operational Variance: performs a comparison between revised budgets and the actual results achieved.
Sales volume variance can be calculated as:
Sales Volume Variance = (Actual Sales – budgeted sales) × Standard profit margin
When companies revise budgets to close the performance gaps, these revised and planned budgets may carry variances. The revised budgets and the actual results may also carry deviations. These two part equation connected with each other represents the market size i.e. sales planning and market size i.e. market share variances.
Companies revise budgets due to several factors, e.g. if a company realizes the standard or original budgets based on historic sale prices are unrealistic. Some important factors forcing companies to revise budgets:
- Shortage of raw material or an important product component
- New competitors entry forcing the company to reduce sale prices
- Inefficiencies in operations causing a delay in production
- Sudden or seasonal demand in a particular product
Every firm wants to increase sales or revenue, which depends on companies’ operational capacity as well as strategic planning. When a company plans to produce and sell more products, it is planning for its “Market Size”.
Definition
Market Size or sales volume planning variance can be defined as:
“Difference between the planned sales and the revised sales considering the market share for the company remains constant”
Market Share or sales volume operational variance can be defined as:
“The difference between the revised sales budget and the Actual sales achieved for the company”
Formula
Below are the formulas for the market size variance or sales volume planning variance and market share variance or sales volume operational variance:
Working Example
Suppose Techno Blue Produces a Product P1, It estimates a sales volume of 490,000 units with a profit margin of $ 4 per unit, with a previous market share of 25%. The total market size was reported at $ 2.0 million. The company recorded sales of $ 520,000.
Total Sales Volume Variance = (Actual Sales – Budgeted Sales) × Standard Profit Margin
Sales Volume Variance = (520,000 – 490,000) × 4 = $ 120,000 Favorable
Breaking down the traditional sales volume variance into market size and market share variances the company should manage:
Revised Sales = (2,000,000 × 25%) = 500,000 units
Total Sales Volume Variance = $ 40,000 + $ 80,000 = $ 120,000 Favorable.
The favorable market size variance occurred because of revised increased sales target was set at 500,000 units instead of originally planned 490,000 units. The market Share variance was favorable as the company market share grew from 25% to (520,000/2,000,000) × 100 = 26%.
Analysis and Interpretation
Sales volume variance depends on the sales mix and sales quantity variances. If the external factors affect the sales volume variances it is more likely to be a planning variance. Companies need to revise the budgets in order to maintain or increase the market share. In other words, market size and market share variances are closely linked with each other. As seen above in our example, if the company had to maintain a market share of 25% they must have revised the budgeted sales. When they achieved more sales than the revised budget, both market size and market share variances remained favorable. The total market size can change with competitors producing more products, a seasonal demand in products or any other macroeconomic factor. Operational managers cannot control the external factors; they must revise the budgets to bridge the gap between standard and actual sales volumes.
There are many factors causing deviation in sales volume, hence the variance in the market size and market share:
- Market Size Variance often occurs due to uncontrollable factors e.g. increased competitors’ products in the market
- Management must revise the budgets to maintain the market share, that affects the market size or planning variance
- Standard or budgeted targets may be inaccurate that can cause variance in the sales volume planning or market size
- Market share variance factors are often controllable for operational managers e.g. increasing the production volume
- After revising the budgets, management must make sure to achieve the revised targets or surpass to maintain the market share
Control measures and variance analyses are useful for a company if the actual reasons for deviation are monitored closely. Sales volume depend on the sales mix of the products i.e. the profitability of the products and the quantity produced and sold. However, to achieve the desired results, the management must plan carefully keeping the standard targets realistic and achievable. Operational managers must be motivated to achieve efficiency, eliminate wastes and idle labor hours to maximize the production. When external factors change (often increase) in the total market size, the only controllable factor for the management is to maintain the market share. Breaking down the total sales volume variance into sales mix and sales quantity helps management achieve continuous improvements. For the top management, the strategic planning and operational variances in sales volume provide a clear picture of the company performance.
Importance of Sales Volume Planning and Operational Variances
In the modern and fast paced economy revising and updating the standards is the only option to stay competitive. When companies plan sales volume budgets, they must revise them to meet the industry standards. The study of differences for each of the planned, revised, and actual sales volume can benefit the company in several ways:
- Sales Volume variance analyses help management to maintain the market share
- These analyses improve a company’s strategic planning to stay competitive
- Provide useful information for the company to improve on operational capacity and eliminate the wastes
- Studying sales volume planning and operational variances in conjunction helps identify the actual causes of variance
- Revising the original sales volume budgets helps close the gap between planned and actual sales
- It stresses on an overall company planning and operations improvements e.g. in a TQM environment
- An efficient management corresponds quickly to the change in the total market size to maintain the market share, which increases the company capacity
Sales volume planning and operational variances offer valuable analysis to any management; however, there are certain limitations too:
- Sales planning variances are often caused by uncontrollable factors, appraising operational managers for that may cause low motivation
- A change in total market size does not guarantee a change in the market share for the company
- The company many not possess the operational capacity to maintain the market share that can cause low morale and motivation for the company
- Operational inefficiencies may hinder the strategic sales volume planning
- Unrealistic approach towards standard sales volume budget may not be achieved even with revised budgets
- Industry standards for market leading companies cannot be used for the smaller production facilities
Conclusion
Both market size and market share variances offer valuable analyses to the management. Often a change in one measure affects the other if all other aspects of production remain the same. Achieving favorable variance results require careful planning, implementation of controls, and revising the budgets regularly. Frequent budget revisions, however, may become costly and time consuming for the management.
The management must not simply attach the sales volume planning and operational variances without considering the production capacity. Efficient production approaches such TQM can eliminate the wastes and idle labor hours, which in turn can help achieve favorable sales volume variances. Operational managers should only be appraised for their performance on sales volume operational variances. The best use of variance analyses is to find out the actual causes for the variances both favorable and adverse. A careful sales volume planning, right operational management, and alert revised controls all play crucial part in achieving the favorable results.
