Introduction
In this article, we will cover the sales price variance analysis. It is sometimes called selling price variance. Variance analysis is one of the key tools in performance management. IT gives management a chance to implement the higher standards and revise the lapses in planning and implementation.
Table of contents
Definition
In simple terms, the variance can be defined as the difference between the set standards and actual performance. In Sales price terms the sales price variance can be defined as below:
Sales price variance is the variation or difference between the standard or target revenue with a standard selling price against the actual revenue with the actual selling price for a business.
How to Calculate the Sales Price Variance?
Sales price variance can be calculated differently with a cost accounting approach, but a standard or simple way to calculate the sales price variance is:
Sales Price Variance = (Actual Sales Price – Standard Sales Price) × Sold units
The sales price variance is part of the total sales variance which consists of two elements sales price and sales volume variance. The sales price variance can be stretched further in the formula to analyze further as:
Sales Price Variance = (Actual Price × Actual Quantity sold) – (Standard Price × Actual Quantity Sold)
Sales Price Variance = Actual Revenue – Standard Revenue
Stating sales price variance in volume terms offers a broader spectrum of analyses for the management for performance measurement and control implementation. Total sales variance depends on two factors price and volume, the sales price variance indicates the difference in target and actual price for sold units. For a manufacturing facility producing a single product line, the sales price variance calculation is straightforward.
For example, a company produces a single product P1 and sets its price at $100, units produced are 1,000. The company faces tough competition and reduces the price to $90 per unit to increase sales. In that case, the sales price variance will be:
Sales Price Variance = (90 – 100) × 1000 = $ 10,000 Adverse or Unfavorable
If the company is unable to sale the total 1,000 units and sales say 800 units, then the sales price variance be calculated as:
Sales Price Variance= (90×800) – (100×800) = $ 8,000 Adverse or unfavorable
The Sales price variance is particularly useful in a production facility where more than one product is produced. In that scenario, sales price variance for each product will be calculated separately and the total sales price variance will be calculated.
Example
Suppose Techno blue Produces 03 different products P1, P2, and P3. The Standard Prices, Actual Prices, and unit productions are as follows, assuming the company sold all planned units:
| Product | Standard Price in $ | Units Produced | Actual Price in $ |
| P1 | 80 | 500 | 70 |
| P2 | 100 | 300 | 120 |
| P3 | 125 | 400 | 110 |
Required: Calculate the sales price variance for the 3 products.
Solution:
Total Sales price Variance for the Company can be calculated as:
Sales Price Variance for P1 = (70-80) × 500 = $ 5,000 Adverse
P2= (120 – 100) × 300 = $ 6,000 Favorable
P3 = (110-125) × 400 = $ 6,000 Adverse
Total Sales Price Variance = $ 5,000 Adverse.
Analyzing the Sales Price Variance
The true value of sales price variance can be achieved by calculating sales price variance for each product separately, or for each type of product group or batches. As evident from a simple example above, one product may seem profitable while others may cause adverse variance. Analyzing each product gives management an idea of which product prices need adjustments and what caused the adverse or favorable variance. Sales price variance provides various benefits to the management:
- It provides analyses for product price comparisons with both internal standards set and the market competition
- Total Sales variance comprises two parts: price and Volume, the analysis of these two separately provide information on the exact situation of the sales.
- An adverse result can be caused by several factors such as wrong budgeting, higher production costs, and wrong standard price setting
- Total sales variance is an important tool for the management for planning and budgeting, the sales price variance calculations help them identify lapses in operations as well as in the forecasting and budgeting
- Favorable result may give an idea to the management to gain an advantage over the competitors in the market and cash on the opportunity
- Sales price variance analysis for each product or group of products provides an in-depth analysis of profitability and sales price standards as a whole for the company.
Every company’s income statement starts with the revenue or sales column, analyzing the sales variance is an integral part of quality controls. Firms aiming for the JIT or TQM approaches in particular need to analyze in-depth for the sales variance, and sales price variance is an important part of it.
Large firms often set a low price for a by-product to increase the sales of the main product; it provides management an overview of the total sales price variance and margins. Large and customized products need more time for production and sales, hence a more comprehensive and evolving sales price variance analysis can be performed for such scenarios. It often forms the basis for the sales and marketing department to decide on marketing pricing strategies between market penetration, product, or market development.
Who are Responsible for Sales Price Variance?
As in any process improvement or performance measurement metric, sales price variance implies to all levels of the company from operation to the top-level management. The cost accountants need to set the standard price and volume production units’ targets realistically and after an in-depth review of past data if available.
Forecasting for sales units and standard prices is evaluated at the time of annual or monthly budgets; normally cost accountants set the standard using previous year or month figures. Cost accountants need to consider the inflation, raw material costs, production efficiencies, product seasonality, and other contingency actions to adjust the standard price and volume targets close to the actuals. The top management can decide on different product sales price variances, and adjust the prices for individual products accordingly to achieve the total favorable sales price variance. As we have seen the total sales variance depends on both price and volume, so the top management needs to consider the factors most affecting the sales variance.
In large organizations, the marketing department needs to work in liaison with the finance department particularly cost accountants, as the price setting for different products will vary depending on several factors. For example, the marketing department may set a lower than average price for a by-product or may set low prices as a market penetration strategy that will affect the sales price variances adversely.
Limitations with the Sales Price Variance Analysis
- Sales price variance analysis require standard cost setting, the data for the new companies may not be readily available
- It is difficult to set standard price and quantity for customized and large products
- Standard price and quantity are set using past data that can become obsolete in rapidly changing markets
- It requires a holistic approach from all the departments to achieve positive results otherwise adverse sales price variances may cause a conflict of roles
- Sales price variance alone cannot provide the true picture to the management for the total sales variances
- Sudden changes in demand for one or more products can cause temporary adverse or favorable variance that cannot be used for the long term planning
Conclusion
As with any performance measurement tool, the sales price variance analysis also requires an in-depth exploration of facts. Past data should only be used as a starting point in setting up the standard price and volume standards. The standard costing approach calls for inclusivity from all the departments. Total sales variance is an important study for any management for future planning and forecasting.
Although, it becomes almost impossible to carry out sales price variance analysis for each product, where there are a large number of products in production but it still remains a valuable tool to assess the sales prices in comparison to the competitors. The sales price variance is often a useful tool for the marketing department to decide on the price-setting strategy such as by-products or market penetration pricing.
