## Friday, June 6, 2008

### Sale price Variance

Q:-9 How can you calculate sale price variance ?
Ans:- Management besides reviewing all the expenditure variance also take great care to investigate any variances in sales revenue.
This is because any variances in sales revenue has a direct impact upon the contribution and profitability of the business.
In a marginal cost system, the variances are calculated in contribution terms whereas:
In an absorption costing system, the sales variances are determined in terms of profit.
The TOTAL Sales Variance are segregated into the following two(2) variances:
Sales PRICE Variance
Measures the effect of the difference between the standard selling price per unit and the actual selling price.
Formula:
[Standard selling price per unit-Actual selling price per unit] x Actual quantity of units sold
Sales VOLUME Variance
· Measure the effect on contribution or profit of the divergence between actual sales and the budgeted level of sales.
· In a marginal costing system the difference between the actual and budgeted sales is multiplied by the standard contribution per unit.
· In an absorption system this difference is multiplied by the standard profit per unit.
· Formula:
[ Budgeted Sales level-Actual Sales level]x Standard Contribution or profit per unit
Illustration:
Company A budgeted sales are 3,500 Product A per month at a standard price of \$70 each against their unit cost of \$35. At the end of the third month, the actual sales revenue was \$780,000 and 12,000 Product A had been sold.
Further details:
Volume Unit selling price Profit per unit
Budget 10,500 70 35
Actual 12,000 65 30
Required:
Compute:
(a) the sales VOLUME profit variance;
(b) the sales PRICE variance.
Solution:
(a) The Sales VOLUME variance is:
[Actual units sold-budgeted units sold]x Standard profit per unit
=(12,000-10,500]x\$35
=\$52,500F
(b) The Sales PRICE variance is:
[Actual selling price-budgeted selling price]x actual sales volume
=[\$65-\$70] x 12,000
=\$60,000A
To recheck:
Total PROFIT Variance= Sales Price Variance + Sales Volume Variance
Budgeted profit
=10,500 x \$35=\$367,500
Less:
Actual profit
=12,000 x \$30=\$360,000
Total PROFIT variance=\$367,500-\$360,000= \$7,500A
From solution a & b:
Sales VOLUME variance(\$52,500F) +Sales PRICE variance(\$60,000A)= \$7,500A 