BAHIR DAR UNIVERSITY

COLLEGE OF BUSINESS & ECONOMICS

DEPARTMENT OF ACCOUNTING AND FINANCE
POST GRADUATE PROGRAMME

Course Title: Financial and Managerial Accounting

Group Assignment on Sales Variance

Group Members

Student Name Student ID

1. Birhanu Alemneh BDU1208309

2. Natnael Ayalew BDU1208298
3. Dessalegn Kassahun BDU1208308
4. Yeshambel Tesfa BDU1208296
5. Adane Wolelaw BDU1208314
6. W/Amanuel Gedefaw BDU1208292
7. Tassew Amanu BDU1208284

Submitted to: - Firew Chekol (Ph.D)

February 2020
Table of Contents
Introductory.................................................................................................................................................. 1
Sales Quantity and Sales mix Variance..................................................................................................... 2
Sales mix variance .................................................................................................................................... 2
Sales Quantity Variance ........................................................................................................................... 3
Sales Mix Variance ................................................................................................................................... 5
Discussion: Mix and Quantity................................................................................................................ 6
Market Size Variance.................................................................................................................................... 7
Market share variance ............................................................................................................................ 8
Market Size: Actual vs. Budgeted ......................................................................................................... 9
Budgeted Market Share ........................................................................................................................... 9
Calculate Market Size Variance ............................................................................................................. 10
Uses for Market Size Variance ............................................................................................................... 10
Market Share Variance ........................................................................................................................ 11
Market Size Variance ........................................................................................................................... 11
Differences in Application .................................................................................................................... 12
Mathematical Differences .................................................................................................................... 12
Sales volume variance ............................................................................................................................... 12
Causes of sales volume variance ........................................................................................................... 13
Conclusion .................................................................................................................................................. 19
References .................................................................................................................................................. 20
Introductory
The calculation of variances only represents the first stage of the control cycle, it is necessary to
ascertain why variances have occurred then take appropriate action to complete this cycle.
It is also essential to recognise that variances are inter-related, for example price and volume,
and it is not possible to understand the significance of particular variances without considering
associated
variances: quantity and mix, market size and market share.
sales variances can be calculated for any organization which sells goods or services. The time
has come,however, to re-evaluate the use of these variances in view of the increasing awareness
of the applicability of these variances for a wide range of business sectors.

Sales variance is the difference between actual sales and budget sales. It is used to measure the
performance of a sales function, and/or analyse business results to better
understand market conditions.

There are two reasons actual sales can vary from planned sales: either the volume sold varied
from plan (sales volume variance), or sales were at a different price from what was planned
(sales price variance). Both scenarios could also simultaneously contribute to the variance.

For example: The plan was to sell 5 widgets at $3 each, for a budgeted sale of: (5*$3) =$15. In
reality, 6 widgets were sold at $2 each, for an actual sale of: (6*$2) =$12. The total variance was
thus ($12–$15) =$3 (U)unfavourable or minus $3, since total sales was less than planned.

Sales price variance

Sales Price Variance: The sales price variance reveals the difference in total revenue caused by
charging a different selling price from the planned or standard price. The sales price variance is
calculated as: Actual quantity sold * (actual selling price - planned selling price). In the example,
the sales price variance was 6*($2–$3) = -$6 (U)unfavourable or minus $6, since the sales price
was less than planned.

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Sales volume variance

Sales Volume Variance is calculated as: budgeted selling price*(actual sales volume-
budgeted sales volume)

Sales Volume Variance is further sub-divided into two variances.

1. Sales Mix Variance

2. Sales Quantity Variance

Sales Quantity and Sales mix Variance

Variance analysis is very important as it helps the management of an entity to control its
operational performance and control direct material, direct labor, and many other resources. The
sales mix variance and the sales quantity variance should be used to evaluate the marketing
department of the firm. The sales mix variance shows how well the department has done in terms
of selling the more profitable products, while the sales quantity variance measures how well the
firm has done in terms of its overall sales volume.

Sales mix variance

Sales mix simply meant that the proportion of each product to the total product. For example,
assuming that apple has four products: MacBook, iPhone, iPod, and iPad. If apple 2017 has
budget sales for the amount of its products USD 100 Million. The proportion of this sale from
every four products is MacBook40%, iphone40%, ipod10%, and ipad10%. well, we can break it
down in to the unit if we like

So, that is the sales mix and the sales mixed variance of apple is the difference between the
above budget and actual sales during the period.

Basically, sales mix is the ratio of each product that contributed to the total sales. The concept
behind sales mix is to assess the changing of profits as the result of changing sales mix ratio.
Management of the entity needs to understand how much the sales of each product that
contribute to the breakeven points of the entity. And how does changing in sales performance
could affect total breakeven? that is the reason why controlling sales mix matter. Let us clarify
this with another example, the total sales budget for 2019 is 200000 units. And this comes from
60% of product A and 40%product B. That means sales mix of budget sales are 60%and 40%.

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The changing sales mix could lead to changing in profit. For example, the profit of product A is
higher than product B and the actual sales are 180,000 units while actual sales mix are product A
got 40% and product B is 60% this changing sales mix will lead to a decrease in profit in 2019.

Sales mix variance is the difference between budgeted contribution margin for the actual sales
mix and budgeted contribution margin for the budgeted sales mix and it can be computed with
the following formula;

sales mix variance = Actual units of all products sold * (actual sales mix% - budgeted sales
mix%) * budget contribution margin per unit.

Sales mix variance is one of the two sub variance of sales volume variance the other being sales
quantity variance. Sales mix variance Quantifies the effect of the variation in the proportion of
different products sold during a period from the standard mix determined in the budget setting
process.

sales mix variance sales mix refers to the share of each product in total sales, in terms of
percentage.

Sales Quantity Variance

Sales quantity variance measures the change in standard profit or contribution arising from the
difference between actual and anticipated number of units sold during a period. And it can be
computed with the following formula.

When marginal costing is used

Sales quantity variance is = (budgeted sales - unit sales at standard mix) * standard
contribution when absorption costing is used

sales quantity variance = (Budgeted sales -unit sales at standard mix) * standard profit

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Explanation

Sales quantity variance is an extension of the sales volume variance which demonstrates the
impact of a higher or lower sales quantity as compared to budget.

The difference between sales volume variance and sales quantity variance is that the former
calculated using the actual sales volume whereas the latter is calculated using the sales volume of
products in the proportion of standard mix . Since sales quantity variance is calculated using the
standard mix any difference between the standard and the actual mix of a products is to be
ignored since the difference is accounted for separately under the sales mix variance.

To compute sales quantity and sales mix variance the following Data is given as an example

Budget Data
QUANTITY PRICE COST
A 1200 100 63
B 1800 110 64
C 1400 120 65

Actual Data
QUANTITY PRICE
A 1285 99.90

B 1777 110.10
C 1402 119.80

The sales quantity variance calculates how much more / less profit would have been made if
sales were above / below budget for a competing range of products since it calculates what
should have been sold of each product if total actual sales were in line with the budget sales mix
%. The first step is to identify the competing products –A, B and C and calculate the budget sales
mix. for them.

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 Quantity Mix

A 1200 37.3%

B 1800 40.9%

C 1400 31.8%

Total 4400 100%

The second step is to determine how much of the competing products would have been sold if
total actual sales were in line with the budget sales mix

A 4464* 27.3%= 1217

B 4464* 40.9%= 1826
C 4464* 31.8%=1420

The third step is to multiply the difference between expected and budget sales by the budget
gross profit margin to determine the sales quantity variance
A 17.5 * 37 = 646
B 26.2 * 46 = 1204
C 20.4 * 55 = 1120
The above calculations indicate that an additional 3,406 would have been made if the total sales
of the competing products were in line with the budget sales mix. Separate calculations are made
for each of the other products since each is sold to a separate market.

Sales Mix Variance

The method of calculating the sales quantity variance allows the calculation of a sales mix
variance i.e. the effect on profitability of the actual sales mix being different from the budget
sales mix. This calculation determines whether or not more / less contribution gross profit was
made by the range of competing products as a consequence of selling relatively more/less of
each product. The first step is to compare actual sales with expected sales ie the figures
calculated for the sales quantity variance.

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Please note that the differences must add up to zero since total sales are the same.
Actual Expected Difference
A 1285 1217 +67.5
B 1777 1826 -49.1
C 1402 1420 -18.4
TOTAL 4464 4464 0

The next step is to multiply the differences between actual and expected sales by the budget
gross profit margin to determine the sales mix variance.
A +67.5 * $37 = + $2499
B -49.2 * $46 = -$2262
C -18.4 * $55 = - $1010

The calculations indicate that a loss of $773 was made as a result of customers purchasing
relatively more of the products which have a lower gross profit margin. Mix variances are not
calculated for the other products since they don’t have any competing products.

Discussion: Mix and Quantity

Sales quantity and mix variances provide useful information since they give an insight into
market movements. For example, if total sales were above budget the sales quantity variance
would indicate how much more profit should have been made as a result of increased demand.
The sales mix variance would then be calculated to determine which products customers bought
relatively more / less of at the increased level of demand. If customers purchased more of the
products that generate lower profit - traded down - an adverse variance would be reported. If
customers purchased more of the products which generate higher profits - traded-up - a favorable
variance would be reported. The reasons for the variance would then be ascertained and the
appropriate action taken:
• Amend advertising strategy.
• Review pricing policy.
• Recognize changing preferences.
• Improve / replace / withdraw product.

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 Market Size Variance
Market size describes the entire scope of a single market. For instance, if Company Y sells yams,
it constitutes one part of the yam market. If the total sales of yams in the United States equal
$500,000, this constitutes the market size. Market size variance helps a company determine
whether a decrease or increase in sales stems from an increase or decrease in the size of the
market. For instance, assume Company Y maintains a 10 percent market share in Year 1 and an
8 percent market share in Year 2. It uses market size variance to determine whether the total
market for its product grew, or whether the company’s share of that market shrank.

Market size variance and market share variance are two ways of using market data to determine
its effect on a company's profits. While the two terms are related, they calculate the effects of
different changes.

The market size variance can quantify the effects of a change in market size on profitability,
assuming that the company's market share stays the same. The formula for calculating market
size variance is:

For example, let's say that your company has a 20% share of the market for a certain product,
and that when you made your budget, the market for this product was expected to be for 110,000
units. However, the most recent industry projections are estimating that the market has grown to
120,000 units. If your profit per unit is $50, you can calculate a market share variance using the
formula:

A couple of notes. First, be sure to convert the market share to a percentage before using it in the
formula. Second, it's worth mentioning that a market share variance can be positive or negative.

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A positive number like the one we calculated implies an increase in profitability, and a negative
value implies a decrease.

Market share variance

A market share variance can tell you how an increase or decrease in your company's market
share can affect your profitability. As you can see, the formula for calculating this is quite similar
to the formula for market size variance.

To illustrate this point, consider the same company we discussed in the market size variance
example. We know that the market for the company's product has grown to 120,000 units.
However, let's say that the company's market share has fallen from 20% to 18%.

So, for our hypothetical company, changes in the size of the market caused gross profits to be
$100,000 greater than expectations, while changes in the company's market share caused gross
profits to fall by $120,000. In all, these two variances combined to produce a gross profit that is
$20,000 less than the company's expectations.

Using information from the market size variance example, the company expected to sell 22,000
units at a total profit of $1,100,000. However, due to the market size variance and market share
variance, the actual profit is $20,000 less, or $1,080,000.

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Market share variance shows the impact of a change in market share on the profits of a business.
This information can be critical when evaluating the marketing and other costs that will be
incurred to create and maintain an increase in market share. If the marketing cost is not

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excessively high and the potential profit associated with an increase in market share is
significant, then it can make sense to pursue an expansion of market share. The calculation of
market share variance is as follows:

(Actual market share % - Budgeted market share %) x Total market in units x Profit margin/unit

There are some issues with making decisions based on the market share variance. For example:

• Competitors may react vigorously to an attempt to gain market share, resulting in higher
costs or lower profit margins
• The amount of market share that will be gained with increased marketing can be difficult
to estimate

The size of a market for a specific product can vary due to many circumstances. Products that
consumers had to have one year can go ignored the next, gathering dust on store shelves.
Companies need to understand how these fluctuations in market size affect their potential profits.
The market size variance measures how the changes in market size can alter a company's
expected income.

Market Size: Actual vs. Budgeted

The market size of an industry is simply the total amount of units sold across all companies in
that industry. The actual market size is the total number of units sold to customers. The budgeted
market size is the number of units the companies had planned to sell to customers. For example,
if the video game industry had planned to sell 1 million consoles in a year but had actually sold
1.2 million, the budgeted market size for the video game industry would be 1 million consoles,
while the actual market size would be 1.2 million.

Budgeted Market Share

With the exception of monopolies, companies that participate in a specific industry do not
control 100 percent of the sales in their markets. A company's budgeted market share is the share
of the market the company expects to receive in sales. For instance, if the video game industry
had planned to sell 1 million consoles in one year, and Generic Games expected to sell 100,000

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units of its Super Generic console that year, the budgeted market share for Generic Games would
be 10 percent (100,000/1,000,000 = 0.1 = 10 percent).

Calculate Market Size Variance

The formula for market size variance (MSZV) looks like this:

MSZV = P x (MSZA-MSZB) x MSHB

• P = the weighted price average of each product

• MSZA = actual market size
• MSZB = budgeted market size
• MSHB = budgeted market share

In this example, Generic Games sells its SuperGeneric console for $300. The industry's actual
market size is 1.2 million units, and its budgeted market size is 1 million units. Generic's
budgeted market share is 10 percent.

MSZV = 300 x (1.2M - 1M) x 0.1

= 300 X 200,000 x 0.1

= 300 x 20,000 = $6,000,000

Uses for Market Size Variance

The market size variance calculation can help businesses assess how changes in the market size
can affect their revenue projections. In this example, an increase of 200,000 units over the
projected industry total contributed to an increase of 20,000 units sold over Generic Games'
internal projections, which led to an additional $6 million over expected sales.

Accountants use numerous methods when analyzing and assessing the performance of
companies and organizations. Among these methods are market share variance and market size
variance. These two phrases share two out of three words. However, market share variance and

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market size variance differ significantly when it comes to application and calculation. The two
measure different things and require divergent mathematical processes to calculate.

Accountants use numerous methods when analyzing and assessing the performance of
companies and organizations. Among these methods are market share variance and market size
variance. These two phrases share two out of three words. However, market share variance and
market size variance differ significantly when it comes to application and calculation. The two
measure different things and require divergent mathematical processes to calculate.

Market Share Variance

Market share means the percentage of the market that a company or organization claims. For
instance, assume Company Y sells yams. If total annual sales of yams in the United States equal
$500,000, and Company Y sells $50,000 worth of yams, it maintains a 10 percent market share.
Market share variance occurs when a difference exists between the actual market share of a
company and the expected/budgeted market share. For instance, if Company Y budgets for a 10
percent market share and ends up with an 8 percent market share, this constitutes a market share
variance.

Market Size Variance

Market size describes the entire scope of a single market. For instance, if Company Y sells yams,
it constitutes one part of the yam market. If the total sales of yams in the United States equal
$500,000, this constitutes the market size. Market size variance helps a company determine
whether a decrease or increase in sales stems from an increase or decrease in the size of the
market. For instance, assume Company Y maintains a 10 percent market share in Year 1 and an
8 percent market share in Year 2. It uses market size variance to determine whether the total
market for its product grew, or whether the company’s share of that market shrank.

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Differences in Application

Market size variance and market share variance play off one another in a distinct way. Market
size variance helps determine whether the market share variance stems from a company or from
the market itself. However, these methods ultimately measure different things. Market share
variance looks exclusively at the change in a company or organization’s percentage of the
market. Market size variance examines the relationship between a company or organization’s
percentage of a market and the overall size of that market.

Mathematical Differences

Mathematically speaking, market size variance and market share variance differ greatly from one
another. The formula for calculating market share variance reads |(Actual Market Share
Percentage – Budgeted Market Share Percentage) x Actual Industry Sales in Units| x Budgeted
Average Unit Contribution Margin. The straight lines -- | -- in this equation indicated an absolute
value, or the difference between the number and zero. For instance, the absolute value of -11,
which reads |-11|, is 11.

The formula for calculating market size variance reads [(Actual Industry Sales in Units –
Budgeted Industry Sales in Units) x Budgeted Market Share Percentage] x Budgeted Average
Unit Contribution Margin.

Sales volume variance

Sales volume variance (also known as sales quantity variance) occurs when actual quantity of
units sold deviates from the standard or budgeted quantity of units sold during a specific period
of time.

It may be defined as the difference between the actual units sold at standard price and standard
units sold at standard price.

If the actual quantity of units sold is more than the budgeted quantity of units sold, the sales
volume variance would be favourable and if on the other hand, the actual quantity of units sold is
less than the budgeted quantity of units sold, the variance would be unfavourable.

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A favourable sales volume variance indicates higher actual revenue than the standard revenue
which usually translates into higher profit. An unfavourable variance, on the other hand, means
lower actual revenue than the standard revenue which usually translates into lower profit for the
business.

The formula for calculating sales volume variance is give below:

(Actual number of units sold × Budgeted price per unit) – (budgeted number of units sold ×
Budgeted price per unit)

or

(Actual number of units sold – budgeted number of units sold) × Budgeted price per unit

Causes of sales volume variance

The possible causes of favourable sales volume variance include reduction in competition,
decrease in price of the product, elimination of trade restrictions previously imposed by the
government, improper or inaccurate budgeting etc.

The possible causes of unfavourable sales volume variance include increase in competition,
increase in sales price, decrease in demand of product in question because of the launch of
another product by the company, product obsolescence because of change in taste and fashion,
trade restrictions imposed by the government, serious issues with the product that could cause a
negative impact on customers’ trust and improper or inaccurate budgeting etc.

In other words, we can say that the sales price variance is the difference occurred in the amount
of sales revenue of a company due to a difference in the actual sales price and the budgeted or
standard sales price of a company.

Favorable sales volume variance suggests a higher standard profit or contribution than the
budgeted profit or contribution.

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Reasons for favorable sales volume variance include:

• Favorable sales quantity variance (i.e. higher total number of units sold than budgeted)
• Favorable sales mix variance> (i.e. higher proportion of the more profitable products sold
than planned in the budget)

Adverse sales volume variance indicated a lower standard profit or contribution than the
budgeted profit or contribution.

Causes for an adverse sales volume variance include:

• Adverse sales quantity variance (i.e. lower total number of units sold than budgeted)
• Adverse sales mix variance (i.e. higher proportion of the less profitable products sold
than anticipated in the budget)

Favorable sales volume variance can be achieved in case of a favorable sales mix variance even
if the total number of units of all products sold during the period are lower than the total
budgeted units (and vice versa).

It is therefore important to investigate the sales volume variance by analyzing it further into sales
quantity and sales mix variances in case where an organization sells more than one product.

Example 1

The sales department of Robert Mineral Water Private Limited estimates that for the third quarter
of the current financial year, the company would sale 5,000,000 bottles of mineral water at an
estimated price of $1.15 per bottle. These budgets are based upon the sales volumes of previous
quarters and an expected growth in the next quarter. When the real results of the sales of third
quarter unveil, company records an unfavourable sales volume variance as real sales of third
quarter are 4,835,000 bottles. Upon further investigation, it was revealed that one of the
costumers of Robert Mineral Water Pvt. Ltd. Became bankrupt due to which sales were ceased to
that costumer.

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The sales volume variance for the third quarter would be:

Sales volume variance = (4,835,000 bottles – 5,000,000 bottles) × $1.15

= $189,750 unfavourable

Example 2

The Martin Trader sells three products – product A, product B and product C. The budgeted sales
and budgeted prices of all three products for the first quarter of the current year are given below:

The actual results for the first quarter in terms of quantity sold and price are given below:

Required: Using the information of Martin Traders given above, calculate sales volume
variance for the individual products as well as in total for the first quarter.

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Solution

Use of standard profit per unit and standard contribution per unit instead of standard
sales price per unit

In above examples, we have used budgeted sales price per unit to calculate sales volume
variance. Instead of budgeted sales price, budgeted profit per unit or budgeted contribution per
unit can also be used to calculate this variance. In these cases, the formula would be written as
follows:

1. If budgeted or standard profit per unit is used

If budgeted or standard profit per unit is used to calculate the sales volume variance, the
difference between actual units sold and the budged units sold is multiplied by the budgeted or
standard profit per unit.

(Actual number of units sold – budgeted number of units sold) × Budgeted or standard
profit per unit

This formula is applied in situations where absorption costing approach is used.

2. If budgeted or standard contribution per unit is used

If budgeted or standard contribution per unit is used to calculate the sales volume variance, the
difference between actual units sold and the budged units sold is multiplied by the budgeted or
standard contribution per unit.

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(Actual number of units sold – budgeted number of units sold) × Budgeted or standard
contribution per unit

This formula is applied in situations where variable costing approach is used.

Sales volume variance should be calculated using the standard profit per unit in case of
absorption costing whereas in case of marginal costing system, standard contribution per unit is
to be applied.

Example

Wrangler Plc is a manufacturer of jeans trousers and jackets.

Information relating to Wrangler Plc's sales during the last period is as follows:

Trousers Jackets
Units Units

Budgeted 12,000 5,000

Actual 10,000 8,000
Standard costs and revenues per unit of trouser and jacket are as follows:

Trousers Jackets
$ $

Revenue 20 50
Direct labor 5 10
Direct Material 6 15
Variable Overheads 4 10
Fixed Overheads 2 5
Wrangler Plc uses marginal costing to prepare its operating statement.

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Sales Volume Variance shall be calculated as follows:

Step 1: Calculate the standard contribution per unit

As Wrangler Plc uses marginal costing system, we need to calculate the standard contribution
per unit. Allocation of the fixed overheads may therefore be ignored.

Trousers Jackets
$ $

Revenue 20 50
Direct labor (5) (10)
Direct Material (6) (15)
Variable Overheads (4) (10)

Standard contribution per unit 5 15

Step 2: Calculate the difference between actual units sold and budgeted sales

Trousers Jackets
Units Units

Actual 10,000 8,000

Budgeted (12,000) (5,000)
3,000
Difference (2,000)

Step 3: Calculate the variance for each product

Trousers Jackets

Standard contribution per unit (Step 1) $5 $15

Actual Units Sold - Budgeted Sales (Step 2) x (2000 units) x 3000 units
Variance $10,000 Adverse $45,000 Favorable

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Step 4: Add the individual variances

Sales Volume Variance ($10,000 - $45,000) = $35,000 Favorable

Note: If Wrangler Plc used absorption costing, sales volume variance would be calculated based
on the standard profit per unit (i.e. fixed costs per unit of output will need to be deducted from
the standard contribution calculated in Step 1).

Conclusion
Sales variances can provide a valuable insight into products’ performance if they are correctly
applied to a company’s product range. Product relationships - competing and complimentary
products - must be identified to produce a reliable analysis. Failure to identify these relationships
will result in misleading information.
While it possible to value sales variances using a number of bases, accountants should always
remember that profitability is the key issue for private sector companies.Profit margin or
contribution should normally be used to value these variances

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References

➢ (An article) Sales Variance :Time for the hard sell? G J Steven Napier University 2018
➢ Cost accounting A Managerial Emphasis Charles T. Horngren, Srikant M. Dater,Madhav
V.Rajan 14th ed.
➢ Drury, C (2000) Management and Cost Accounting, 734 - 738, Thomson Learning 2000
➢ Horngren et al, Management and Cost Accounting, 606 - 613, Prentice Hall Europe
➢ The Price Elasticity of Selective Demand: A Meta-Analysis of Econometric Models of
Sales Article Nov 1988 J MARKETING RES Gerard J. Tellis
➢ Williams, J.R.; Haka, S.F.; Bettner, M.S. and Carcello, J.V (2006). Financial and
managerial accounting, 12 edition.
➢ https://accounting-simplified.com/management/variance-analysis/sales/volume.html

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