Variance Analysis (Volume,

Mix, Price, Fx Rate)

Budgets are the main instruments for planning and controlling. They
set the targets and enable the analyzer to see how much it have been
approached to these targets by comparing budget with the actual
figures periodically. Furthermore, an analyst also may want to see the
deviations compared with the previous periods. Oftentimes, it
is known that sales are higher or lower but most of the time unless a
deep dive analysis has been made, the reasons of increase or decrease
may not be clarified easily. For a financial controller it is important to
explain the sources of deviation.

Variance analysis are good tools to explain the causes of deviations.

They basically compare a period (could be current month, current
year, last estimation etc.) with a base period and analysis the
deviations and their reasons.

This article will deal with the revenue variances. Also, a link will be
given to download the variance analysis template that is used in this
article.

1
Reasons of Revenue Variance:

Sources of revenue variance can be summarized as follows:

Price and Volume Variance:

Firstly, let’s work on about the first level of variance: Price and
volume variance. Assume that a company sells only one product and
assume that P and V are budgeted price and volume respectively. P
and V stands for actual price and volume.

If, P= 126.5 $/pcs, V= 600 pcs, P= 132 $/pcs, V= 800pcs.

Budgeted revenue will be 75,900$ and actual revenue will be 105,600

$. What is the breakdown of the 29,700$ sales revenue increase? How
much is due to volume increase and how much is due to price
increase?

Let's explain the logic with a coordinate system:

2
As it is seen, area of the rectangle PO VK is the budgeted revenue and
area of the rectangle PO VT is actual revenue. The total area of the
colored rectangles is the variance between the two periods. Area of
red rectangle represents the volume variance, blue represents the price
variance and yellow represents the intersection of both effects, but
established practice is to add the conjugate variance to price variance.

So, below formula will work:

Deviation due to volume change: ΔV = (V - V) x P and

Deviation due to price change: ΔP = (P - Pb) x VA

ΔV = (800 – 600)pcs x 126.5$/pcs = 25,300$

ΔP = (132 – 126.5)$/pcs x 800pcs = 4,400$

3
As it is seen, volume increase contributed to revenue much more than
the price increase.

Variance Due to Fx Rate:

Let’s go a bit detail. Assume that, €/$ parity in the budget is 1.10 and,
in the actual it is 1.20. Also consider that the negotiated price currency
is EUR.

Budgeted price in original currency would be 115€/pcs and actual

would be 110€/pcs. Even there is a positive effect in price variance,
there is a price decrease in original currency which makes sense and
should be explained.

Price variance have been calculated with the prices in column “1” and
“3”. But there is something between them which is Actual price with
the budget parity. If the parity is the same with budget, actual price
would be 121$/pcs. As it is seen the only difference between column
“1” and “2” is the price (which gives the real price variance), and the
only difference between “2” and “3” is parity (which gives the
variance caused by fx parity change)

ΔP = (Act Price($)@Bd Parity – Budget Price($)@Bd Parity) x

Actual Volume

Δ Fx Rate = (Act Price($)@Act Parity – Act Price($)@Bd Parity) x

Actual Volume

4
So,

ΔP = (121 – 126.5)$/pcs x 800pcs = -4,400$

Δ Fx Rate = (132 – 121)$/pcs x 800pcs = 8,800$

It is clearly seen that, in fact price is not increased (even decreased)

but fx parity contributed to the revenue. Price decrease in original
currency is a question t0 sales team.

Mix Variance:

If there are several products in the field, and if the share of an

individual product in the portfolio changes there will be a mix effect.
Sales mix variance compares the actual mix of sales to the budgeted
mix. Mix analysis is important because all the products that a
company sells are not at the same price level. Increase in the share of
a high priced product will contribute to revenue positively and vice
versa.

As in the fx rate variance case let’s put an additional column to

volume table.

When the volume variance of product #2 was being calculated,

volume difference between actual and budget was multiplied with the
budgeted price. If product #2 is the only product that the company

5
sells, there would not be any mix effect because for both actual and
budget the mix would be %100. But if there are several products there
will arise the mix effect.

At the above table, column 2 is simply the actual volume with the
budgeted mix. So, the only difference between column “1” and “2” is
the volume (which will give us the quantity variance) and the only
difference between column “2” and “3” is mix (which will give us the
mix variance)

ΔQ = (Act Vol. @ Bd Mix – Budget Vol) x Bd Price

Δmix = (Act Vol - Act Vol. @ Bd Mix) x Bd Price

So For Product #2

ΔQ = (809 – 600 )pcs x 126.5$/pcs = 26,477$

Δmix = (800 – 809)pcs x 126.5$/pcs = -1,177$ (See, the share of

product #2 is decreasing)

Mix effect will be meaningful when analyzing the revenue variance of

the portfolio of a product group. What is done here is: a bridge have
been made between budgeted volume and the actual volume. Between
them, a point was specified at which one could be able to separate the
volume and mix effect. At this point, two columns were same in mix
(but not in volume) and other two columns are same in volume (but
not in mix)

6
Overall Picture:

With the data below:

Variance analysis would be:

As it is seen from the data, except product #4 all the products have
price decrease. Price decrease may enable the volume increase. If that
is the case, the strategy is correct because volume contributed much
more than the loss due to decrease in price. Moreover, mix has
changed in favor of high priced products. For product #2, it is seen
that price decrease is compensated by the increase in €/$ parity (also
the residual is a plus for revenue).

How to present variance analysis:

In order to take attention to favorable and unfavorable effects with

their magnitudes, the best way to present the variance analysis is to

7
use a waterfall chart as below. Chart is also embedded in the variance
analysis template that you may download.

Conclusion:

Even only the revenue variance have been discussed and it has been
split into 4 causes, depending of the business and appetite of the
analyzer to work on details, sources of causes may me diversified. For
example, variances in demand, variances in market share etc. can be
included as the elements of deviation. If the retail business is in
question same methodology also works for the cost of goods sold but
for a manufacturer it is recommended to go much more detail. For a
manufacturer cogs can be analyzed as below:

• Volume Variance
• Mix variance
• Quantity variance
• Manufacturing Cost Variance
• Variance in Raw material
• Variance due to purchase price
• Variance due to supplier mix

8
 • Variance due to fx rate
• Variance due to unit consumption of raw material
• Variance in Other Variable Costs (energy, other direct
materials)
• Variance due to purchase price
• Variance due to supplier mix
• Variance due to fx rate
• Variance due to unit consumption.
• Variance Due to Fixed Costs
• Variance due to local currency fixed
cost increase/decrease
• Variance due to fx parity change
• Also depending the cost structure, labor efficiency,
productivity and capacity variances can be questioned.

Variance analysis are the good tools to understand the real causes of
variances. By doing so, it is being easy to track the performance
properly and to decide which effect to be focused.

è Umit Coskun, May 2016