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What Is Sales Price Variance?
A Sales Price Variance, or a selling price variance, refers to a product's sales revenue variation due to a difference between its budgeted and actual selling price. This variance can be favorable or unfavorable depending on the increase or decrease in the projected revenue.
A sales price variance analysis provides many insights to the company's management. Based on the direction of the variance, they can increase the selling price of products and services. They can also decide to discontinue a product if they are not yielding expected returns.
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- A sales price variance can be defined as the difference in targeted and actual sales revenue due to unexpected changes in a product's budgeted and actual selling price.
- The budgeted price may sometimes be higher, leading to an unfavorable variance. Alternatively, the actual price may be higher, implying a favorable variance.
- A selling price variance is a financial tool companies can use to make important decisions about a product. Depending on the variance, they can take appropriate steps to improve the situation.
Sales Price Variance Explained
The sales price variance is an essential analytical tool for businesses. Often, companies sell their product at a particular price, known as the budgeted or targeted price. This price is decided based on the cost of selling the product, the competitor's selling price, the customer's expectations, etc.
However, it is only sometimes possible to sell at the targeted price. Sometimes, the actual selling price is less than expected. It is an unfavorable variance, as the company cannot achieve its targets. There is also a chance of making losses. Alternatively, if the actual selling price is higher, it is a favorable condition.
A favorable variance occurs due to a more-than-expected customer's acceptance of the product, fewer competitors, and a successful marketing campaign. When the demand for the product is initially high, businesses increase the price.
An unfavorable variance occurs due to a decrease in demand, an increase in competitors, a lower price ceiling, etc. It reduces the company's anticipated revenue. If the selling price falls too low, the company might incur losses and discontinue a product line.
That said, the selling price variance is not a constant figure. It keeps changing with any changes in selling price that the company might resort to in a particular period. The selling price variance analysis also considers how often the company has changed the price levels.
While a flexible budget and an adaptable business style are essential, a high change frequency means the company needs to analyze and understand the market well. It also implies a flaw in the targeted price set by the company at the beginning of the budgeting period.
Formula
Here is how to calculate the sales price variance of a particular product.
Sales Price Variance = (Actual Selling Price ā Budgeted Selling Price) x Number of Units Sold
As can be seen, a selling price variance is more than just about the selling price. It is also about the resultant change in sales revenue from a particular product or even a product line due to pricing changes.
A positive selling price variance means the actual selling price was higher, and the company overshot the targets. It is a favorable situation. A negative selling price variance means the selling price was lower and the company's products underperformed. It is an unfavorable situation.
Examples
Let us discuss a few examples to understand the concept better.
Example #1
In March 2023, mobile phone manufacturer XYZ achieved sales of 1,000 units, each priced at $102. However, their initial budget projected a selling price of $98 per unit. To determine the selling price variance, they use the below-mentioned formula:
Selling Price Variance = (Actual Selling Price ā Budgeted Selling Price) x Number of Units Sold
So, the selling price variance for XYZ in March 2023 is calculated as follows:
Selling Price Variance = ($102 - $98) x 1,000 = $4,000.
Therefore, the selling price variance for XYZ in March 2023 amounts to $4,000.
Example #2
The following details are given about a company selling a model of their car for two years. Let us study the information and suggest a course of action.
| Units | 2021 | 2022 |
|---|---|---|
| Budgeted price | $150,000 | $145,000 |
| Selling price | $140,000 | $135,000 |
| Cost of car sold | $135,000 | $135,000 |
| Number of units sold | 100 units | 75 units |
| Selling price variance | ( $1,000,000 ) | ( $750,000 ) |
| Profit on goods sold | $500,000 | $0 |
- While the unfavorable selling price variance in 2022 has decreased over 2021, it is due to a fall in the number of units sold and not due to the variation between selling and budgeted price.
- A decrease in demand has pushed the prices downward. Over two years, the selling price and units sold have declined. The profit in 2022 was $0.
- Therefore, the company should consider discontinuing the product, as it can be expected that the demand will fall further in the next year. It is a case of adverse sales price variance.
- If the company doesnāt want to opt for an extreme move, it can cut costs and wait another year to see how the situation pans out.
Frequently Asked Questions (FAQs)
The selling price variance ratio compares the actual selling price and the budgeted price. It is calculated by dividing the actual selling price by the budgeted selling price or vice versa.
Sales volume variance is a change in sales revenue arising from a difference in budgeted sales quantity and actual quantity sold. It is calculated by multiplying the standard profit per unit with the difference in targeted and actual sales volume. On the other hand, a selling price variance establishes a change in revenue due to a difference in expected and actual selling prices.
The selling price variance per unit is calculated by subtracting the actual and budgeted selling prices. It follows the standard formula but ignores the āNumber of Units Soldā term. Therefore, the difference in revenue is not considered.
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