5/2/2021 (99+) Variance Analysis (Volume, Mix, Price, Fx Rate) | LinkedIn

Variance Analysis (Volume, Mix, Price,

Fx Rate)
Published on May 1, 2016

Umit Coskun, M. Sc. MBA 5 articles Follow

Kordsa şirketinde Finance Group Manager

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.

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 Pb and Vb are
budgeted price and volume respectively. Pa and Va stands for actual price and
volume.

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If, Pb = 126.5 $/pcs,  Vb = 600 pcs,  Pa = 132 $/pcs, Va = 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:

As it is seen, area of the rectangle PbOVbK is the budgeted revenue and area of the
rectangle PaOVaT 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 = (Va - Vb) x Pb and

Deviation due to price change: ΔP = (Pa - Pb) x Va

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

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

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

Variance Due to Fx Rate:

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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

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.

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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 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)

Overall Picture:

With the data below:

Variance analysis would be:

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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 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
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Manufacturing Cost Variance

Variance in Raw material

Variance due to purchase price

Variance due to supplier mix

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.

Please feel free to download the excel template from here that is used to
prepare this article.

Umit Coskun, May 2016

Read More From Umit Coskun:

Establishing a Risk Management System

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Published by
Umit Coskun, M. Sc. MBA 5 articles Follow
Kordsa şirketinde Finance Group Manager
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