Sales variances and operating statements

Sales variances-

1) Selling price variance measures impact of change in selling price in comparison to standard selling price.
Calculated as the difference between what the sales revenue should have been for the actual quantity sold, and what it was.

Sale price variance = (Actual price - standard price) x actual quantity sold

2) Sales volume profit variance measures the increase or decrease in standard profit as a result of the sales volume being higher
or lower than budgeted

Sale volume profit variance = ( Actual unit sold - Budgeted unit to be sold ) x standard profit per unit

Interdependence between sales price and sales volume variances

Reduction in the sales price might stimulate greater sales demand thus adverse sale price variance is adjusted against
increased sales volume variance.
Operating statements show how the combination of variances reconcile budgeted profit and actual profit.

An operating statement is a regular report for management which compares actual costs and revenues with budgeted figures and shows
variances.
Operating statement is also called statement of variances.
Operating statement is helpful in depicting the reconciliation between budgeted and actual performance.

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There are two main differences between the variances calculated in an absorption costing system and the variances
calculated in a marginal costing system.
A) In the marginal costing system the only fixed overhead variance is an expenditure variance.
There will be no fixed overhead volume variance.

B) The sales volume variance is valued at standard contribution margin, not standard profit margin.

Control action
A variance should only be investigated if the expected value of benefits from investigation and any control action exceed the costs of
investigation.
If a variance is assessed as significant, then control action may be necessary.

If the cause of the variance is controllable, action can be taken to bring the system back under control in future.
If the variance is uncontrollable it will be necessary to revise forecasts of expected results, and to revise the budget.

Measurement errors Action is required to improve the accuracy of the

recording system

Highlight the need to frequently review and update

Out of date standards
standards.
Reasons Possible
for Highlight the cause of the inefficiency or efficiency control
Efficient or inefficient
variances and will lead to control action to eliminate the action
operations
inefficiency being repeated

Random or chance Set up a range around average standard figure

fluctuations upto which control action will not be necessary.