How to Calculate Sales Volume Variance (With Examples)

By Indeed Editorial Team

Updated October 20, 2022 | Published May 16, 2022

Updated October 20, 2022

Published May 16, 2022

The Indeed Editorial Team comprises a diverse and talented team of writers, researchers and subject matter experts equipped with Indeed's data and insights to deliver useful tips to help guide your career journey.

Business professionals, sales managers, and accountants analyze a company's financial health to identify areas of opportunity to increase profitability. One sales element to evaluate is sales volume variance, which can provide insight into your actual results compared to a budget. Learning about sales variance can help you better understand your sales results and revenue, including the calculations to perform. In this article, we discuss the definition and importance of sales volume variance, identify the potential causes of variation in sales, and explore several formulas to calculate sales variance.

What is a sales volume variance?

When working in sales, it's critical to determine your sales volume variance. Sales variance is a measurement you can use to evaluate your sales performance based on actual sales compared to a budgeted amount. Depending on the criteria you use, you can identify the difference between actual and budgeted sales revenue or variance in profitability. Calculating sales variance can help you determine if you've met your sales budget and your results' financial impact on the company.

Why is calculating sales variance important?

Calculating sales variance is vital because it helps sales professionals and accountants to identify changes in profitability and revenue over a specific period. In addition, you can use this information to identify sales opportunities further, enhance advertising and marketing strategies, and evaluate production expenses. As a result, being aware of sales variance can help increase a company's future profitability. Several other benefits of understanding sales variance include:

  • Identifying areas for improvement related to sales training and development

  • Tracking specific product sales by salesperson or the company as a whole

  • Optimizing budgeting strategies and creating realistic budgets

  • Improving marketing and advertising campaigns

  • Monitoring and reducing overhead and production costs

  • Analyzing price points to ensure proper market pricing

Related: 8 Types of Product Positioning (Plus Examples and Tips)

What are the potential causes of a sales variance?

There are several reasons that you may experience a variance in sales volume. Assuming that the budget you're comparing your sales numbers against is realistic, here are other potential causes:

Cannibalization

Cannibalization happens when a company releases a product similar to another existing item in their product line. This creates internal competition between the company's two products. As a result, customers purchase one product over the other and cannibalize the sales of the existing item. For example, a company has a current hair-removal product that performs well in the market. It then releases another hair-removal product with new features and benefits while continuing to sell the original item. Customers may wish to purchase the new product instead and, as a result, it cannibalizes the existing product's sales.

Competition

The marketing efforts and product releases from competing companies can also cause an unexpected variance in sales. Competitors are constantly researching the market to identify new customer needs and preferences, helping to create unique products that outsell other items. When a competing company releases a new product that customers find more attractive, the result can include a decrease in revenue and a variance in sales.

Related: What Is Product Differentiation? A Complete Guide

Changes in pricing

Changes in pricing can cause an unexpected variance in sales. For example, the company may alter the selling price of the item and, as a result, the sales volume amount changes. In addition, a change in production cost, such as an unexpected increase in raw materials or shipping fees, can affect the profit margin. When calculating sales variance, a change in production cost affects the amount of profit a company makes, even when the sales volume remains the same.

Related: What Is Loss Leader Pricing? (With Advantages and Tips)

Product recalls and returns

When a product has a notable flaw, a company may recall the item back from customers. A product recall has two significant effects on a company's revenue. First, it causes a loss of revenue without recovery of production costs. The company still incurs the cost of producing the item and then losses income by offering a refund or replacement to the customer. The second effect is a decline in customer confidence and trust. If a company recalls a product because of safety concerns or manufacturing defects, consumers may feel less inclined to purchase from the company again.

How to calculate the variance in sales volume

There are several formulas you can use to calculate variance. The procedure you use depends on the data you're evaluating and the company's costing technique in its accounting practices. You can measure sales variance using revenue, absorption costing, or marginal costing:

1. Calculating variance in sales based on revenue

Determining variance in sales based on revenue is a simple calculation. You require minimal data when assessing the difference between a budget and actual sales. To use the formula, begin by identifying the number of items you sold within a specific period. Next, determine how many items you budgeted for during the same period. You also require the price per unit.

Once you have this information, you can complete the calculation by subtracting the budgeted amount of units sold from the actual number. Finally, multiple your answer by the price per unit to determine the sales variance in dollars. The formula for calculating sales variance based on revenue is:

Sales variance = (actual units sold - budgeted units sold) x (price per unit sold)

For example, you budgeted to sell 100 units in January and finished the month by selling 120 units. Each item sells for $20.

Sales variance = (120 - 100) x $20

Sales variance = 20 x $20

Sales variance = $400

The calculation result shows you earned $400 more in revenue than originally planned.

2. Calculating variance in sales based on an absorption costing method

When a company uses an absorption costing method, the accountant totals all production costs, including overhead, to identify the standard profit per unit. The standard profit per unit is how much money you earn after subtracting the fixed production costs. To use the formula, begin by identifying the number of items you sold within a specific period. Next, determine how many items you budgeted for during the same period. Next, calculate the standard profit per unit by identifying how much it costs to produce each item and subtract this amount from the product's selling price.

Once you have this information, you can complete the calculation by subtracting the budgeted amount of units sold from the actual number. Finally, multiple your answer by the standard profit per unit to determine the sales variance in dollars. The formula for calculating sales variance based on the absorption costing method is:

Sales variance = (actual units sold - budgeted units sold) x (standard profit per unit)

For example, you budgeted to sell 100 units in January and finished the month by selling 105 units. Each item sells for $20, and the cost of producing each item is $8.

Sales variance = (105 - 100) x ($20 - $8)

Sales variance = 5 x $12

Sales variance = $60

The calculation result shows you earned $60 more in profit for January than initially planned.

Related: How to Calculate Hours Worked: Tools and Strategies

3. Calculating variance in sales based on a marginal costing method

When using the marginal costing method, accountants use variable costs to identify the standard contribution per unit. This method is like the absorption costing calculation but considers the variable production costs instead of fixed expenses. The result is the standard contribution per unit that provides the profit after paying for all variable costs. To use the formula, begin by identifying the number of items you sold within a specific period. Next, determine how many items you budgeted for during the same period.

Next, calculate the standard contribution per unit by identifying how much it costs to produce each item and subtracting this amount from the product's selling price. Once you have this information, you can complete the calculation by subtracting the budgeted amount of units sold from the actual number. Finally, multiple your answer by the standard contribution per unit to determine the sales variance in dollars. The formula for calculating sales variance based on the marginal costing method is:

Sales variance = (actual units sold - budgeted units sold) x (standard contribution per unit)

For example, you budgeted to sell 100 units in January and finished the month by selling 90 units. Each item sells for $20, and the variable cost to produce each item is $10.

Sales variance = (90 - 100) x ($20 - $10)

Sales variance = (5) x $10

Sales variance = ($50)

The calculation result shows you lost $50 worth of profit in January, based on your sales budget.

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