Chapter 21: Decision Analysis: Sales Variances

Analyzing Changes in Sales from Expected Amounts Sales Variance Analysis is crucial for understanding the differences between actual and expected sales performance. Two main variances are analyzed: Sales Price Variance and Sales Volume Variance. These variances help managers evaluate the impact of actual sales prices and quantities on revenue and inform pricing, production, and marketing strategies. 1. Sales Price Variance Sales Price Variance measures the effect of selling products at a different price than budgeted. It is calculated by taking the difference between the actual selling price and the budgeted (standard) selling price, multiplied by the actual number of units sold. Sales Price Variance=(Actual Price−Standard Price)×Actual Quantity Sold Example (based on Exhibit 21.18 for G-Max): • The total sales price variance for G-Max is $850 unfavorable. o This indicates that, on average, products were sold at a price lower than budgeted. o The primary cause was a $10 per unit price decrease on Big Bert drivers, contributing to the unfavorable variance. Managerial Action: The decrease in the selling price of Big Bert drivers may have been necessary to boost sales in a competitive market, but management needs to determine if the price cut will remain sustainable and if it is effective in maintaining demand. 2. Sales Volume Variance Sales Volume Variance assesses the impact of selling a different quantity of products than originally expected, using the difference between the actual quantity sold and the budgeted quantity, multiplied by the standard price. Sales Volume Variance=(Actual Quantity Sold−Budgeted Quantity)×Standard Pric e Example: • For G-Max, the total sales volume variance was $1,000 unfavorable, driven by a lower-than-expected volume for Big Bert drivers. o G-Max budgeted to sell 150 units but only sold 140 units, leading to this unfavorable variance. Managerial Action: The lower demand for Big Bert drivers could be temporary or reflect a longer-term decline. Management should analyze market trends and competitor pricing to gauge whether this demand reduction will persist and if adjustments in marketing or product positioning are needed. 3. Interpreting the Combined Effect of Sales Variances Despite selling 90 more units combined than budgeted, G-Max faced unfavorable overall sales variances. This mixed result highlights how: • • Lower selling prices can offset the benefits of increased volume. Sales variance analysis offers insights into whether demand changes or price adjustments primarily drive sales performance. Sales Growth Rates for Forecasting: Companies, like Callaway Golf, may use historical sales growth rates to estimate future performance. For example, Callaway observed a 20.4% growth rate in golf ball sales, leading to an expected increase from $195.6 million to $235.5 million in the following year. Example Scenario - Sales Variance Analysis Steps for Sales Manager In a scenario with a favorable sales volume variance but an unfavorable sales price variance, the sales manager should: 1. Investigate Reasons for Lower Prices: Determine if sales teams applied discounts, such as quantity discounts, to meet sales targets. 2. Assess Competitor Actions: Evaluate if competitors' pricing strategies influenced the need to discount prices. 3. Analyze Volume Drivers: Examine whether the increased volume is sustainable and if it resulted from lower prices, increased advertising, or seasonal demand changes. This approach allows management to balance pricing strategies with sales volume to meet profit targets effectively. Summary Sales variance analysis is a powerful tool for understanding revenue deviations from budgeted amounts, separating the influence of pricing from volume. By identifying and responding to sales price and volume variances, management can better adapt sales strategies to market conditions, making informed decisions that support profitability and customer demand alignment.