Sales Variances: Price, Volume, Mix and Quantity Variances Explained

A beverage company budgets to sell 600 cartons a week across three products: a cheap cola, a mid-priced juice and a premium water. In the week it sells 660 cartons, which beats the budget, but most of the extra sales are of the cola, the product with the lowest margin.

The sales manager points to the 60 extra cartons and asks for credit; the finance director points to the margin and asks whether the extra volume has really helped. A single sales volume variance cannot settle the argument.

It must be split into a sales quantity variance, the effect of selling more or fewer cartons in total, and a sales mix variance, the effect of selling a different combination of products from the budgeted one.

This topic starts with the two basic sales variances, sales price and sales volume, then explains the quantity and mix variances, the units method and the line-by-line method, the effect of costing system (contribution or profit), and how to interpret the result. It builds on the earlier topic on labour mix and yield variances. The next topic covers planning and operational variances: sales, market size and market share.

Sales price and sales volume variances

Sales variances are included in variance reports to help to reconcile budgeted with actual profit and to assess sales performance. Unlike cost variances they are not recorded in the cost accounts. There are two basic ones.

• Sales price variance = actual sales revenue − (actual units sold × standard selling price). Favourable if units were sold above the standard price.
• Sales volume variance = (actual units sold − budgeted units) × the standard profit per unit under standard absorption costing (sometimes called the sales volume profit variance), or the standard contribution per unit under marginal costing. Favourable if more were sold than budgeted.

Possible causes. Price: market conditions; unplanned discounts to major customers; competitors’ price cuts. Volume: demand higher or lower than expected; a strong or weak sales force; an advertising campaign that did better or worse than planned; a competitor leaving the market; fashion changing.

The two variances may be related: a price rise gives a favourable price variance but may reduce volume; a price cut to win sales gives an adverse price variance and, hopefully, a favourable volume variance.

Quantity and mix variances

When a company sells several products, the sales volume variance is found for each product and added. It can then be analysed further, since there are two differences between budget and actual: the total number of units sold, and the combination of products. The total variance splits into a quantity variance and a mix variance.

The sales quantity variance

The quantity variance shows the effect on profit of the total quantity sold being different from budget, assuming the budgeted mix. In that case the average standard contribution per unit would be the same as budgeted. It is (total actual units − total budgeted units) × the budgeted weighted average standard contribution (or profit) per unit.

The sales mix variance

The mix variance shows the effect on profit of the actual mix being different from the budgeted mix.

1. Find the budgeted mix as percentages of total budgeted units.
2. Apply these to the total actual units: this gives the units of each product that would have been sold in the budgeted mix.
3. For each product: actual units − units in the budgeted mix. The total across products is zero.
4. Multiply by the product’s standard contribution (or profit) per unit and add.

It is favourable if the company sold more of the products with higher margins and fewer of the lower. Mix + quantity = volume.

The line-by-line method

Start with actual units in the actual mix at standard contribution. Then actual total units in the budgeted mix at standard contribution: the difference is the mix variance. Then budgeted total units at the budgeted average contribution, which equals the budget contribution: the difference is the quantity variance.

The second line can be found quickly as the total actual units × the budgeted average contribution per unit only if the mix is as budgeted; otherwise use each product.

Interpretation and limits

A favourable mix with an adverse quantity variance shows that the company sold fewer units but richer ones; the opposite shows volume bought with margin. The mix variance is meaningful only where products are related and management can influence the mix (through promotion, pricing and sales incentives); for unrelated products, a different mix may simply reflect demand.

Sales staff paid a bonus on volume may push the easiest, lowest-margin product, giving a favourable quantity variance and an adverse mix variance. The mix variance also ignores differences in selling price between products that have already been taken into account in the standard contribution.

Layouts for sales variances

1. Price: actual revenue less actual units × standard price.
2. Volume by product: (actual − budget) × standard contribution (or profit); total.
3. Quantity: (total actual − total budget) × budgeted average contribution.
4. Mix table: actual; units in budgeted mix; difference; × standard contribution; total.
5. Check: mix + quantity = volume.

Money is in naira and each answer is rounded once, at the end.

Worked examples

1. Price.
   5,300 × 120 = 636,000 should have been received; actual 630,000; ₦6,000 A.
2. Volume.
   (5,300 − 5,000) = 300 units F × 30 = ₦9,000 F.

1. Volume by product.
   A: (250 − 300) × 40 = 2,000 A.
   B: (280 − 200) × 60 = 4,800 F.
   C: (130 − 100) × 90 = 2,700 F.
   Total ₦5,500 F.
2. Quantity.
   (660 − 600) × 55 = ₦3,300 F.
3. Mix. Budgeted mix 50%, 33.3%, 16.7%. Of 660 units: A 330; B 220; C 110.
   A: 250 − 330 = 80 A × 40 = 3,200 A.
   B: 280 − 220 = 60 F × 60 = 3,600 F.
   C: 130 − 110 = 20 F × 90 = 1,800 F.
   Total ₦2,200 F; units sum to zero.
4. Check.
   3,300 F + 2,200 F = 5,500 F.
5. Line by line.
   Actual units in actual mix: 250 × 40 + 280 × 60 + 130 × 90 = 10,000 + 16,800 + 11,700 = 38,500.
   Actual units in budgeted mix: 330 × 40 + 220 × 60 + 110 × 90 = 13,200 + 13,200 + 9,900 = 36,300; difference 2,200 F (mix).
   Budget: 600 × 55 = 33,000; difference 3,300 F (quantity).
6. Comment. More units were sold (quantity favourable) and the extra sales were of the higher-margin B and C rather than A (mix favourable), so the sales team has done well on both counts.

If the company used absorption costing, replace the standard contribution by the standard profit per unit in each calculation.

Expect variants: a percentage given for the budgeted mix, absorption costing profit per unit, a question requiring the whole operating statement, and a comparison of the sales manager’s claim with the finance view.

Sales mix and quantity variances using contribution ratios, and how to interpret them

If the question gives a contribution to sales ratio, the standard contribution per unit = price × ratio. Example. Premium wash ₦2,000 at 40% = ₦800; Basic ₦800 at 50% = ₦400. Budget 3,000 and 2,000 (total 5,000); actual 3,100 and 3,900 (total 7,000). Actual total in budgeted mix: Premium 7,000 × 60% = 4,200; Basic 2,800. Mix variance = (actual − actual in budget mix) × standard contribution: Premium (3,100 − 4,200) × 800 = ₦880,000 A; Basic (3,900 − 2,800) × 400 = ₦440,000 F; total ₦440,000 A. Quantity variance = (actual in budget mix − budget) × standard contribution: Premium (4,200 − 3,000) × 800 = ₦960,000 F; Basic (2,800 − 2,000) × 400 = ₦320,000 F; total ₦1,280,000 F.

Together they equal the sales volume variance (₦840,000 F). Interpretation. When incomes fall, customers trade down to the cheaper service: more units are sold (favourable quantity) but with a lower contribution each (adverse mix); say so, and add price and cost effects.

Pitfalls: work out the standard proportions on the actual total; use the monthly fixed cost for a monthly profit (not the annual figure); and note that a mix variance matters because it affects profit, can be used to judge sales managers and informs decisions on which product to promote, although it is meaningful mainly when the products are substitutes.

Common mistakes

• Using the budgeted units instead of the actual total units when finding the budgeted-mix units.
• Valuing quantity at one product’s contribution instead of the budgeted average.
• Using contribution in absorption costing, or profit in marginal costing.
• Mix units that do not add to zero.
• Splitting for unrelated products without comment.
• Forgetting that mix and quantity add to volume.

Quick revision

• Price = actual revenue − actual units × standard price. Volume = unit difference × standard profit (absorption) or contribution (marginal).
• Quantity = total unit difference × budgeted average. Mix = actual v budgeted-mix units, each at its own standard.
• Mix + quantity = volume; mix units total zero.

How the marks are earned

• Table with units and standard values.
• Check that mix and quantity make the volume variance.
• Comment on what the mix says about margin.

Practice questions

These are original questions, written in the style of the Skills examination. Work each one before you open the answer.

Recall check: multiple choice

Section B style: written questions

Model answers

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