What Is Sales Price Variance?
Sales price variance is the difference between the price at which a business expects to sell its products or services and what it actually sells them for. Sales price variances are said to be either "favorable," or sold for a higher-than-targeted price, or "unfavorable" when they sell for less than the targeted or standard price.
Key Takeaways
- Sales price variance refers to the difference between a business's expected price of a product or service and its actual sales price.
- It can be used to determine which products contribute most to the total sales revenue and shed insight on other products that may need to be reduced in price or discontinued.
- A favorable sales price variance means a company received a higher-than-expected selling price, often due to fewer competitors, aggressive sales and marketing campaigns, or improved product differentiation.
- Unfavorable sales price variances, selling for less than the targeted price,can stem from increased competition, falling demand for a given product, or a price decrease mandated by some type of regulatory authority.
Understanding Sales Price Variance
The sales price variance can reveal which products contribute the most to total sales revenue and shed insight on other products that may need to be reduced in price. If a product sells extremely well at its standard price, a company may even consider slightly raising the price, especially if other sellers are charging a higher unit price. Companies can use the sales mix variance to compare a product or product line to their total sales and identify top and bottom performers.
Large and small businesses prepare monthly budgets that show forecasted sales and expenses for upcoming periods. These budgets integrate historical experience, anticipated economic conditions with respect to demand, anticipated competitive dynamics with respect to supply, new marketing initiatives undertaken by the firms, and new product or service launches to take place.
A comprehensive budget will use a set of standardized prices and break out expected sales for each individual product or service offering, with a further breakdown of expected sales quantity, and then roll those figures into a top-line sales revenue number. After the sales results come in for a month, the business will enter the actual sales figures next to the budgeted sales figures and line up results for each product or service.
It is unlikely that a business will have sales results that exactly match budgeted sales, so either favorable or unfavorable variances will appear in another column. These variances are important to keep track of because they provide information for the business owner or manager on where the business is successful and where it is not.
A poorly selling product line, for example, must be addressed by management, or it could be dropped altogether. A briskly selling product line, on the other hand, could induce the manager to increase its selling price, manufacture more of it, or both.
The formula is:
SalesPriceVariance=(AP−SP)×UnitsSoldwhere:AP=ActualsellingpriceSP=Standardprice
Sales Price Variance Example
Let's say a clothing store has 50 shirts that it expects to sell for $20 each, which would bring in $1,000. The shirts are sitting on the shelves and not selling very quickly, so the store chooses to discount them to $15 each.
The store ends up selling all 50 shirts at the $15 price, bringing in a gross sales total of $750. The store's sales price variance is the $1,000 standard or expected sales revenue minus $750 actual revenue received, for a difference of $250. This means the store will have less profit than it expected to earn.
Why Is the Sales Price Variance Important?
The sales price variance is useful in demonstrating which products are contributing the most to total sales revenue and whether the pricing of certain products is effective. For example, something that is selling exceptionally well could potentially be repriced a bit higher and maintain its popularity, particularly if the original price is not as competitive as it should be, relative to other sellers.
What Causes a Sales Price Variance?
A favorable sales price variance may result from a product having been initially underpriced, suddenly surging in popularity, or being unavailable from a sufficient number of competitors. An unfavorable sales price variance may result from a product's assumed popularity having been overestimated, too many competitors offering the same product, or a calculated drop in price to clear the shelves for an upgraded version of the same product.
What Is Price Variance?
Different from sales price variance, price variance is the true unit cost of a purchased item, minus its standard cost, multiplied by the number of actual units purchased. It's used in budget preparation and to determine whether certain costs and inventory levels need to be adjusted.
The Bottom Line
Sales price variance is a measure of the gap between the price point a product was expected to sell at and the price point at which the product was actually sold. The variance can be favorable, meaning the price was higher than anticipated, or unfavorable, meaning the price failed to meet expectations. Companies can use the information to adjust prices or shift their inventory to better reflect what customers most want to purchase.
