## **Learning Outcomes**

After reading this article, you will be able to explain the principles of sales price and sales volume variances, understand their roles within overall sales, material, and labour variances, and apply the standard formulae for their calculation. You will see how these variances are interpreted, what they reveal about business performance, and why they matter in management control. You will also develop the ability to identify common pitfalls and apply these variances in ACCA-style exam scenarios.

## **ACCA Management Accounting (MA) Syllabus**

For ACCA Management Accounting (MA), you are required to understand how businesses use standard costing techniques to assess and control performance. This article addresses these syllabus requirements:

- The principles of variance analysis in performance measurement
- Calculation of sales price and sales volume variances
- Application of standard costing to materials and labour
- Use and interpretation of variances for management control
- Reconciliation of budgeted and actual figures using variances

## **Test Your Knowledge**

_Attempt these questions before reading this article. If you find some difficult or cannot remember the answers, remember to look more closely at that area during your revision._

1. Which formula calculates the sales price variance?  
   a) (Actual units sold – Budgeted units) × Standard profit  
   b) (Actual price – Budgeted price) × Actual units sold  
   c) (Budgeted price – Actual price) × Budgeted units  
   d) (Budgeted price – Actual price) × Budgeted units

2. True or False? The sales volume variance under absorption costing is valued at the standard profit per unit.

3. A product’s budgeted sales are 800 units at \$25. The actual sales were 950 units at \$24. What is the sales price variance?

4. Briefly explain the management use of sales price and volume variances.

## **Introduction**

Variance analysis is a key tool in management accounting. It compares standard or budgeted figures with what actually happened, providing essential feedback. Focusing on sales, material, and labour variances, this article examines two major sales variances: the sales price variance and sales volume variance. Both help managers evaluate how pricing and demand have contributed to changes in business performance.

Understanding and interpreting these variances provides actionable information to help managers drive improvements. Accurate calculation and thoughtful analysis are frequently tested in the ACCA Management Accounting (MA) examination.

## Sales, Material, and Labour Variances: The Context

Standard costing systems generate a range of variances. These typically include:

- **Sales variances:** Effect of price and quantity differences on sales revenue and profit
- **Material variances:** Difference in price paid and usage (quantity) for materials
- **Labour variances:** Difference in rate paid and efficiency (hours worked)

This article focuses in detail on the structure and calculation of **sales price** and **sales volume** variances.

> **Key Term: variance**  
> The difference between an actual result and a standard or budgeted amount, measured in value terms.

## Understanding Sales Price and Sales Volume Variances

Both variances compare actual results to budgeted or standard expectations, but each reveals a different reason for performance differences.

> **Key Term: sales price variance**  
> The change in profit resulting from selling at a different price from the standard or budget, holding quantity constant.
>
> **Key Term: sales volume variance**  
> The change in profit resulting from selling more or fewer units than budgeted, valued at the standard profit (absorption costing) or contribution (marginal costing) per unit.

### Why are these variances important?

- **Sales price variance** highlights the impact of price discounting, premium pricing, or error in standard price setting.
- **Sales volume variance** reveals the effects of sales performance—was volume up or down, and what was the profit (or contribution) impact?

Managers and accountants use these variances to pinpoint causes of profit deviations, inform decisions, and target areas for corrective action.

## Calculating Sales Price Variance

The **sales price variance** shows the profit impact of changes in selling price.

**Formula:**
$$
\text{Sales price variance} = (\text{Actual price} - \text{Standard price}) \times \text{Actual quantity sold}
$$

- Favourable (F) if actual price > standard price (increased profit)
- Adverse (A) if actual price < standard price (decreased profit)

### **Worked Example 1.1**

A company budgets to sell 900 units at \$15 each. Actual sales total 950 units at \$14.50 each.

**Calculate the sales price variance.**

> **Answer:**  
> Sales price variance = (Actual price – Standard price) × Actual units sold  
> = (\$14.50 – \$15.00) × 950 = (–\$0.50) × 950 = \$475 Adverse  
> Actual prices were lower than expected, reducing profit by \$475.

### **Revision Tip**

When calculating sales price variance, always multiply the price difference by actual sales volume, not budgeted.

## Calculating Sales Volume Variance

The **sales volume variance** isolates the effect on profit from selling more or fewer units than planned.

**Under absorption costing:**
$$
\text{Sales volume variance} = (\text{Actual quantity sold} - \text{Budgeted quantity sold}) \times \text{Standard profit per unit}
$$

**Under marginal costing:**
$$
\text{Sales volume variance} = (\text{Actual quantity sold} - \text{Budgeted quantity sold}) \times \text{Standard contribution per unit}
$$

- Favourable (F) if actual quantity > budgeted
- Adverse (A) if actual quantity < budgeted

> **Key Term: standard profit per unit**  
> The expected profit on each unit, including fixed production overheads (absorption costing).
>
> **Key Term: standard contribution per unit**  
> The expected contribution from each unit—selling price less all variable costs (marginal costing).

### **Worked Example 1.2**

A company budgets sales of 1,000 units at \$30 with a standard cost of \$22 (including absorbed fixed overhead). Actual sales are 1,200 units.

**Calculate the sales volume variance under absorption costing.**

> **Answer:**  
> Standard profit per unit = \$30 – \$22 = \$8  
> Sales volume variance = (1,200 – 1,000) × \$8 = 200 × \$8 = \$1,600 Favourable  
> Selling more units than planned increased profit by \$1,600.

### **Exam Warning**

Do not confuse price and volume variances—price variance uses _actual_ sales quantity, volume variance uses _difference in units_, valued at standard profit or contribution.

## Interpreting Sales Price and Volume Variances

Sales price and volume variances offer clear understanding for managers:

- A **favourable sales price variance** may indicate effective pricing strategy or strong market demand.
- An **adverse sales price variance** could mean heavy discounting or competitive pressures.
- A **favourable sales volume variance** often signals successful marketing or increased demand.
- An **adverse sales volume variance** may point to sales underperformance, poor market conditions, or supply issues.

Performance should always be considered alongside external factors—market changes, seasonality, or competitor actions can also drive these variances.

## Reconciling Budgeted and Actual Profit with Sales Variances

Standard costing systems reconcile budgeted profit to actual profit by adjusting for total variances. Sales price and volume variances are two of the most significant items in this reconciliation.

### **Worked Example 1.3**

A company budgets for sales of 850 units at \$20, planning a standard cost of \$15 per unit. Actual results are for sales of 900 units at \$18 per unit.

**Calculate the sales price and sales volume variances, and explain the overall impact on profit.**

> **Answer:**  
> _Sales price variance_:  
> (\$18 – \$20) × 900 = (–\$2) × 900 = \$1,800 Adverse  
> _Sales volume variance_:  
> (900 – 850) × (\$20 – \$15) = 50 × \$5 = \$250 Favourable  
> _Net impact_:  
> Profit is \$1,800 lower due to reduced price, but \$250 higher due to selling more units; overall, a net \$1,550 reduction in profit.

## Sales Variances: Limitations and Interrelationships

- Variances only measure the difference from what was planned; they do not explain _why_.
- Price and volume variances often influence one another: aggressive price cuts may increase volume, while premium pricing can depress sales.
- Real performance improvement requires understanding and correcting root causes, not just calculating variances.

### **Revision Tip (Linking Variances)**

When analysing overall business performance, always look for linkage between price, sales volume, and total profit. Variance analysis should trigger management investigation—not be viewed as an end in itself.

## **Key Point Checklist**

_This article has covered the following key knowledge points:_

- Sales price and sales volume variances as part of the standard costing framework
- Definition and practical meaning of each variance
- Calculation formulae for sales price and volume variances (absorption and marginal costing)
- Interpretation of favourable and adverse sales variances
- Role of variances in budgeted vs actual profit reconciliation
- Common pitfalls and links between price and volume effects

## **Key Terms and Concepts**

- variance
- sales price variance
- sales volume variance
- standard profit per unit
- standard contribution per unit

Sales, material, and labour variances - Sales price and volume variances