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Profit or sales margin method: The purpose of measuring the variances under this method is to identify the effect of changes in sale quantities and selling prices on the profits of the company. The quantity and mix variances should be analysed in conjunction with each other because the sales manager is responsible for both of these variances. Where a company is engaged in the manufacture and sale of multiple products, the variances between budgeted sales and actual sales may arise due to the following reasons:
(a) Changes in unit price and cost.
(b) Changes in physical volume of each product sold. This is quantity variance.
(c) Changes in the physical volume of the more profitable or less profitable products. This is mix variance.
There are five distinct variables that can cause actual performance to differ from budgeted performance. They are:
(a) Direct substitution of products.
(b) Actual quantity of the constituents of sales being different from the budgeted quantity.
(c) Actual total quantity being different from the budgeted total quantity.
(a) Changes in unit price and cost.
(b) Changes in physical volume of each product sold. This is quantity variance.
(c) Changes in the physical volume of the more profitable or less profitable products. This is mix variance.
There are five distinct variables that can cause actual performance to differ from budgeted performance. They are:
(a) Direct substitution of products.
(b) Actual quantity of the constituents of sales being different from the budgeted quantity.
(c) Actual total quantity being different from the budgeted total quantity.
(d) Difference between actual and budgeted unit cost.
(e) Difference between actual and budgeted unit sale price.
The sales management should consider particularly the interaction of more than one variable in making decisions. For example, decrease in selling price coupled with a favourable product quantity variance may help to assess the price elasticity of demand.
(e) Difference between actual and budgeted unit sale price.
The sales management should consider particularly the interaction of more than one variable in making decisions. For example, decrease in selling price coupled with a favourable product quantity variance may help to assess the price elasticity of demand.
