What Is Sales Variance?
Sales variance is a term used to describe the difference between the projected or budgeted sales figures of a company and the total amount of sales that actually do occur in the period under consideration. The breakdown of sales variance may focus on overall generated or collected revenue for the period in comparison to projected sales figures, or provide a more detailed view that takes into account differences in unit prices. Ideally, the degree of sales variance will be relatively small, meaning that the projections for revenue are very close to the actual sales volume that takes place.
Within the scope of sale variance, the specifics of the comparison between budget figures and actual figures will vary. In some cases, the variance will look at total sales versus projected sales, providing actual monetary amounts as part of the comparison. At other times, the process may be more of a sales quantity variance, with attention focused on the difference between the number of actual units sold and the number of units that were projected to be sold during that time frame. A third approach focuses on the unit price for the goods under consideration, comparing the projected unit price with the price that consumers actually were willing to pay for the goods sold.
One of the easiest ways to understand the idea of sales variance is to consider a baker who has projected that during the course of a week a total of 100 loaves of pumpernickel will be sold at a given price. Once that week is completed, sales are tallied and it is found that only 96 pumpernickel loaves were actually purchased by consumers. This leaves a sales quantity variance of a negative four, indicating that the bakery did not perform as well as anticipated.
When the sales variance is based on unit price, the result will be favorable if the actual quantity sold produces at least the amount of income projected for the period. This means that even if some of the units are sold at sale prices that resulted in selling more units than anticipated, the sales variance is still considered favorable, since the total sales figures exceeds the projected revenue for the period. If the lower sales price does not stimulate additional sales that make up the difference, then the sales variance will be expressed as a negative result rather than a positive one.
Analyzing sales variance can help a company make adjustments in production and the setting of pricing that helps to keep costs within reason and attract attention from customers that results in sales. Using this approach, it is possible to maintain an inventory of finished goods that meets customer demand both in terms of units and in unit prices. Doing so in turn helps to keep operational expenses within reason and allows the business to realize the highest level of profit possible from each unit sold.
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