Sales variance is the difference between projected or budgeted sales figures and actual sales. It can be based on overall revenue or unit prices, and helps companies adjust production and pricing to meet customer demand and maximize profit.
Sales variance is a term used to describe the difference between a company’s projected or budgeted sales figures and the total value of sales that actually occur in the period considered. The breakdown of sales variance can focus on overall revenue generated or collected for the period compared 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 revenue projections are very close to the actual sales volume that occurs.
As the scope of sale varies, the specifics of comparing budget amounts to actual amounts will vary. In some cases, variance will look at total sales versus projected sales, providing actual monetary values as part of the comparison. At other times, the process may be more of a variance in sales quantity, with attention focused on the difference between the number of actual units sold and the number of units projected to be sold during that period. A third approach focuses on the unit price of the products under consideration, comparing the projected unit price with the price consumers were actually willing to pay for the products sold.
One of the easiest ways to understand the idea of sales variance is to consider a baker who has projected that, during a week, a total of 100 nickel loaves will be sold at a certain price. Once the week is complete, sales are tallied and it turns out that only 96 nickel buns were actually purchased by consumers. This leaves a variance in sales quantity of negative four, indicating that the bakery has not performed as well as expected.
When sales variance is based on unit price, the result will be favorable if the actual quantity sold produces at least the projected amount of revenue for the period. This means that, even if some of the units are sold at sales prices that resulted in the sale of more units than anticipated, the sales variance is still considered favorable, since the total sales exceed the projected revenue for the period. . If the lower selling price does not stimulate the additional sales that make up the difference, the sales variance is expressed as a negative rather than a positive result.
Sales variance analysis can help a company make adjustments to production and pricing that help keep costs within reason and attract customer attention that result 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 unit prices. This, in turn, helps keep operating expenses within reason and allows the company to earn the highest possible level of profit from each unit sold.
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