For every established company like Apple or a new start-up in any sector, monitoring sales is critical for business growth. Sales Volume Variance is one such term that every venture looks to know about.
Calculating Sales Volume Variance is one of the metrics that can help to know the business has reached financial goals and help the business predict financial results for the future.
Let’s see it then.
What is Sales Volume Variance (SVV)?
In simple words, Sales Volume Variance is the amount of difference between Actual sales & Budgeted sales of the product over a period of time.
So, SVV is the difference between Actual sales & Estimated sales multiplied by the standard unit cost of the product in a particular period of time.
How to Calculate Sales Volume Variance?
Let’s look at each term.
Actual Sales = Total no. of products sold at a period of time
Estimated Sales = Target set by the sales team of the company.
Standard Price of the Product = Average amount of the product sold.
Suppose KFC wants to calculate the Sales Volume Variance of a branch for 1 month period on the 8 Pc. Chicken Only Family meal.
Now, the Estimated no. of sales is 1000 & the Actual no. of sales is 1100. Keeping the Standard unit price of $15.
So, SVV = (1100-1000)*15 = $1500
Now for the same product if the Estimated no. of sales is 1000 & the Actual no. of sales was 900. Keeping the Standard unit price of $15.
So, SVV = (900-1000)*15 = -$1500
Read till the end to find out what the positive & negative value means.
SVV can be calculated in 3 ways:
- Total Sales Method
- Standard Profit/Absorption Costing Method
- Marginal Costing/Standard Contribution Method
Let’s look at them one by one.
Total Sales Method
In this method, you will be calculating based on the price at which the product will be sold. So the result here will be useful more likely for the sales team.
As the result here will not ignore the profits or the production costs.
Standard Profit/Absorption Costing Method
Here, the average profit per unit of product is considered for calculation. This method helps you to understand the product pricing, performance under the competition, cost of supplier & other factors.
It can happen that the sales of the product are going very well but the profit earned for that period is very less or negative. So a company should have knowledge of this, then this method is used.
Marginal Costing/Standard Contribution Method
Through this method, You can calculate the running cost of the company. Here, the Marginal cost of the product is used in the formula. This broadens the scope from just understanding the sales to making the business run more efficiently.
Note: Calculate Sales Volume Variance differently for each product to get a more accurate & better understanding of the product sales in the market.
What does the Sales Volume Variance tell you?
So a positive value shows a favorable condition for the business. As the company has exceeded its target & going above it. Now the work for them is to look at how can they increase manufacturing without compromising the quality of products & services.
While a negative value will be a concern for the company. It is a realization to look into the estimations & work developing new strategies looking at what work & what misses were responsible.
So this was about Sales Volume Variance which you need to know for running the venture.
You also read similar articles like Sales Growth Rate, Lifetime Value of Customer & Revenue Retention.
Hope you found the information that you were seeking.
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