What is a Sales Price Variance
Sales price variance is the difference between the amount of money a business expects to sell its products or services for and the amount of money it actually sells them for. Sales price variances are said to be either "favorable" (more sold than budgeted) or "unfavorable" (less). The equation is simply:
Sales price variance = (actual selling price - budgeted price) x units sold
BREAKING DOWN Sales Price Variance
Large and small businesses alike prepare monthly budgets that show forecasted sales and expenses for upcoming periods. These budgets integrate historical experience, anticipated economic conditions with respect to demand, anticipated competitive dynamics with respect to supply, new marketing initiatives undertaken by the firms and new product or service launches to take place. A comprehensive budget will break out expected sales for each individual product or service offering, with further breakdowns of price (P) and quantity (Q), and then roll those figures into the top line number. After the sales results come in for a month, a business will enter the individual sales figures next to the budgeted sales figures and line up the Ps and Qs for each product or service.
It is unlikely that a business will have sales results that exactly match budgeted sales, so either favorable or unfavorable variances will appear in another column. These variances are important to keep track of because they provide information for the business owner or manager where the business is successful and where it is not. A poor selling product line, for example, must be addressed by management, or it could be dropped altogether. A brisk selling product line, on the other hand, could induce the manager to increase its selling price, manufacture more of it, or both.
Small Business Example of Sales Price Variance
Let's say a clothing store has 50 shirts that it expects to sell for $20 each, which would bring in $1,000. Unfortunately, the shirts are sitting on the shelves and are not selling, so the store has to discount them to $15. It ends up selling all 50 shirts at the $15 price, bringing in $750. The store's sales price variance is $1,000 minus $750, or $250, and the store will earn less profit than it expected to.