A company goes to great lengths to set a budget, projecting potential income and expenses for the following year. However, a budget is only a plan. There are differences between the budgeted figures and the actual results. In accounting, these differences are analyzed in the form of variances.
Within sales variances, there are three variances used to calculate for sales: price variance, quantity variance, and product mix variance. Sales variances are calculated by reference to contribution margins.
- Price variance: Price variance is the measure of the effect on profit of selling at prices different from budget.
- Quantity variance: Quantity variance measures the effect of selling quantities different from the amounts projected in the budget.
- Product mix variance: Product mix variance measures the effect of selling products in different proportions from the budget.
A difference in price effects profit but a difference in quantities or mix doesn’t because they involve different costs. Contribution margins can be defined as the selling prices of the products less their variable costs. The company aims for positive sales variances since this signifies higher actual revenues than budgeted revenues.
When considering selling and administration expenses, the common practice is to calculate difference between actual and budget amounts as budget or spending variances only. Occasionally, budget variances are divided into price and quantity components but volume variances are not calculated.
Higher budgeted amounts rather than actual amounts are considered favorable for the company.