Definition
Selling Price Variance is a financial metric used to determine the impact of the difference between the actual selling price and the standard (or budgeted) selling price of goods or services on a company’s revenues. This variance is calculated by multiplying the difference between the actual and budgeted selling prices by the actual quantity sold. The formula is:
\[ \text{Selling Price Variance} = (\text{Actual Selling Price} - \text{Budgeted Selling Price}) \times \text{Actual Quantity Sold} \]
Examples
Example 1
Assume a company had budgeted to sell a product for $50 per unit but actually sold it for $55 per unit. The company sold 200 units during the period. The Selling Price Variance would be:
\[ ($55 - $50) \times 200 = $5 \times 200 = $1000 \]
Example 2
A company expected to sell a product at $20 per unit but reduced the selling price to $18 per unit to boost sales. They sold 500 units. The Selling Price Variance would be:
\[ ($18 - $20) \times 500 = -$2 \times 500 = -$1000 \]
A negative variance indicates that the actual selling price was lower than the budgeted price.
Frequently Asked Questions
Q1: Why is Selling Price Variance important?
- Selling Price Variance helps businesses understand the impact of price deviations on revenue. It can identify pricing strategy effectiveness and help in future budgeting.
Q2: How can companies improve their Selling Price Variance?
- Companies can improve their Selling Price Variance by better market research, adjusting pricing strategies, optimizing cost structures, and enhancing product value propositions.
Q3: What does a positive Selling Price Variance indicate?
- A positive Selling Price Variance indicates that the actual selling price was higher than the budgeted price, leading to an increase in revenue.
Q4: What does a negative Selling Price Variance mean?
- A negative Selling Price Variance means that the actual selling price was lower than the budgeted price, resulting in lower than expected revenue.
Q5: Is Selling Price Variance the same as Sale Volume Variance?
- No, Selling Price Variance focuses on the price per unit, while Sale Volume Variance looks at the difference in the quantity of units sold versus the expected quantity.
Related Terms
Sales Margin Price Variance:
- Definition: The difference between the budgeted sales margin and the actual sales margin, multiplied by the actual number of units sold.
- Formula: \[(\text{Actual Sales Margin} - \text{Budgeted Sales Margin}) \times \text{Actual Quantity Sold}\]
Sales Volume Variance:
- Definition: Measures the impact on profit of a difference between the actual number of units sold and the expected number of units.
- Formula: \[(\text{Actual Quantity Sold} - \text{Budgeted Quantity Sold}) \times \text{Budgeted Contribution Margin per Unit}\]
Online Resources
- Investopedia: What is Variance Analysis?
- AccountingTools: Selling Price Variance
- Business Case Studies: Variance analysis
Suggested Books for Further Studies
- “Managerial Accounting” by Ray H. Garrison, Eric W. Noreen, and Peter C. Brewer
- Provides an in-depth look into various accounting metrics, including selling price variance.
- “Financial & Managerial Accounting” by Jerry J. Weygandt, Paul D. Kimmel, and Donald E. Kieso
- A comprehensive guide covering all aspects of financial and managerial accounting.
- “Accounting: Tools for Business Decision Making” by Paul Kimmel, Jerry Weygandt, and Donald Kieso
- Offers practical insights and tools necessary for managerial decision-making.
Accounting Basics: “Selling Price Variance” Fundamentals Quiz
### What is the formula for calculating Selling Price Variance?
- [ ] \\( (\text{Actual Selling Price} \times \text{Budgeted Selling Price}) \times \text{Actual Quantity Sold} \\)
- [ ] \\( (\text{Budgeted Selling Price} - \text{Actual Selling Price}) \times \text{Budgeted Quantity Sold} \\)
- [x] \\( (\text{Actual Selling Price} - \text{Budgeted Selling Price}) \times \text{Actual Quantity Sold} \\)
- [ ] \\( (\text{Actual Selling Price} + \text{Budgeted Selling Price}) \times \text{Actual Quantity Sold} \\)
> **Explanation:** The correct formula for Selling Price Variance is \\( (\text{Actual Selling Price} - \text{Budgeted Selling Price}) \times \text{Actual Quantity Sold} \\).
### What does a positive Selling Price Variance imply?
- [x] Actual revenue was higher than expected.
- [ ] Budgeted revenue was lower than expected.
- [ ] Actual revenue was lower than expected.
- [ ] There was no variance at all.
> **Explanation:** A positive Selling Price Variance indicates that the actual selling price was higher than the budgeted price, resulting in higher revenue.
### What effect does a negative Selling Price Variance have on a company's revenue?
- [ ] It leads to increased revenue.
- [ ] It has no impact.
- [ ] It breaks even.
- [x] It leads to decreased revenue.
> **Explanation:** A negative Selling Price Variance means the actual selling price was lower than the budgeted price, leading to decreased revenue.
### When would a company see a zero Selling Price Variance?
- [ ] When the actual revenue is lower than budgeted revenue.
- [x] When the actual price matches the budgeted price.
- [ ] When the budgeted price was overestimated.
- [ ] When the quantity sold exceeds expectations.
> **Explanation:** A zero Selling Price Variance occurs when the actual selling price matches the budgeted selling price.
### What is required to calculate the Selling Price Variance?
- [x] Actual Selling Price, Budgeted Selling Price, and Actual Quantity Sold
- [ ] Budgeted Quantity Sold and Actual Revenue
- [ ] Budgeted Revenue and Actual Expenses
- [ ] Cost of Goods Sold and Operating Expenses
> **Explanation:** To calculate the Selling Price Variance, you need the Actual Selling Price, Budgeted Selling Price, and Actual Quantity Sold.
### In which situation would the Selling Price Variance be favorable?
- [x] When the actual selling price is higher than the budgeted price.
- [ ] When the actual selling price is lower than the budgeted price.
- [ ] When sales volume is higher than expected.
- [ ] When budgeted expenses are lower than actual expenses.
> **Explanation:** The Selling Price Variance is favorable when the actual selling price exceeds the budgeted price.
### Why is the Selling Price Variance significant in sales analysis?
- [x] It helps assess the effectiveness of pricing strategies.
- [ ] It helps in stock evaluation.
- [ ] It is necessary for credit analysis.
- [ ] It determines tax savings.
> **Explanation:** Selling Price Variance is crucial for assessing how effective pricing strategies are in generating revenue.
### How would a company typically respond to a negative Selling Price Variance?
- [ ] Increase production.
- [ ] Decrease advertising.
- [x] Adjust pricing strategy.
- [ ] Invest more in equipment.
> **Explanation:** A negative Selling Price Variance would typically prompt a company to adjust its pricing strategy to better align with market conditions and improve revenue.
### Which financial statement would typically highlight Selling Price Variance?
- [ ] Balance Sheet
- [ ] Cash Flow Statement
- [ ] Income Statement
- [x] Internal Management Report
> **Explanation:** Selling Price Variance is usually highlighted in internal management reports used for performance analysis rather than external financial statements like the Balance Sheet or Cash Flow Statement.
### How does Selling Price Variance differ from Sales Volume Variance?
- [ ] It focuses on the cost of goods sold.
- [ ] It deals with the total sales revenue.
- [ ] It analyzes the total expenses.
- [x] It focuses on the price per unit rather than the number of units sold.
> **Explanation:** Selling Price Variance focuses on the difference between the actual and budgeted selling prices per unit, whereas Sales Volume Variance looks at the difference in quantities sold.
Thank you for exploring the concept of “Selling Price Variance” through our comprehensive guide and tackling the sample quiz questions. Dive deeper into financial metrics for better business insights!
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