Variances based on Profit Margin:

         For the purpose of computation of variances, all costs are to be taken at standard cost. This is done because extraction of all the differences between planned costs & actual costs is done by the cost variance analysis.

Total Sales Margin Variance:

         This is the basic variance by which the difference between the budgeted profit & actual profit is represented. The formula is:

                        Budgeted profit – Actual profit at standard purchase price

         This basic variance has two components (a) sales margin price variance, & (b) sales margin volume variance.

Sales Margin Price Variance:

         The effect of a change in selling price on profits, other things being at standard is represented by Sales Margin Price variance. The formula is:

                        Standard Profit – Actual Profit
                        Or, (Actual quantity sold * Standard profit per unit) – Actual profit
Or, (Standard profit per unit – Actual profit per unit) * Actual quantity sold

Sales Margin Volume Variance:

         The difference in price resulting from a change in sales volume is shown by Sales margin volume variance. The formula is:

                        Budgeted Profit – Standard Profit
                        Or, Standard Profit per unit * (Budgeted quantity – Actual quantity)

         The sales margin volume variance can be sub-divided into two components (a) sales
margin mix variance & (b) sales margin quantity variance, when sale of more than one product is made.

Sales Margin Mix Variance:
         The difference between the revised standard profit & the standard profit is shown by the sales margin mix variance. The formula is:

                        Revised Standard Profit – Standard Profit
Or, Standard profit per unit * (Actual quantity at standard mix – Actual quantity at actual mix)

Sales Margin Quantity Variance:

         The difference between budgeted profit & revised standard profit is reflected by the sales margin quantity variance. The formula is:

                        Budgeted Profit – Revised Standard Profit
Or, Standard profit per unit * (Actual quantity at standard mix – Budgeted quantity at standard mix)

Relationship between the variances:

                        Total Sales Margin Variance = Price Variance + Volume Variance
                       
                        Sales Margin Volume Variance = Mix Variance + Quantity Variance

Illustration 2:

         The summarized budget & actual working results of a co. for the year 2010-11 are given below:

                                                            Budget                                    Actual
Details                                                 Products                      Products
                                            X               Y                  Z               X                     Y              Z
Selling Price per unit ($)     24              32                50              26                  32             54
Cost per unit ($)                18              22                40               20                 24             42
Sales (Units)                    20000         16000          12000        21000          20000     11000 

         Analyse the results & calculate the following:

(a) Budgeted profit, actual profit & variance in profit

(b) Analyse the variance in profit into the following:

(1) Price Variance; (2) Cost Variance; (3) Sales margin volume variance; (4) Sales margin mix variance; (5) Sales margin quantity variance
   
Solution: (a) Actual Profit = Actual Price – Actual Cost                               $

Product X                                ($26 - $20) * 21000                                       126000
Product Y                               ($32 - $24) * 20000                                        160000
Product Z                                ($54 - $42) * 11000                                       132000
                                                                                                                       418000

Standard Profit:

Product X                               ($24 - $18) * 20000                                        120000
Product Y                               ($32 - $22) * 16000                                        160000
Product Z                                ($50 - $40) * 12000                                        120000
                                                                                                                       400000

Variance in Profit:

Product X                               $ 126000 - $ 120000                                       6000 F
Product Y                               $ 160000 - $ 160000                                       Nil
Product Z                                $ 132000 - $ 120000                                     12000 F          
                                                            Variance                                            18000 F

(b) Cost Variance: Actual no of units * (Actual cost – Standard cost)

Product X                               21000 * ($20 - $18)                                        42000 A
Product Y                               20000 * ($24 - $22)                                        40000 A
Product Z                                11000 * ($42 - $40)                                       22000 A
                                                            Variance                                            104000 A

Sales Margin Variance

            Actual Margin = Actual Price – Standard Cost

Product X                               $ 26 - $ 18                               $ 8
Product Y                               $ 32 - $ 22                               $ 10
Product Z                               $ 54 - $ 40                               $ 14

            Standard Margin = Standard Price – Standard Cost

Product X                               $ 24 - $ 18                               $ 6
Product Y                               $ 32 - $ 22                               $ 10
Product Z                               $ 50 - $ 40                               $ 10

SM1 = Actual Sales margin on actual sales                             $

Product X                               21000 units * $ 8                    168000
Product Y                               20000 units * $ 10                  200000
Product Z                               11000 units * $ 14                  154000           
                                              52000                                      522000

SM2 = Standard Sales margin on actual sales
                       
Product X                               21000 units * $ 6                    126000
Product Y                               20000 units * $ 10                  200000
Product Z                               11000 units * $ 10                  110000             
                                              52000                                      436000

SM3 = Standard Sales Margin, if the sales had been in
 the ratio of standard sales mix 

Product X                               (20/48) * 52000 * $ 6              130000
Product Y                               (16/48) * 52000 * $ 10            173333
Product Z                               (12/48) * 52000 * $ 10            130000
                                                                                               433333

SM4 = Standard Sales Margin as per budget

Product X                               20000 units * $ 6                    120000
Product Y                               16000 units * $ 10                  160000
Product Z                               12000 units * $ 10                  120000
                                              48000                                      400000

(1) Sales Margin Price Variance = (SM1 - SM2)

Product X                               $ 168000 - $ 126000               42000 F
Product Y                               $ 200000 - $ 200000                 Nil
Product Z                               $ 154000 - $ 110000               44000 F
                                                                                               86000 F

(2) Sales Margin Mix Variance = (SM2 – SM3)

Product X                               $ 126000 - $ 130000                4000 A         
Product Y                               $ 200000 - $ 173333               26667 F
Product Z                               $ 110000 - $ 130000               20000 A
                                                                                                2667 F

(3) Sales Margin Quantity Variance = (SM3– SM4)

Product X                               $ 130000 - $ 120000               10000 F          
Product Y                               $ 173333 - $ 160000               13333 F
Product Z                               $ 130000 - $ 120000               10000 F
                                                                                                33333 F

(4) Sales Margin Volume Variance = (SM2– SM4)

Product X                               $ 126000 - $ 120000                 6000 F          
Product Y                               $ 200000 - $ 160000               40000 F
Product Z                               $ 110000 - $ 120000               10000 F

Check: Sales Margin Volume Variance = Sales Margin

            Mix variance + Sales Margin Quantity Variance     36000 F

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Other topics under Standard costs:

• Establishment of Standards
• Fixed Overhead Variances
• Labour Mix Variance, Revised Efficiency Variance
• Labour Variances, Direct Labour Cost Variance
• Material Mix Variance, Material Yield Variance
• Material Variances
• Sales Variances
• Setting of Standards
• Standard Costing- Introduction
• Standard Time Determination, Standard Rate Determination
• Types of Standards
• Variable Overhead Variances