Definition
In standard costing, Sales Margin Price Variance (also known as Selling Price Variance) is the variance that occurs as a result of the difference between the actual sales revenue earned versus the revenues that would have been earned had the actual sales quantities been sold at the budgeted or standard selling prices. This variance highlights the impact of deviations in selling prices from what was originally planned. A positive variance (favorable) indicates higher actual prices than budgeted, while a negative variance (adverse) reflects lower actual prices than budgeted.
\[ \text{Sales Margin Price Variance} = (\text{Actual Selling Price} - \text{Standard Selling Price}) \times \text{Actual Quantity Sold} \]
Examples
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Example 1: Favorable Variance
- Budgeted Selling Price: $50 per unit
- Actual Selling Price: $55 per unit
- Actual Quantity Sold: 1,000 units
- Sales Margin Price Variance Calculation:
\[ (55 - 50) \times 1,000 = 5 \times 1,000 = $5,000 \text{ (Favorable)} \]
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Example 2: Adverse Variance
- Budgeted Selling Price: $50 per unit
- Actual Selling Price: $45 per unit
- Actual Quantity Sold: 1,000 units
- Sales Margin Price Variance Calculation:
\[ (45 - 50) \times 1,000 = -5 \times 1,000 = -$5,000 \text{ (Adverse)} \]
Frequently Asked Questions
Q1: What causes sales margin price variance?
A1: This variance arises from differences between the actual selling price and the budgeted or standard selling price. Causes include changes in market conditions, pricing strategies, discount offers, and competition.
Q2: How is sales margin price variance used in financial analysis?
A2: It helps businesses understand the impact of pricing decisions on profitability, allowing management to make informed decisions about pricing, budgeting, and sales strategies.
Q3: Can sales margin price variance be controlled?
A3: While external factors like market demand cannot be fully controlled, companies can manage internal factors such as pricing policies and marketing strategies to influence selling prices.
Q4: What is the difference between sales volume variance and sales margin price variance?
A4: Sales volume variance measures the difference in profit due to the change in the number of units sold versus the budgeted quantity. In contrast, sales margin price variance focuses on the differences between actual and standard selling prices.
- Standard Costing: A cost accounting method that assigns expected costs to products, helping in variance analysis to manage operational effectiveness.
- Variance Analysis: The process of analyzing differences between budgeted and actual financial performance, aiming to understand reasons for variances.
- Sales Margin Volume Variance: The difference between the actual sales quantity and the budgeted sales quantity, multiplied by the standard profit margin per unit.
References
Online Resources
Suggested Books
- “Managerial Accounting” by Ray H. Garrison, Eric W. Noreen, and Peter C. Brewer: A comprehensive guide on cost accounting and variance analysis.
- “Cost Accounting: A Managerial Emphasis” by Charles T. Horngren, Srikant M. Datar, and Madhav V. Rajan: This book provides detailed insights into costing methods and variance analysis.
Accounting Basics: “Selling Price Variance” Fundamentals Quiz
### What is the Sales Margin Price Variance used for?
- [ ] Calculating inventory levels.
- [ ] Planning production schedules.
- [x] Analyzing the effect of price variations on revenue.
- [ ] Allocating marketing budgets.
> **Explanation:** The Sales Margin Price Variance is used to analyze the effect of price variations on revenue, helping businesses understand how deviations in selling prices impact profitability.
### What type of variance is it if the actual selling price is lower than the budgeted selling price?
- [x] Adverse
- [ ] Neutral
- [ ] Favorable
- [ ] Minimal
> **Explanation:** If the actual selling price is lower than the budgeted selling price, the variance is termed as adverse, indicating a negative impact on profitability.
### Which of the following can cause a Sales Margin Price Variance?
- [x] Market changes
- [ ] Fixed costs
- [ ] Depreciation expenses
- [ ] Operational efficiencies
> **Explanation:** Market changes, including shifts in demand and competition, can lead to differences between actual and budgeted selling prices, contributing to the variance.
### The standard selling price of a product is $100. If the actual selling price is $110 and the actual quantity sold is 500 units, what is the Sales Margin Price Variance?
- [ ] $5,000 Favorable
- [ ] $500 Adverse
- [x] $5,000 Favorable
- [ ] $50 Adverse
> **Explanation:** The Sales Margin Price Variance is calculated as (110 - 100) * 500 = $5,000, indicating a favorable variance.
### In which cost accounting method is Sales Margin Price Variance most commonly analyzed?
- [ ] Absorption costing
- [x] Standard costing
- [ ] Activity-Based costing
- [ ] Marginal costing
> **Explanation:** Sales Margin Price Variance is most commonly analyzed in standard costing, which involves setting standard costs and analyzing variances between actual and standard figures.
### A company has a standard selling price of $250 for a product. They manage to sell 200 units at an actual selling price of $260. What is the Sales Margin Price Variance?
- [x] $2,000 Favorable
- [ ] $3,000 Favorable
- [ ] $1,000 Adverse
- [ ] $2,000 Adverse
> **Explanation:** The Sales Margin Price Variance is (260 - 250) * 200 = $2,000, making it a favorable variance.
### Why might a company experience a favorable Sales Margin Price Variance?
- [x] Improved market conditions
- [ ] Increased labor costs
- [ ] Higher material wastage
- [ ] Delays in production
> **Explanation:** Improved market conditions can lead to an increase in actual selling prices compared to the budgeted prices, resulting in a favorable variance.
### If a company’s actual selling price exceeds its budgeted selling price, how is the variance classified?
- [ ] Static
- [x] Favorable
- [ ] Adverse
- [ ] Balanced
> **Explanation:** When the actual selling price exceeds the budgeted selling price, the resulting variance is classified as favorable, indicating an improvement in profitability.
### What does an adverse Sales Margin Price Variance indicate?
- [ ] Higher actual selling price than budgeted
- [ ] Better operational efficiency
- [x] Lower actual selling price than budgeted
- [ ] Stable market conditions
> **Explanation:** An adverse Sales Margin Price Variance indicates that the actual selling price was lower than the budgeted or standard selling price.
### How can a business address an adverse Sales Margin Price Variance?
- [ ] Increase fixed costs
- [x] Implement better pricing strategies
- [ ] Reduce production
- [ ] Increase inventory
> **Explanation:** To address an adverse Sales Margin Price Variance, businesses can implement better pricing strategies to bring actual selling prices closer to budgeted levels and improve profitability.
Thank you for engaging deeply in our detailed examination of Sales Margin Price Variance and tackling the associated quiz questions. Keep enhancing your financial acumen with continual practice and learning!
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