Sales variance scenario: one type of product

Scenario 1: one type of product

The following are example scenarios between the master budget and the actual results for sales where an entity is selling only one type of product.

Category	Master budget	Actual results	Total variance	Nature of variance
Sales volume (units)	10,000	9,000	(1,000)	Unfavorable
Sales price ($ per unit)	20	22	2	Favorable
Total sales ($)	$200,000	$198,000	($2,000)	Unfavorable

In the master budget, the company planned to sell 10,000 units at a budgeted sales price of $20 per unit, projecting total revenue of $200,000 for the period.

Actual results differed: the company sold 9,000 units, 1,000 units fewer than planned. This represents an unfavorable variance.

The company sold at $22 per unit, $2 above budget, a favorable variance.

The combination of these variances resulted in total actual sales revenue of $198,000, slightly below the master budget’s projection.

The total unfavorable sales variance of $2,000 represents the overall deviation between the master budget sales and actual sales. This total variance will be explained by breaking it into the sales volume and sales price variances.

Scenario 1.1: Preparing the flexible budget

To determine the breakdown of the total sales variance into its components (i.e., sales volume variance and sales price variance) we need to prepare a flexible budget for sales. The flexible budget adjusts sales revenue based on the actual sales volume (9,000 units) while maintaining the budgeted sales price ($20 per unit). This intermediate step isolates the impact of sales volume changes from pricing changes, providing clarity on the underlying causes of the variance.

Below is a revised table showing the master budget, flexible budget, and actual results side by side for comparison:

Category	Master budget (10,000 units)	Flexible budget (9,000 units)	Actual results (9,000 units)
Sales volume (units)	10,000	9,000	9,000
Sales price ($ per unit)	20	20	22
Total sales ($)	$200,000	$180,000	$198,000

Scenario 1.2: Calculating sales variances

The diagram below illustrates how the total sales variance splits into the sales volume variance and sales price variance, using the flexible budget as the midpoint.

This comparison highlights that the difference between the master budget and the actual results ($2,000 total sales variance) can be analyzed by splitting it into the sales volume variance and sales price variance. The flexible budget serves as a critical intermediary step in this process.

1.2.1. Sales volume variance

$Sales volume variance = Flexible budget sales - Master budget sales = 180, 000 - 200, 000 = (20, 000)$

The unfavorable sales volume variance of $20,000 indicates that selling fewer units than planned resulted in a reduced revenue.

Equivalently: $(actual units - budgeted units) \times budgeted price = (9, 000 - 10, 000) \times $20 = ($20, 000)$ unfavorable. The volume variance always uses the budgeted price, holding price constant so only the change in units shows through.

1.2.2. Sales price variance

$Sales price variance = Actual sales - Flexible budget sales = 198, 000 - 180, 000 = 18, 000$

The favorable sales price variance of $18,000 shows that selling products at a higher price offset some of the revenue loss from lower volume.

Equivalently: $(actual price - budgeted price) \times actual units = ($22 - $20) \times 9, 000 = $18, 000$ favorable. The price variance always uses actual units, holding volume constant so only the change in price shows through.

1.2.3. Total sales variance

$Total sales variance = Sales volume variance + Sales price variance = (20, 000) + 18, 000 = (2, 000)$

This breakdown demonstrates that while pricing strategies were favorable, they did not fully offset the impact of selling fewer units than planned.

The total (actual − master) is the static-budget variance; the actual − flexible comparison is the flexible-budget variance, which for revenue equals the sales price variance. On an operating-income report, the sales volume variance is instead measured at the budgeted contribution margin per unit: $(actual units - budgeted units) \times budgeted CM per unit$ , since lost or gained units affect income by their contribution margin, not their full selling price.

Sign convention: every formula above is actual (or flexible) minus budget - the sales price variance is actual − flexible, and the sales volume variance is flexible − master. For revenue, a positive result raises operating income and is favorable (F); a negative result, shown in parentheses, is unfavorable (U). Favorable isn’t always good news on its own: the $2 price increase here may be the reason 1,000 fewer units sold, so you should look at the volume and price variances together rather than in isolation.

Flexible Budget vs. Master Budget

Flexible budget restates revenue at actual volume but budgeted price — isolates volume effects from price effects
Serves as the midpoint between master budget (planned volume & price) and actual results (actual volume & price)
Used to decompose total sales variance into volume and price components

Sales Volume Variance

Formula: $Flexible budget sales - Master budget sales$
Equivalent: $(actual units - budgeted units) \times budgeted price$
Holds price constant; isolates impact of unit changes
Example: $(9, 000 - 10, 000) \times $20 = ($20, 000)$ unfavorable
On operating-income reports, use budgeted contribution margin per unit instead of price (lost/gained units affect income by CM, not full price)

Sales Price Variance

Formula: $Actual sales - Flexible budget sales$
Equivalent: $(actual price - budgeted price) \times actual units$
Holds volume constant; isolates impact of price changes
Example: $($22 - $20) \times 9, 000 = $18, 000$ favorable

Total Sales Variance & Terminology

Total variance = Sales volume variance + Sales price variance = Actual − Master
Also called the static-budget variance
Actual − Flexible = flexible-budget variance (equals sales price variance for revenue)
Sign convention: always actual (or flexible) minus budget; positive = favorable (F), negative = unfavorable (U)
Favorable price variance isn’t necessarily good news alone — e.g., a price hike may cause the volume drop, so analyze volume and price variances together, not in isolation