36. Management by Exception and Sales Revenue Variances

Question 1

Describe how the Variance Framework works and how you would use it to calculate the price and quantity variances.

Answer 1

• The framework is a visual method for calculating variances.
• Moving from left to right, you move from actual amounts to standard amounts.
• The price variance is calculated first as you isolate the price by comparing Actual Quantity × Actual Price to Actual Quantity × Standard Price.
• You calculate the quantity variance by comparing Actual Quantity × Standard Price to Standard Quantity × Standard Price

Question 2

How are price and quantity variances calculated using the formula approach?

Answer 2

• Price variance formula: Actual Quantity × (Standard Price − Actual Price) = Price Variance
• Quantity variance formula: (Standard Quantity − Actual Quantity) × Standard Price = Quantity Variance

Question 3

The sales volume variance can be broken down into two separate variances. What are these variances and why would a company use them in their analysis?

Answer 3

• The sales volume variance can be broken down into the sales mix variance and sales quantity variance.
• Most organizations sell a mix of products or services so the sales volume variance results not only from selling more or less total goods or services, but also from selling relatively more or less of one type of product versus another.
• Using the sales mix and quantity variances helps an organization break down the financial impact of both factors.

Question 4

What is the sales mix variance a subset of, and how it is calculated using both the framework and formula approaches?

Answer 4

• The sales mix variance is a subset of the sales volume variance.
• Using the framework approach, it is calculated by comparing the Total Actual Volume × Expected Mix % × Standard Contribution Margin to the Total Actual Volume × Actual Mix % × Standard Contribution Margin.
• Using the formula approach, it is calculated as Total Actual Volume × (Expected Mix % − Actual Mix %) × Standard Contribution Margin.

Question 5

What is the sales quantity variance, and how is it calculated using both the framework and formula approaches?

Answer 5

• The sales quantity variance is a subset of the sales volume variance.
• Using the framework approach, it is calculated by comparing the Total Expected Volume × Expected Mix % × Standard Contribution Margin to the Total Actual Volume × Expected Mix % × Standard Contribution Margin.
• Using the formula approach, it is calculated as (Total Expected Volume − Total Actual Volume) × Expected Mix % × Standard Contribution Margin.