Selling Price Variance
Selling Price Variance is a metric used in cost accounting and management accounting to measure the difference between the actual selling price of a product and its budgeted or standard selling price. It helps businesses understand how price changes (either increases or decreases) impact the overall revenue or sales value compared to what was expected or planned.
The formula to compute Selling Price Variance is:
Selling Price Variance = (Actual Selling Price − Budgeted Selling Price) × Actual Quantity Sold
Where:
- Actual Selling Price is the real price at which the product was sold.
- Budgeted Selling Price (or Standard Selling Price) is the expected or planned selling price of the product.
- Actual Quantity Sold refers to the number of units of the product that were actually sold.
When the result of the formula is positive, it indicates a favorable variance, meaning the actual selling price was higher than the budgeted selling price, leading to higher revenue. Conversely, a negative result indicates an unfavorable variance, meaning the actual selling price was lower than expected.
It’s important to note that the Selling Price Variance only measures the impact of selling price differences. It doesn’t consider other variances that might impact profitability, such as cost variances or sales volume variances.
Example of Selling Price Variance
Let’s use a fictional scenario to illustrate Selling Price Variance.
CoolSneakers Co. is a company that sells fashionable sneakers. For the upcoming year, they budgeted a selling price of $100 per pair of a specific sneaker model. By the end of the year, they sold 5,000 pairs of that model at an actual average selling price of $105 per pair.
Let’s compute the Selling Price Variance:
Given:
- Budgeted Selling Price = $100
- Actual Selling Price = $105
- Actual Quantity Sold = 5,000 pairs
Using the formula:
Selling Price Variance = (Actual Selling Price − Budgeted Selling Price) × Actual Quantity Sold
Selling Price Variance = ($105 – $100) x 5,000
Selling Price Variance = $5 x 5,000 = $25,000
The Selling Price Variance for CoolSneakers Co. is $25,000 (favorable). This means they earned $25,000 more in sales revenue than they had budgeted, solely because they were able to sell the sneakers at a higher price than initially expected.
This positive variance might prompt the management to investigate the reasons for the higher selling price. Perhaps there was increased brand recognition, a successful marketing campaign, or maybe competitors raised their prices, making CoolSneakers’ price increase more acceptable in the market.
