Question

1. You are required to prepare the Sales price variance and Revenue sales quantity variance by taking any of your choice Saudi based company and suggest the suitable reasons for the variances. (3 Points)

Answer:

Playground Steel Factory is a leading manufacturer and supplier of Restaurant Seating, Tables & Other related Furniture, Indoor & Outdoor Playgrounds for Restaurants, Public & Private Parks, Public Houses, Hospitals, Schools and Furniture Seating for Shopping Centers, Sun Shades & Car Shades in the whole Kingdom of Saudi Arabia and Middle East Countries.

The Factory expected to sell 50,000 units from one of its products "Hospital seats" during 2018, the following is the planned sales and variable costs for 2018.

Sales (50,000 units)                      SR 3,000,000

Variable costs                                  1,750,000

During the year, a competitor came out with a similar hospital seats at a lower price. Management reacted by dropping its selling price for the hospital seat, but the actual sales dropped to 45,000 units at 55 SR per seat.

The cost accounting department prepare the sales price variance and revenue sales quantity variance.

Actual units sold at Actual Price

Actual units sold at Standard Price

Standard units sold at Standard Price

Actual Units

×

Actual Price

Actual Units

×

Standard Price

Standard Units

×

Standard Price

45,000

×

55

45,000

×

60

50,000

×

60

2,475,000

2,700,000

3,000,000

Sales Price Variance

Revenue sales quantity variance

-225,000

-300,000

Unfavorable

Unfavorable

Revenue Budget Variance

-525,000

Answer 1

Satndard Sales Price = Standard Sales Value/ Standard Sales Qty

= 3000000 / 50000

= 60 per unit.

Sales Price Variance = Actual Quantity * ( Actual Price - Standard Price)

= 45000 * ( 55-60)

= 45000 * -5

= -225000 ( Unfavorable)

Sales Price Variance is unfavourable since we have reduced the sale price to the extent of 5 per Unit.

Sales Quantity Variance = Stanadard Price * ( Actual Qty - Standard Qty)

= 60 * ( 45000 - 50000)

  = - 300000

Sales Qty Variance is Unfavourable since the actual sales Qty were less than the standard sales Qty.

So , Revenue Budget Variance = Sales Price Variance + Sales Qty Variance

= -225000 - 300000

= -525000.

Check : Actual Sales - Standard Sales = ( 45000*55) - 3000000

= 2475000 - 3000000

= - 525000 ( Unfavourable)

Reasons for the Variance :

1. Due to Competitor , Sales Qty reduced and as a result , Sales Qty Variance Arises.

2. In order to save the market share , we reduced the sales price and as a result , Sales Price Variance Arises.

3. Sales Qty Variance may also arise due to changing customer preferences or wrong estimation of standard sales Qty

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