Question

when examining revenue variances from a projected budget organizations look ar volume versus price variances. Describe what the differences are and what each variance entails and what specific drivers impact each type of variance.

Answer 1

Solution:-

Revenue variance refers to the difference between budgeted revenue and actual revenue that a company earns. There could be a difference between the two due to the following reasons:

1. The number of units that the company sold was more than the number of units they had budgeted for. Due to this there revenue ends up being higher or lower as the case may be when compared to the budgeted revenue, hence resulting in revenue variance. This component of revenue variance is known as volume variance. The various reasons/drivers behind this type of variance are as follows:
   • The actual demand in the market was different from the demand the company had anticipated
   • Due to production constraints the company could not produce as many units as it had anticipated and therefore couldn't meet the demand of its products. The examples of production constraints are labour strikes, plant fire, raw material shortage, etc
   • The overall market demand was in line with the company's expectations but a competitor snatched away the market share, resulting in lesser number of units being sold by the company
2. The other reason behind revenue variance is that the price that company sold its goods at came out to be different than what it had anticipated. The difference between budgeted price and actual price realised results in price variance. The reasons for price variance are as follows:
   • The competitive pressures in the industry reducing the prices that can be charged by the company
   • Improvement in manufacturing technologies resulting in decline in product cost which is passed on to customers by way of a cut in prices
   • Price regulations set by regulators or government. It happens in industries such as power, energy, etc
   • Increase in customer demand of a product results in an increase in the price charged by the companies supplying that product