Question

can you please help with 11.20

11.20 (appendix) Explain how the sales price variance and the sales volume variance can assist managers to control costs. LO 11.11

Answer 1

It is a term used to express the way in which the cause of one variance may be wholly or partially explained by the cause of another variance. For control purposes, it might therefore be essential to look at several variances together and not in isolation.

Some examples of interdependence between variances are listed below

1. Use of cheaper material which is poorer quality, the material price variance will be favourable but this can cause more wastage of materials leading to adverse usage variance.

2. Using more skilled labour to do the work will result in an adverse labour rate variance, but productivity might be higher as a result due to experienced labour.

3. Changing the composition of a team might result in a cheaper labour mix (favourable mix variance) but lower productivity (adverse yield variance).

4. Workers trying to improve productivity (favourable efficiency variance) in order to get bonus (adverse rate variance) might use materials wastefully in order to save time (adverse materials usage).

5. Cutting sales prices (adverse sales price variance) might result in higher sales demand from customers (favourable sales volume variance). Similarly, favourable sales price variance may result in adverse sales volume variance

Each component of cost will directly empact on the sales price or volume here the some direct interpretaion can be used management to control the cost with sales price and sales volume

1. Sales price variance

• Higher discounts given to customers in order to encourage bulk purchase

• The effect of low price offers during a marketing campaign

• Poor performance by sales personnel

• Market conditions or economic conditions forcing changes in prices across the industry

2. Sales Volume Variance

• Successful or unsuccessful direct selling efforts
• Successful or unsuccessful marketing efforts (for example, the effects of an advertising campaign).
• Unexpected changes in customer preferences and buying patterns.
• Failure to satisfy demand due to production difficulties.
• Higher demand due to a cut in selling prices, or lower demand due to an increase in sales prices

Hope it will help.