- This topic has 4 replies, 2 voices, and was last updated 5 years ago by
.
- Posts
Elm Co is a company which operates in Sealand. Elm Co budgeted to sell 25,000 units of a new product during the year. The budgeted sales price was $8 per unit, and the variable cost $4 per unit. Actual sales during the year were 22,000 units and variable costs of sales were $88,000. Sales revenue was only $9 per unit. With the benefit of hindsight, it is realised that the budgeted sales price of $8 was too low, and a price of $10 per unit would have been much more realistic.
Calculate the favourable sales price planning variance.
the answer to the following question is 44000 fHow come its favourable? we planned to sell it on 8$ but it was too low and should have been 10$? shouldnt that be adverse?
I can understand your confusion, but look at it this way:
It turns out that they should have been able to sell for $10 and this would have gained them $2 per unit (as against the original budget). This gain would have been due to bad planning and be favourable.
They actually sold for $9 when they should have been able to sell for $10, and this lost them $1 per unit and is an adverse operating variance.
Overall, they gained $1 (9 – 8) as against the original budget. $2 is gained (so favourable) as a result of planning, and $1 is lost (so adverse) as a result of operations.
I have attempted all questions on variances correctly but I just can’t understand this logic. What if we had budgeted of selling it at 10$, the market had figures of 8$ and we sold it at 9$?
Okay, I understand this now. We will always first look at current market situation to calculate operational variance. If the market is selling it at 10 and we sold it for 9, the 1 dollar difference is going to be adverse (operational) and doesnt matter even if our budget was to sell at 8 dollars.
And for the planning price variance questions I have attempted, the majority question showed that market had a lower selling price than budgeted and in this case the planning variance is adverse, and if the market had a higher selling price than budgeted, the difference is taken to favourable planning variance.
Am I correct?
- The topic ‘planning variance’ is closed to new replies.