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Hi John
One thing that is not making logical sense is the Price vs volume variance, in general. On the volume variance we are using standard profit or contribution, but on the sales price we are using the sales price. Surely the movement in sales price thus affects contribution?
Would we not be left with an overstated variance by using sales price?
Any why would we use sales price on this variance, yet contribution on the volume variance. Its like comparing apples with oranges in my mind.Now I do know it is called “sales price variance”, but it’s use beside the volume variance (which uses profit or contribution) has me a little confused.
Thanking you in advance.
The sales price will certainly affect the contribution.
However we are trying to separate the two effects.
i.e. what is the effect on the profit of selling more or less if the price did not change (the sales volumes variance), and separately, what is the effect on the profit of changing the selling price (the sales price variance).
We need to separate out the two reasons because there might be different managers responsible.
(I assume that you have actually watched the lectures? 🙂 )
I think I understand. So with the sales price, the difference in price….by default will be the difference in profit with all else being equal. So whether profit or sales price is used, the variance should be the same. However, the correct one to use is of course the sales price. It sounds so simple to me now. Your explanation has pointed my brain in the right direction here…..assuming of course I am correct. 🙂
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