Analysing Sales Variances: A Microeconomic Approach

Sales variance is a performance measure commonly reported by management accountants: it is the difference between the actual and the expected sales revenues. Given additional information, it can be decomposed into component variances arising from changes in price, sales volume, market size and market share. However, little guidance is provided to managers and marketers on the proper interpretation of these quantities. Further, the standard textbook analysis neglects the effect of price on sales volume and therefore may be misleading. Before an unambiguous interpretation of the causes of variance can be made, price-volume relationships must be either known or assumed. We present decompositions of the sales volume variance that incorporate the price-volume relationship and discuss their use, in order to help measure performance and formulate market strategy.