Revenue Variance Analysis: Understanding Sales Performance & Forecasting

Revenue Variance Analysis is used to measure differences between actual sales and expected sales, based on sales volumeDays Sales in Inventory (DSI)Days Sales in Inventory (DSI), sometimes known as inventory days or days in inventory, is a measurement of the average number of days or time metrics, sales mix metrics, and contribution margin calculations.

Information obtained from Revenue Variance Analysis is important to organizations because it enables management to determine actual sales performance in relation to the projected or perceived performance of the company for specific products. It helps businesses identify which products are performing better in the market. Overall, variance analysis helps management make better strategic and business-level decisions to maximize profitability.

Learn to perform revenue variance analysis in our online forecasting course.

Four Types of Revenue Variance

Similar to variance analysis, we can use the same column-based approach to calculate the four different types of revenue variance.

And finally, Sales Volume Variance (SVV) = Sales Mix Variance + Sales Quantity Variance.

These variances are summarized in the following table:

Flexible Budget Variance (FBV)Sales Mix Variance (SMV)Sales Quantity Variance (SQV)Difference between the actual contribution margin and the standard contribution with sales mix and sales volume held constantDifference between the actual product mix and the standard product mix with sales volume and contribution margin held constantDifference between the actual volume of sales and the standard (estimated) volume of sales with sales mix and contribution margin held constant

Example

Data from XYZ Company with equal Actual CM and Budgeted CM.

 Standard TicketLuxury TicketContribution Margin$20$5Budgeted tickets sold4,0006,000Actual seats sold3,3007,700

To determine the relevant variances, we use the column method shown above.

First, organize a table that outlines all relevant information regarding the two products.

 Budget  Actual  VolumeSales Mix (%)CMVolumeSales Mix (%)CMStandard4,00040%$203,30030%$20Luxury6,00060%$57,70070%$5Total10,000100%11,000100%

Standard Ticket:

SVV = 22,000 U + 8,000 F = 14,000 U

Luxury Ticket:

SVV = 5,500 F + 3,000 F = 8,500 F

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Analysis

From the above example, management can draw several conclusions:

• For the standard ticket, the actual sales mix is lower than originally budgeted, leading to an unfavorable sales mix variance.
• For the standard ticket, the actual sales volume is higher than originally estimated, leading to a favorable sales quantity variance.
• The sales volume variance, therefore, is unfavorable overall because the sales mix variance is significant.
• For the luxury ticket, the actual sales mix is higher than originally budgeted, leading to a favorable sales mix variance.
• For the luxury ticket, the actual sales volume is higher than estimated, leading to a favorable sales quantity variance
• The sales volume variance, therefore, is favorable overall and the luxury ticket proves to be performing better in terms of sales even though the contribution margin is lower.
• For both tickets, the flexible budget variance is 0 because the actual and budgeted CM are the same.

Market Share and Market Size Variances

Just like the variance analysis shown above, companies can also take their analysis one step further to determine market share and market size variances. Market share variance is the difference between actual market share and the estimated/standard market share at the same volume of sales.

On the other hand, market size variance is the difference between actual industry sales and estimated industry sales at a constant market share percentage. When the market shareMarket ShareMarket share refers to the portion or percentage of a market earned by a company or an organization. In other words, a company’s market share and market size variances are added together, they will be equal to the total sales quantity variance of all products sold by the company.

Learn to perform revenue variance analysis in our online budgeting course.

Importance of Variance Analysis

Variance analysis, as a whole, is imperative for companies because it gives management information that may not necessarily be obvious. By actually examining all individual costs, sales information, and contribution margin figures, companies can better measure the effectiveness of production methods and the performance of specific products relative to others.

For example, even though a certain product may provide a larger contribution marginContribution MarginContribution margin is a business’ sales revenue less its variable costs. The resulting contribution margin can be used to cover its fixed, leading to higher profitability, it may actually be performing worse than a lower contribution product. Although in the short run the higher CM product may be more appealing, companies should consider which products to focus their efforts on if they intend to maintain longevity in today’s highly competitive market.

Additional Resources

CFI offers the Financial Modeling & Valuation Analyst (FMVA)Become a Certified Financial Modeling & Valuation Analyst (FMVA)®CFI's Financial Modeling and Valuation Analyst (FMVA)® certification will help you gain the confidence you need in your finance career. Enroll today!®Become a Certified Financial Modeling & Valuation Analyst (FMVA)®CFI's Financial Modeling and Valuation Analyst (FMVA)® certification will help you gain the confidence you need in your finance career. Enroll today! certification program for those looking to take their careers to the next level. To help you advance your career, check out the additional CFI resources below:

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