The sales volume variance is computed by comparing our original static budget to the budget we would have made if we had somehow known in advance exactly how many units we would have sold. In other words, for GelSoft, we would compare the static budget to our 180,000 recalculated (flexible) budget.

Flexible Budget
Sales Volume Variance
F or U
Static Budget
Budgeted Amounts per Unit

Units
          180,000

        172,405

Sales Revenue
$   6,120,000
$   258,230
F
$  5,861,770
$     34.00

Variable Costs
      3,362,400
$   141,875
U
3,220,525
$     18.68

Contribution Margin
      2,757,600
$   116,355
F
2,641,245

Fixed Costs
  2,452,694
–
N/A
2,452,694

Operating Income
$     304,906Double line
$   116,355
FDouble line
$    188,551Double line

What we see is that sales in dollars were more than a quarter of a million better than expected because of the volume increase, despite the slightly lower average sales price, so we have a favorable sales volume variance.

However, as we would expect, the increased volume carries with it an increase in overall variable costs. Not per unit, because we are using the original budget number for the per-unit variable costs, but total variable costs increase as total units increase. That creates an unfavorable overall variance between the original (static) budget and the recalculated (flexible) budget. It’s unfavorable because it reduces the bottom line.

Fixed costs would have been budgeted the same regardless of sales volume unless we knew that we were exceeding the relevant range for those projected fixed costs, so there won’t be a variance there.

Overall, we had a favorable sales volume variance equal to the additional contribution margin. We sold an additional 7,595 units, and each one contributes $15.32 to fixed costs ($34 sales price minus $18.68 variable costs).

7595 X $15.32 = $116,355 (rounded to the nearest whole dollar)

Next, well combined the fixed budget variance and the sales volume variance into one performance report, but first, check your understanding of the sales volume variance.