The Importance of Revenue Variances

The revenue variance for an accounting period is the difference between budgeted and actual revenue. A favorable revenue variance occurs when actual revenues exceed budgeted revenues, while the opposite is true for an unfavorable variance. Revenue variance results from the differences between budgeted and actual selling prices, volumes or a combination of the two.


A favorable or unfavorable revenue variance occurs if the actual selling price is greater or less than the budgeted selling price, respectively. For example, if a small business estimates that it will sell 1,000 units at $20 each, but sells them at $22 each, there is a favorable revenue variance of $2 per unit and a total revenue variance of $2,000--$2 multiplied by 1,000. A small business might be able to raise prices if there is strong enough demand or if everybody is raising prices to cover higher input costs. However, aggressive price discounting could lead to an unfavorable revenue variance. Strategies to counter an unfavorable variance include increasing the advertising budget and improving customer service.


A favorable or unfavorable revenue variance also occurs if the actual sales volume is greater or less than the budgeted sales volume, respectively. For example, if the budgeted volume is 1,000 units at $10 each, but the actual volume is 1,100 units, there is a favorable revenue variance of $1,000--$10 multiplied by 100. Management needs to anticipate demand correctly, because it affects profitability. Businesses that do not have enough products in stock could lose revenue and may risk losing customers to its competitors, while overestimating customer demand may lead to higher inventory costs and operating losses.


A company's revenue variance may affect its profit and cash flow. However, profits also depend on other factors, such as raw material costs, salaries and marketing expenses. If a favorable revenue variance coincides with higher expenses, it could indicate a loss. Conversely, if an unfavorable revenue variance coincides with lower expenses, it could indicate a profit. For example, if a small business spends an additional $1,000 on marketing expenses, but generates only $800 in additional revenue, the pretax profits would fall by $200--$1,000 minus $800.


Revenue, cost and other variances factor into the budget preparation process. For example, if the revenue variance this year was due to aggressive price discounting and a small business expects this trend to continue, management could adjust the product mix or look for ways to reduce input costs to achieve profit targets. If poor quality is the main reason for an unfavorable revenue variance, management should make changes to its design and manufacturing processes to improve product quality.


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