Does the production volume variance provide parallel information for evaluating the effects of exceeding or falling short of production targets?

Essay by Diane RidgwayUniversity, Master'sB-, August 2004

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Since variances are merely mathematical formula, they can be applied to any situation where there is a standard of performance to be compared with an actual one. This includes sales and margins.

In the same way that costs can be broken down into material. Labour and overheads with price / rate and efficiency variances so the sales results as they differ from a standard (or budget) can be analysed. The principals are exactly the same for calculating:

• Sales margin price variance

• Sales margin quantity variance

• Sales margin mix variance

• Sales margin volume variance

In all these, the standard sales margin is the standard selling price minus the standard cost. If marginal costing is used, then the phrase 'sales margin' is simply replaced by 'sales contribution' As I have some knowledge of the inside track on pharmaceutical sales

"Drug companies still consider outsourcing to be a tactical rather than a strategic move.

Decisions are price driven and done on a product-by-product basis." (1)

This stance has been fostered in the pharmaceutical industry by historically high profit margins: Gross margins: price received minus cost of goods--typically have been 80%.

"Every sales dollar lost because of a supply interruption means 80 cents off the bottom line, for this reason, pharma's principal consideration in manufacturing has not been cost but security of supply. In most other industries, cost is often part of the competitive environment and manufacturing efficiency is important." (1)

Sales knowledge is a valuable source of competitiveness. Because of increasingly complex products and growing importance of product launches, efficient sales training is beneficial to many companies Standard costs are predetermined costs that should be achieved under predetermined conditions. Their usefulness encompasses:

Planning: building blocks for budgeting eg. materials specifications standards use in calculating the materials purchasing...