Variance analysis: price, volume, and mix

A revenue shortfall has three common explanations. The business sold fewer units, which is volume. It achieved a lower price, which is price. Or it sold a different mix of products, which is mix. Each points to a different owner: sales pipeline, pricing, or product and customer strategy. Reporting a single net gap hides that choice.

Margin adds a fourth factor: cost. A business can hit its revenue plan and miss its margin plan because input costs rose or because discounts were deeper than planned. Separate the factors before writing any commentary.

Choose one base: the approved budget or the latest forecast. Use standard cost for margin analysis, and state whether the standard cost has changed during the period. Mix must be measured against the budget mix, not against last month, or the result will drift.

Set a sign convention. Favourable is positive, adverse is negative, and the parts must add to the total variance. The three-way split below does that without a residual: volume at budget mix and budget price, mix at actual total volume and budget price, price at actual volume.

Volume variance is the change in total units valued at the budget price. For a single product, multiply the unit difference by the budget price. For a portfolio, use the budget weighted average price, so the result isolates size rather than product choice.

Mix variance holds total actual units constant and compares the actual product mix with the budget mix, valued at budget prices. A shift toward a cheaper product can reduce revenue while total units rise. For margin, repeat both calculations using budget margin per unit; the answer will differ because products carry different margins. Apply the same logic at customer-segment level when that is where the mix decision is made.

Price variance compares the actual price with the budget price, multiplied by actual units. If discounts vary by customer, calculate at the level where pricing decisions are made, then aggregate. Separate list-price changes from discount changes when both matter.

Cost variance compares the actual unit cost with the standard cost, multiplied by actual units. Do not bury cost inside price: a price rise passed on by a supplier is a cost effect, not a pricing win.

Take a hypothetical two-product business. Product A: budget 6,000 units at £50, standard cost £30. Product B: budget 4,000 units at £25, standard cost £15. Actual A: 5,000 units at £52, cost £31. Actual B: 6,000 units at £24, cost £16.

Budget revenue is £400,000 and budget margin is £160,000. Actual revenue is £404,000 and actual margin is £153,000. The table splits the £4,000 revenue gain and the £7,000 margin loss.

The value of the analysis is the action it triggers. Use these rules as a starting point, then adapt them to the business. Review the split at the level where the decision is made: product group, customer segment, or region. Too much granularity produces noise; too little hides the mix effect entirely.