Variance analysis (Price/Volume analysis)
1. Goal of VPV (Volume/Price Variance) analysis
Compare the financial indicators of one period (actual period) to a reference period (same period of previous year, budget period, ...)
By characterizing the evolution between these periods on different axes (price, volume, variable costs, fixed costs, exchange rate impact, ...)
In order to measure and explain the business performance evolution (internally).
Within the Group, VPV is used to understand and explain sales, contribution margin and Underlying EBITDA .
- by GBU or by activity: for the GBU or Group Management
- by Customer, Product, Technology: to discuss with business, sales and marketing, etc...
This indicator is also used in Financial Communications (Press Releases)
Examples:
- Sales of Soda Ash
- Contribution margin of Soda Ash
2. Sales Variance
Price/Volume Variances
- P : The Price effect is the variation of unit selling prices between the current period and the reference period times the volume sold of the current period.
- V : The Volume effect is the variation of volumes between the current period and the reference period times the unit selling price of the reference period.
Other Variances
- Conv : The Conversion effect is the variation of exchange rates (local currency to EUR) between the current period and the reference period times the amount sold in the reference period in local currency.
- Compute unit prices in local currency
- Convert the results to the Group currency
- Assign the difference arising fron the exchange rate evolution to a Conversion effect.
Use the actual period exchange rate if the figures are expressed in local currency, and have to be converted to EUR.
- FX : The Transactional Foreign Exchange (FX) effect is the variation of exchange rates (transaction currency to local currency) between the current period and the reference period times the amount sold in the reference period in transaction currency.
The Sales variance is the sum of all effects mentioned above (price, transactional FX, volume, conversion) which corresponds to:
Sales variance at actual period exchange rate = Price + Transactional FX + Volume effects.
Formulas of the various effects (P, V, FX, Conv)
| P act | = | Unit price of the current period in transaction currency |
| P ref | = | Unit price of the reference period in transaction currency |
| V act | = | Quantity of the current period |
| V ref | = | Quantity of the reference period |
| X act | = | Exchange rate consolidation currency TO local currency FOR actual period |
| X ref | = | Exchange rate consolidation currency TO local currency FOR reference period |
| XT act | = | Exchange rate local currency TO transaction currency FOR actual period |
| XT ref | = | Exchange rate local currency TO transaction currency FOR reference period |
3. Variable Costs Variance
The definitions used for Sales Variance can be extended to Variable Costs.
Variable Costs variance = Variable Costs + Transactional FX + Volume + Conversion effects
- C : The Variable Costs effect is the variation of unit costs between the current period and the reference period times the volume sold of the current period.
- V : The Volume effect is the variation of volumes between the current period and the reference period times the unit cost of the reference period.
- Conv : The Conversion effect is the variation of exchange rates (local currency to EUR) between the current period and the reference period times the variable costs in the reference period in local currency.
- FX : The Transactional Foreign Exchange (FX) effect is the variation of exchange rates (transaction currency to local currency) between the current period and the reference period times the amount sold in the reference period in transaction currency, for costs incurred in non-local currency .
Formulas of the various effects (C, V, FX, Conv): same as for Sales Variance except for P which is replaced by C .
4. Variance on Contribution Margin or Underlying EBITDA
The volume effect on Contribution Margin or Underlying EBITDA is the sum of the volume effect on sales and on variable costs.
The sum or Price, Foreign Exchange on Sales, Variable Costs and Foreign Exchange on Costs is called the Pricing Power.
Consequence on Contribution Margin and Underlying EBIDTA
| P&L | Volume | Price | FX on sales | Var Costs | FX on costs | Fixed Costs | Conversion |
|---|---|---|---|---|---|---|---|
| Sales | Yes | Yes | Yes | - | - | - | Yes |
| Variable Costs | Yes | - | - | Yes | Yes | - | Yes |
| Contribution Margin | ∑ Volume | Price | FX on sales | Var Costs | FX on costs | - | ∑ Conversion |
| Fixed Costs | - | - | - | - | - | Yes (FC) | Yes |
| Other Operating gains & losses | - | - | - | - | - | Yes (Other) | Yes |
| Underlying EBITDA | ∑ Volume | Price | FX on sales | Var Costs | FX on costs | ∑ FC + Other | ∑ Conversion |
| Pricing Power | |||||||
5. Default rules and keep in mind
If no unit price or unit costs can be computed for reason that:
- no sales in current or reference period
- no costs in current or reference period
- no quantities in current or reference period
the variance is defaulted to the volume effect for sales and variable costs.
Perimeter effect:
To avoid unwanted volume effects, differences in the perimeter between the current and reference period have to be handled in order to make the reference period comparable to the current period.
The use of the perimeter effect applies only in the following cases:
- acquisition or sale of companies
- changes in consolidation method or in accounting rules
- transfer of activities between GBUs and/or between GBUs and CBS
It is not used for organic business impacts such as new products and temporary shutdowns.
The transactional exchange rate impact on costs is usually based on amounts declared by the BUs