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

Financial Reporting Guide - SCO > S07.06-VPV > image2017-4-27 19:40:34.png

Contribution margin of Soda Ash

Financial Reporting Guide - SCO > S07.06-VPV > image2017-4-27 19:40:54.png

2. Sales Variance

Financial Reporting Guide - SCO > S07.06-VPV > image2017-4-27 19:41:32.png

Financial Reporting Guide - SCO > S07.06-VPV > image2017-4-27 19:42:5.png

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.

To avoid misinterpretation:

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)

Financial Reporting Guide - SCO > S07.06-VPV > image2017-4-27 19:44:19.png

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