The main job of a business controller is to understand the business and present that understanding in a way that triggers reflection, action and change.
So, how to go about understanding a business? In this post, I will illustrate the simple example of understanding a change in sales revenue by breaking it down into volume and price effects.
Sales revenue is the product of volume and price, so these are the business drivers. Now, when these drivers change, we quantify the effect of those changes and we call these a volume and a price effect.
Let's assume the very simple case of one product in the beginning of a period and in the end of it. Something like this:
Plotted on a chart, it would look something like this:
The sales variance of -10 is solely due to the change in volume, since the price remained unchanged. Therefore, we can say that we have a Volume Effect of -10.
Let's assume another situation where Price is changing driver:
The sales variance of -10 is solely due to the change in price, since the volume remained unchanged. Therefore, we can say that we have a Price Effect of -5.
Easy so far, let's explore the situation in which both Volume and Price change.
By using this practice, the calculation of the Volume and Price Effect is:
Volume Effect = Volume Difference x Initial Price [(V1-V0)xP0]
Price Effect = Price Difference x New Volume [(P1-P0)xV1]
Here is another example of Volume-Price Effects when the direction is opposite:
To conclude, when we have one product, the sales revenue variance can always be broken down into Volume and Price Effects. The point with doing this kind of calculation is to isolate the impact of the two drivers and make it easier to see trends over time.