## Overview

Where volume, price and exchange variance analysis is used in a different currency from the planning currency for an item, calculations are as follows:

Exchange Variance = Actual value * Actual rates - Actual value * Base Rates

Price Variance = (Actual units * Actual ASP - Actual units * Base ASP) @ Base Rates

Volume Variance = Total Variance - Exchange Variance - Price Variance

Note that is equivalent to:

Volume Variance = (Actual Units * Base ASP - Base Units * Base ASP) * Base rates

In the above calculations **Base** normally refers to forecast or prior year values.

## Example Data

Local currency data as follows:

### Exchange Rates

Actual = 1.53851, Plan = 1.48925

### Calculations

For the first item above, calculations are as follows:

Exchange Variance = 367,853 * 1.53851 - 367,853 * 1.48925 = 18,121

Price Variance = (23,021 * 15.979 - 23,021 x 16.500) * 1.48925 = -17,862

Volume Variance = -4238 - 18121 - (-17862) = -4,497

**Check:**

Volume Variance = (23,021 - 23, 204) * 16.500 * 1.48925 = -4,497

## Example Analysis

The analysis below was run in US$ with GBP being the base/planning currency.

## Interpretation of Analysis

Volume, price and exchange variance analysis in IFP provides estimates of the contributions to variances between actual and base sales values of volume, price and exchange rate differences. This analysis is in terms of the selected **analysis currency** . The analysis of volume and price variances uses **base exchange rates** throughout, in order to avoid mixing exchange rate differences with volume and price differences.

Interpretation of the above results requires **careful consideration**. For example, the price variance of -17,862 US$ indicates that, at **base** (plan) exchange rates, differences between actual and plan prices caused an **unfavourable** variance of 17,862 US$ when applied to **actual units**.

## Conversion of Local Currency Variance Analyses to Reporting Currencies

It is quite common for the above analysis to be executed in local currency for local management and then to convert it into equivalent amounts in a reporting currency for submission to HQ. For example, the analysis below was run in GBP (the base/planning currency for database).

To convert this analysis into equivalent results in US$ terms, the volume and price variances would need to be multiplied by the base (plan) exchange rate for **each month**. In general, this cannot be done using local currency results for **multiple months**, as details for each month would be required in order to be able to convert each month at the correct base exchange rate for each month.

The conversion does work correctly if the **base** rate happens to be a **fixed rate** for **all** months (as in the above example for plan data). However, will clearly not be the case where the base file is **actual** data.

## Use/Abuse of Period Totals for Analysis

The above is further complicated by the fact that some organisations choose to use **total period** units, values, prices and exchange rates for the analysis rather than summing the results of the analysis for individual months. This use of period total data for the analysis causes **inconsistencies** when results for volume and price variances are posted each month by HQ into consolidated databases (e.g. in US$ terms). The only way to ensure consistency of results on a YTD basis is to calculate variances for **each month separately in US$ terms** and to use the **sum** of monthly variances to measure YTD variances.

## Alternative Business Questions

It is essential to fully understand the **business question** when calculating and interpreting the above types of variance. A slightly different question would require modification to the above.

For example, a perfectly reasonable question for a multinational organisation is to ask 'By how much, in **current** US$ terms, did the UK market price variances reduce our sales for this month?". To answer this question, **current** exchange rates would have to be applied to reported local currency volume and price variances.

This becomes obvious when you consider a case where a currency has undergone a significant devaluation in the last year (say from a rate of 1.2 GBP to 1 US$ to 2.0 GBP to 1 US$) . The** current** importance to the organisation of price variances in the UK market is clearly best measured using the **current** exchange rate and **not** the base (prior year rate).

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