Mix Variance Lessons

Variance analysis is a concept that gives some students the jitters. The reason isn’t far-fetched. Variance analysis has just too many concepts, terms, and calculations you have to wrap your head around.

 

In this article, you’ll learn about sales mix variances. Importantly, I will guide you through calculations of this mix variance.

 

Please, note that mix variance is particular to both sales and materials variance analysis. However, we will be exemplifying sales mix variance at length in this article. Continue reading to start learning

 

What Is Sales Mix Variance?

It measures the difference between a company’s budgeted sales mix and the actual sales mix. Sales mix is a wheel of different products sold by an entity, it measures the sales of each product relative to the total sales of the company.

 

Where a company adopts the absorption costing technique, standard profit per unit would be used in the sales mix variance analysis while standard contribution per unit is enlisted in the case of marginal costing technique.

 

Relationship Between Sales Mix Variance And Sales Quantity Variance

Both variances are sub variances of sales volume variance. The difference between these two sub variances is that sales quantity variance involves just a single product while sales mix variance is used where the entity has more than one product/offering/service.

 

How To Calculate

  1. Determine the budgeted sales mix in percentage: add all budgeted sales together and calculate the percentage of each product’s budgeted sales relative to the total anticipated sales.

 

  1. Apply the percentages to the actual total sales to obtain the actual number of products that would have been sold if actual sales were made in a standard mix.

 

  1. The mix variance for each product would be the difference between the figure obtained in the step above and the actual sales of the product.

 

  1. The variance obtained is multiplied by standard profit per unit/contribution per unit to see how it affects the entity’s profitability.

 

Following the steps above, let’s solve a question on sales mix variance. Assume Company U is a manufacturer of different types of glassware in Onitsha market. The entity produces 3 glasswares and has requested you to present the sales mix variance using the information below.

 

Product X Y Z Total 
Budgeted sales (units) 200 150 100 450
contribution/unit ($) 10 20  40
Total contribution($) 2000 3000 4,000 9,000
Standard average contribution($) 20
Actual sales (units) 150 200 120 470

 

Solution:

Following the steps listed above:

 

  • Find budgeted sales mix for each of the product:

X = 200/450, Y = 150/450, Z = 100/450

X = 44.4%, Y = 33.3%, Z = 22.2%

 

  • Apply the percentages to the actual total sales.

For X = 44.4% x 470 = 207 units

For Y = 33.3% x 470 = 157 units

For Z = 22.2% x 470 = 106 units

 

  • The mix variance (in units) for each product: (Actual Mix Units – Standard Mix Units) x Standard contribution

X = 150 – 207 = 57 units Adverse x $10 = $570 A

Y = 200 – 157 = 43 units Favourable x $20 = $860 F

Z = 120 – 106 = 14 units Favourable x$40 = $560 F

 

  • The total sales mix variance = $570A + $860F + $560F = 850F

 

Proof:

To check if you have done the right thing, the addition of your variance (units) must equal zero.

 

In this case, 57A + 43F + 14F = 0

What Is Its Importance?

The following are the importance of sales mix variance to any company selling more than one product.

 

  1. It helps to determine whether the company is making a profit from its choice of product lines.
  2. It assists management in making decisions about the product line to be eliminated from its offering.
  3. The computation of this variance helps the sales team effort to know plan its promotional activities.

Limitations

  1. This variance is based on data easily manipulated to suit the reporting manager or department.
  2. It also does not show the actual costs of producing each of the products.

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