How to Calculate Sales Mix Variance?

In this article, we will cover how to calculate sales mix variance. This includes the definition, important of sales mix variance, example calculation, causes for favorable and adverse variance as well as the limitation of sales mix variance.

Variance reports are developed at the closing of each control period (say, at the end of each month). Large adverse variances show poor performance, provided that they are due to factors that are under the control of management. Large favorable variances show unanticipated good performance. Management might wish to look at how this good performance can be continued to maintain in the future as well.  A statement for the accounting period is prepared that reconciles the budgeted profit with the actual profit for the period and where the variances are reported. This statement is termed as an operating statement.

What is Sales Mix Variance?

Sales mix variance is a variance that measures the effect of the variation in the proportion of different products sold during a period from the standard mix determined while the budget was being prepared.

Sales mix variance assesses any change in profit or contribution attributable to the variation in the proportion of the dissimilar products from the standard mix.

Sales Mix Variance is one of the two sub-variances of sales volume variance (another one is sales quantity variance).

In case of absorption costing standard profit per unit should be used while calculating the sales mix variance and sales volume variance while standard contribution per unit should be used in calculation in case of marginal costing system.

Important of calculating Sales Mix Variance (or When and Why)

The sales mix variance is a significant tool for all the organizations who are selling more than one product this is because just doing analyses of total sales may not give accurate information about the performance of the individual products.

Also, it is not possible that the profit margin will be the same for all the products, and a change in the sales volume of any product will not touch the total gain attained by the company.

It is useful for the managers of the company as it gives full information to the managers about the expected consequences on the company’s profit if they want to alter the sales volume of any product in their product line and on the basis of this information, companies can determine either or not to invest more on products which are highly gainful as compare to other products.

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How to Calculate Sales Mix Variance?

The sales mix variance can be calculated by using the formula below:

  • If used in standard costing

Sales Mix Variance = (Units Sales at Actual Mix – Units sales at Standard Mix) × Standard Profit per Unit

  • If used in marginal costing

Sales Mix Variance = (Units Sales at Actual Mix – Unit sales at Standard Mix) × Standard Contribution per Unit

Example with Analysis

Now, let’s jump in to the example and calculation of sales mix variance.

Example:

ABC is a small company that particularizes in the manufacture and sale of computers used for gaming purposes. Presently, the company is offering two models of gaming computers:

M – a professional gaming computer with a water-cooling system priced at $3,500

N – an entry-level gaming computer with standard fan cooling priced at $2,000

ABC budgeted sales of 1,700 units of M and 3,400 units of N in the last year. The standard variable costs of a single unit of M and N were set at $2,500 and $850 respectively.

The sales team at ABC handled to sell 1,400 units of M and 4,700 units of N during the current year.

Solution:

In order to simply calculate the sales mix variance, we will break it down into steps as follow:

Step 1: Calculating the standard mix ratio

The standard mix ration can be calculated as below:

Standard mix for product M = 1,700/ (1,700 + 3,400) = 33%

Standard mix for product N = 3,400/ (1,700 + 3,400) = 67%

Note: For simplicity, we rounded up the percentage above.

Step 2: Calculating the actual sales quantities in proportion to the standard mix

The actual sales for both product M and N are 1,400 units and 4,700 units respectively.

Thus, the total actual sales is 6,100 units (1,400 units + 4,700 units)

Now, let’s calculate the actual sales at standard mix.

The actual sales at standard mix is calculated as follow:

Actual Sales of M in standard mix @ 33 % of 6,100 = 2,013 units

Actual Sales of N in standard mix @ 67 % of 6,100 = 4,087 units

Step 3: Calculating the difference between actual sales quantities and the sales quantities in the standard mix

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DescriptionM unitsN units
Actual sales quantities (as per question)1,4004,700
Actual unit sales at standard mix (Step 2)(2,013)(4,087)
Sales mix variance in units(613)613
 Unfavorable/AdverseFavorable

Step 4: Calculating the standard contribution per unit

DescriptionM $N $
Revenue3,5002,000
Variable cost(2,500)(850)
standard contribution per unit1,0001,150

Step 5: Calculating the variance for each product

DescriptionMN
Standard contribution per unit (Step 4)$ 1,000$ 1,150
Sales mix variance in units (Step3)(613) units613 units
Sales mix variance in US$$ 613,000$ 704,950
 Unfavorable/ AdverseFavorable

Step 6: Add the individual variances

So the last step is to add each individual variance. Thus, the total sales mix variance is as follow:

Sales mix variance = ($ 613,000 – $ 704,950)

Sales mix variance = $ 91,950 (Unfavorable / Adverse)

Alternatively, we can calculate the sales mix variance by using the tabular below:

ProductActual sales mixStandard mix ratioStandard sales mixSales mix variance in unitsStand contribution per unitSales mix variance in US$
M1,40033%2,013613 A1,000613,000 A
N4,70067%4,087613 F1,150704,950 F
 6,100100%6,100  91,950 F

Interpretation and Analysis

In the above example sales mix variance is unfavorable / adverse, this is because a lower proportion (i.e. 23%) of M computers (which is more profitable than N computers) were sold during the year as compared to the standard mix (i.e. 33%).

The sales mix variance appraises the deviation in unit volumes in the actual sales mix from the budgeted sales mix. Typically, there is almost always a difference in between actual sales and targeted or budgeted sales. Therefore, the sales mix variance is very useful tool to analyze where sales changed from the target or budget.

Sales mix variance should be used and interpreted with due care in assessing the deviation of performance of a company. For example, an adverse sales mix variance will be perfectly all right where a company is able to earn revenue in excess through sale of lower-margin products if such sales are in addition to sales of the products with higher margins.

Favorable sales mix variance indicates that a higher proportion of more gainful products were sold during the period than was expected in the budget.

Causes for favorable sales mix variance includes:

  • Increasing the concentration of sales and marketing efforts in order to sell more profitable products.
  • High demand for the higher-margin products (where demand is a limiting factor).
  • Increase in the supply of more moneymaking products for example addition to the production capacity (where supply is a limiting factor).
  • Decrease in the demand or supply of the less products that are not profitable.
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Adverse sale mix variance indicates that low margin products were sold in high proportion during the period than it was expected in the budget.

Causes for adverse sales mix variance includes:

  • Demand for the more gainful products being lower than expected.
  • Diminish in the manufacturing of the high margin products due to supply-side limiting factors (e.g. deficit of raw materials or labor).
  • Sales team not concentrating on selling products with higher margins owing to lack of knowingness or misaligned performance incentives (e.g. uniform sales commission on the all product range may not motivate sales staff to compete for high margin sales).
  • Increase in demand or supply of the less moneymaking products.

Limitations of Sales Mix Variance

Using and application of sales mix variance do have some limitations too. For instance, in the process of production when all of the products are being manufactured at the same time, it is very hard to separate the cost of every product severally.

In this type of situation, the sales mix variance may not show the manufacturer the actual scenario. The result a manufacturer will get from sales mix variance may not be exact if the basis for setting budget used by the manufacturer goes in the wrong way. This is because the data and information used for calculating sales mix variance is originated by multiple departments and the managers. And of course, they will not want to show any negative points about their own department. Hence, due to incorrect availability of data, the results may not be according to your requirements.

Conclusion

Companies review sales mix variances from time to time in order to identify the products and product lines that are performing good and the ones which are not performing up to the mark. Sales mix variance tells the “what” but not the “why” which is not a good thing however still companies use this concept and other analytical data before making any changes. The concept provides a valuable insight into the performance of products however if applied correctly to the company’s product range. While it is possible to value sales variances using a number of bases, accountants should always keep this in mind that profitability is the key concern of many companies in private sector. All in all the discussed concept is very significant from costing point of view however at the same time during its application care should be taken by keeping in view its few limitations.

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