Importance and Limitations of Sales Mix Variance (With detailed explanation)

The difference between budgeted sales mix and actual sales mix at standard price is called sales mix variance.

There is always a difference between the planned sales volume and actual sales volume, so this is a useful tool to identify where the sales are distracted from the plan or not.

Sales mix is the ratio of each product sales in the total company’s sales. The concept behind sales mix variance is to access the effect on profit by changing the proportion of individual product sales in the sales mix.

To calculate the sales mix variance you will need to know the values of the budget sales mix, actual sales mix, and standard price.

How to Calculate Sales Mix Variance?

The formula for sales mix variance will be:

Sales mix per product = (Actual Sale mix ratio – Budgeted Sales mix ratio) × Actual sales ×Budgeted contribution margin per product

Example:

ABC Company is selling its two products naming Product X and product Z. The total sales of the company are 150,000 Units.

The standard price for product X is $5 and product Z is $10. The share of product X in total sales is 40% while the share of product Z is 60%.

Required: Calculate the total sales mix variance for the company ABC.

Solution:

Sales mix variance for product X will be = 150,000 × (40%-60%) × 5 = ($150,000)

Sales mix variance for product Y will be = 150,000 × (60%-40%) × 10 = $300,000

The total effect of sales mix variance will be = $300,000 – $150,000

= $150,000.

Importance of sales mix variance:

The sales mix variance is an important tool for all the companies who are selling more than one product.

Because analyses of total sales may not give exact information about individual product performances.

Also, it is not necessary that the profit margin of all the products will be the same, and change in sales volume of any product will not affect the total profit of the company.

Sales mix variance gives full information to the managers about the expected effects on the company’s profit if they want to change the sales volume of any product in their product line.

On the basis of this information, companies can decide to invest more on products which are highly profitable as compare to other products.

Allocation of Scarce Resources:

The scarce resources include company’s workers, machine hours and direct material.

Companies always want to get maximum from their operations. The allocation of the company’s scarce resources should be done in the right direction.

It means that scarce resources should be allocated to high margin products on a priority basis. Like if a company has only 1000 labor hours and produces two products A and B.

And profit margin of product A is $10 while the profit margin of product B is $15. And there is unlimited demand for both the products.

Then on the basis of sales mix variance, the company should consider allocating the labor hours to product B. Which would result in high profits.

Limitations of Sales Mix variance:

Sales mix variance has also some limitations too. Like the production process of all the products are running simultaneously and it is very difficult to separate the cost of every product individually. 

In this situation, the sales mix variance may not give you the actual picture. The results you will get from sales mix variance may not be accurate if somehow your basis for setting budget goes in the wrong direction.

Because the data for calculating sales mix variance is originated by different departments and the managers always do not want to show any negative points about their department.

So due to incorrect data, the results may be as fruitful as they should be.

See also  How to Calculate Sales Price Variance? The formula, Example, And Analysis
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