Sales Mix Variance: Definition, Formula, Explanation, Analysis, And Example

Definition:

Sales Mix variance measures the change in profit or contribution that is attributable to the changes in the proportion of different products from the standard mix.

In simple words, it measures the difference in unit volumes in the actual sales mix from the budgeted sales mix. In reality, there are always some differences between budgeted and actual sales.

Hence, the sales mix variance very useful technique to gain knowledge as to where actual sales varied from expectations.

n simple words, it measures the difference in unit volumes in the actual sales mix from the budgeted sales mix. In reality, there are always some differences between budgeted and actual sales.

Hence, the sales mix variance very useful technique to gain knowledge as to where actual sales varied from expectations.

Formula:

Sales Mix Variance (where the standard costing is used):

= (Actual Units sold – Unit Sales at standard Mix) x Standard Profit per unit

Sales Mix Variance (where marginal costing is used):

= (Actual Units Sold – Unit Sales at Standard Mix) x Standard Contribution per unit

Explanation:

Sales volume variance can be bifurcated into sales mix variance and sales quantity variance.

Being a sub-variance of sales volume variance, sales mix variance shows the difference in sales value due to the fact that the actual sales mix is different from the budgeted sales mix.

In the case of the absorption method of costing, we use standard profit per unit while in the case of the marginal method of costing, we use standard contribution per unit.

Analysis:

Due care and consideration shall be made while evaluating the favorable and adverse sales mix variance.

See also  Importance and Limitation of Sales Quantity Variance

Favorable sales mix variance presents that a larger quantity of profitable products was sold during the period that it was expected in the budget. The reasons for sales mix variance are as follows:

  • The surge in demand for higher-margin products
  • Prioritization of entity utilizing more resources and efforts towards the sale of higher-margin products.
  • Decrease in demand or supply of lower-margin products

One more reason would be case if supply is the limiting factor, increase in supply of higher margin products can cause favorable sales mix variance.

Adverse Sales mix variance presents that a higher quantity of lower-margin products was more sold than expected in the budget. The reasons for adverse sales mix variance are as follows:

  • The decrease in demand for higher-margin products than expected.
  • The surge in demand or supply of lower-margin products
  • Lack of concentration of entity and sales team efforts toward selling higher-margin products due to one reason or other.

Example:

Gear VR, a company specializes in manufacture and sale of Virtual Reality products. This company offers 2 products of VRs.

  • VR-2D, a entry level VR priced at $300
  • VR-3D, a high end product priced at $750

Gear 3D budgeted 1200 units of VR-2D and 800 units of VR-3D last year. The standard variable cost of a single unit of 2D and 3D VR are $225 and $450 orderly. The sales team managed to sell 1850 units of VR-2D and 650 units of VR-3D.

Calculate the standard mix ratio

2D= 1200/2000= 60%

3D= 800/2000 = 40%

Now, we shall proceed to calculate sales quantities in proportion to the standard mix

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Total sales = 1850 +650 =2500 units

2D = 60% of 2500 = 1500

3D = 40% of 2500 = 1000

Unit sales at standard mix:

We calculate the difference now between actual sales and unit sales at standard mix as

2D units = 1500-1850 = 350 Favorable

3D units = 650- 1000 = 350 Adverse

Standard Contribution per unit be as: Revenue – Variable cost

2D = 300-225 = $75

3D = 750- 40 = $300

Variances for each product shall be

2D = 75 * 350 = 26250 Favorable

3d = 300 * 350 = 105000 Adverse

Total Sales mix variance = $78750 Adverse Analysis: Sales mix variance is adverse as 650/2500 i.e. 26% proportion of the lower quantity of higher-margin product i.e. 3D is sold than expectation of 40%.

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