Definition
Sales Mix Variance measures the change
in profit or contribution attributable to the variation in the
proportion of the different productsfrom the standard mix.
Formula
Sales Mix Variance (where standard
costing is used):
|
=
|
(Actual Unit Sold - Unit Sales at Standard Mix)
|
x
|
Standard Profit Per Unit
|
Sales Mix Variance (where marginal
costing is used):
|
=
|
(Actual Unit Sold - Unit Sales at Standard Mix)
|
x
|
Standard Contribution Per Unit
|
Explanation
Sales Mix Variance is one of the two
sub-variances of sales volume variance (the
other being sales quantity variance). Sales mix variance quantifies the
effect of the variation in the proportion of different products sold during a
period from the standard mix determined in the budget-setting
process.
Sales mix variance, as with sales volume
variance, should be calculated using the standard profit per
unit in case of absorption costing and standard contribution per
unit in case of marginal costing system.
Example
Aliengear Inc.
is a small company that specializes in the manufacture and sale of gaming
computers. Currently, the company offers two models of gaming PCs:
- Turbox - A professional gaming PC with a
water-cooling system priced at Rs.2,500
- Speedo - An entry level gaming PC with
standard fan cooling priced at Rs.1,000
Aliengear
budgeted sales of 1,600 units of Turbox and 2,400 units of Speedo in the last
year. The standard variable costs of a single unit of Turbox and Speedo were
set at Rs.1,500 and Rs.750 respectively.
The sales team
at Aliengear managed to sell 1,300 units of Turbox and 3,700 units of Speedo
during the last year.
Step 1:
Calculate the standard mix ratio
Standard mix
ratio: 40% Turbox* and 60% Speedo**
* 1,600 /
(1,600 + 2,400) % = 40% Turbox
** 100% - 40% =
60% Speedo
Step 2:
Calculate the sales quantities in proportion to the standard mix
Total sales
during the period: 1,300 Turbox + 3,700 Speedo = 5,000 units
Unit Sales at
Standard Mix:
Sales of Turbox
in standard mix @ 40% of 5,000 = 2,000 units
Sales of Speedo
in standard mix @ 60% of 5,000 = 3,000 units
Step 3:
Calculate the difference between actual sales quantities and the sales
quantities in standard mix
|
Turbox
Units
|
Speedo
Units
|
|
Actual sales quantities (as per
question)
|
1,300
|
3,700
|
|
Unit sales at standard mix (Step
2)
|
(2000)
|
(3000)
|
|
Difference
|
(700) Adverse
|
700 Favorable
|
Step 4: Calculate
the standard contribution per unit
|
Turbox
Rs.
|
Speedo
Rs.
|
|
Revenue
|
2,500
|
1,000
|
|
Variable cost
|
(1,500)
|
(750)
|
|
Standard contribution per unit
|
1,000
|
250
|
Step 5:
Calculate the variance for each product
|
Turbox
|
Speedo
|
|
Standard contribution per unit
(Step 4)
|
Rs.1,000
|
Rs.250
|
|
Actual quantity - Standard mix
(Step 3)
|
x (700 units)
|
x 700 units
|
|
Variance
|
Rs.700,000
Adverse
|
Rs.175,000
Favorable
|
Step 6: Add the
individual variances
|
Sales Mix Variance
|
=
|
(Rs.700,000 - Rs.175,000)
|
|
=
|
Rs.525,000 Adverse
|
Sales mix
variance is adverse in this example because a lower proportion (i.e. 26%) of
Turbox (which is more profitable than Speedo) were sold during the year as
compared to the standard mix (i.e. 40%).
Analysis
Sales mix
variance is only a relative measure of the variation in performance of an
organization and should be interpreted with care. For instance, an adverse
sales mix variance may be perfectly fine where a company is able to earn extra
revenue through sale of lower margin products if such sales are in addition to
high sales of the products with higher margins.
Favorable sales
mix variance suggests
that a higher proportion of more profitable products were sold during the
period than was anticipated in the budget.
Reasons for
favorable sales mix variance may include:
- Concentration of sales and marketing
efforts towards selling the more profitable products
- Increase in the demand for the higher
margin products (where demand is a limiting factor)
- Increase in the supply of the more
profitable products due to for example addition to the production capacity
(where supply is a limiting factor)
- Decrease in the demand or supply of the
less profitable products
Adverse sale
mix variance suggests
that a higher proportion of the low margin products were sold during the period
than expected in the budget.
Reasons for
adverse sales mix variance may include:
- Demand for the more profitable products
being lower than anticipated
- Decrease in the production of the high
margin products due to supply side limiting factors (e.g. shortage of raw
materials or labor)
- Sales team not focusing on selling
products with higher margins due to for example lack of awareness or
misaligned performance incentives (e.g. uniform sales commission on the
entire product range may not motivate sales staff to compete for high
margin sales)
- Increase in demand or supply of the less
profitable products
Sales Quantity Variance
Definition
Sales Quantity Variance measures the change in
standard profit or contribution arising from the difference between actual and
anticipated number of units sold during a period.
Formula
Sales Quantity Variance:
|
=
|
(Budgeted sales - Unit Sales at Standard Mix)
|
x
|
Standard Contribution*
|
*Where marginal costing is used
Sales Quantity Variance:
|
=
|
(Budgeted sales - Unit Sales at Standard Mix)
|
x
|
Standard Profit*
|
*Where absorption costing is used
Explanation
Sales quantity variance is an extension of
the sales volume variance which
demonstrates the impact of a higher or lower sales quantity as compared to
budget.
The difference between sales volume variance
and sales quantity variance is that the former is calculated using the actual
sales volume whereas the latter is calculated using the sales volume of
products in the proportion of standard mix (see example below).
Since sales quantity variance is calculated
using the standard mix, any difference between the standard and actual mix of
products is to be ignored (since the difference is accounted for separately
under the sales mix variance).
Example
Aliengear Inc.
is a small company that specializes in the manufacture and sale of gaming
computers. Currently, the company offers two models of gaming PCs:
- Turbox - A professional gaming PC with a
water-cooling system priced at Rs.2,500
- Speedo - An entry level gaming PC with
standard fan cooling priced at Rs.1,000
Aliengear
budgeted sales of 1,600 units of Turbox and 2,400 units of Speedo in the last
year. The standard variable costs of a single unit of Turbox and Speedo were
set at Rs.1,500 and Rs.750 respectively.
The sales team
at Aliengear managed to sell 1,300 units of Turbox and 3,700 units of Speedo
during the last year.
Sales Quantity
Variance shall be calculated as follows:
Step 1:
Calculate the standard mix ratio
Standard mix
ratio: 40% Turbox* and 60% Speedo**
* 1,600 /
(1,600 + 2,400) % = 40% Turbox
** 100% - 40% =
60% Speedo
Step 2:
Calculate the sales quantities in proportion to the standard mix
The objective
is to find the respective sales quantities of products as if the total sales
during the period where distributed among the two products in proportion to
their standard mix.
Total sales
during the period: 1,300 Turbox + 3,700 Speedo = 5,000 units
Unit Sales at
Standard Mix:
Sales of Turbox
in standard mix @ 40% of 5,000 = 2,000 units
Sales of Speedo
in standard mix @ 60% of 5,000 = 3,000 units
Step 3:
Calculate the difference between actual sales quantities and the sales
quantities in standard mix
|
Turbox
Units
|
Speedo
Units
|
|
Budgeted sales quantities (as per
question)
|
1,600
|
2,400
|
|
Unit sales at standard mix (Step
2)
|
(2000)
|
(3000)
|
|
Difference
|
400 Favorable
|
600 Favorable
|
Step 4:
Calculate the standard contribution per unit
|
Turbox
Rs.
|
Speedo
Rs.
|
|
Revenue
|
2,500
|
1,000
|
|
Variable cost
|
(1,500)
|
(750)
|
|
Standard contribution per unit
|
1,000
|
250
|
Step 5:
Calculate the variance for each product
|
Turbox
|
Speedo
|
|
Standard contribution per unit
(Step 4)
|
Rs.1,000
|
Rs.250
|
|
Budgeted Sales - Sales in Standard
mix (Step 3)
|
x 400 units
|
x 600 units
|
|
Variance
|
Rs.400,000
Fav
|
Rs.150,000
Fav
|
Step 6: Add the
individual variances
Sales Mix
Variance = Rs.400,000 - Rs.150,000 = Rs.550,000 Favorable
Step 7: Proof
check
Therefore:
|
Rs.
|
|
|
Sales Quantity Variance (Step 6)
|
550,000
|
Favorable
|
|
|
(525,000)
|
Adverse
|
|
Total
|
25,000
|
Favorable
|
Equals-
Sales Volume
Variance:
|
Turbox
|
Speedo
|
|
Actual Sales
|
1,300
|
3,700
|
|
Budgeted Sales
|
(1,600)
|
(2,400)
|
|
Difference (Units)
|
(300)
|
1,300
|
|
Standard Contribution (Rs.)
|
x 1,000
|
x 250
|
|
Sales Volume Variance
|
(Rs.300,000)
|
Rs.325,000
|
Total = Rs.320,000
- Rs.300,000 = Rs.25,000 Favorable
Analysis
Favorable sales
quantity variance suggests that the company was able to sell a higher number of
products in aggregate as compared to the total number of units
budgeted to be sold during a period.
Favorable sales
quantity variance may be achieved through:
- Improvement in demand side factors where
demand is the limiting factor such as by:
- Improved marketing of company products
- Higher overall demand in industry (e.g.
due to increase in population, reduction in supply of substitutes, etc)
- Improvement in supply side factors where
excess demand exists in the market for example through:
- Installation of a new production plant
- More efficient production (this may be
evident in a favorable labor
efficiency variance)
Adverse sales
quantity variance indicates that the company sold lesser number of goods on
aggregate basis as compared to the total number of units budgeted to
be sold during a period.
Adverse sales
quantity variance may be caused by the following:
- Decline in demand side factors where
demand is the limiting factor such as by:
- A reduction in the overall demand in
industry (e.g. due to the introduction of a better or cheaper substitute
in the market, etc)
- Decrease in the quantity and quality of
supply side factors where excess demand exists in the market for example
due to:
- Unavailability of a critical
manufacturing component or raw material
- Decline in the productivity of the
workforce (this should be evident in an adverse labor
efficiency variance)
