5/2/2021 Sales Mix Variance Definition

CORPORATE FINANCE & ACCOUNTING FINANCIAL ANALYSIS

Sales Mix Variance

By JAKE FRANKENFIELD | Reviewed by DAVID KINDNESS | Updated Nov 28, 2020

What Is Sales Mix Variance?

Sales mix variance is the difference between a company’s budgeted sales mix and the actual
sales mix. Sales mix is the proportion of each product sold relative to total sales. Sales mix
affects total company profits because some products generate higher profit margins than
others. Sales mix variance includes each product line sold by the firm.

KEY TAKEAWAYS
The sales mix compares the sales of a product to that of total sales.
The sales mix variance compares budgeted sales to actual sales and helps identify
the profitability of a product or product line.

Understanding Sales Mix Variance

A variance is the difference between budgeted and actual amounts. Companies review sales
mix variances to identify which products and product lines are performing well and which
ones are not. It tells the "what" but not the "why." As a result, companies use the sales mix
variance and other analytical data before making changes. For example, companies use
profit margins (net income/sales) to compare the profitability of different products.

Assume, for example, that a hardware store sells a $100 trimmer and a $200 lawnmower and
earns $20 per unit and $30 per unit, respectively. The profit margin on the trimmer is 20%
($20/$100), while the lawnmower’s profit margin is 15% ($30/$200). Although the
lawnmower has a higher sales price and generates more revenue, the trimmer earns a higher
profit per dollar sold. The hardware store budgets for the units sold and the profit generated
for each product the business sells.

Important: Sales mix variance is a useful tool in data analysis, but alone it may
not give a complete picture of why something is the way it is (root cause).

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Example of Sales Mix Variances

Sales mix variance is based on this formula:

SMV = (AUS × (ASM − BSM)) × BCMPU

where:
AUS = actual units sold
ASM = actual sales mix percentage
BSM = budgeted sales mix percentage
BCMPU = budgeted contribution margin per unit

Analyzing the sales mix variance helps a company detect trends and consider the impact they
on company profits.

Assume that a company expected to sell 600 units of Product A and 900 units of Product B. Its
expected sales mix would be 40% A (600 / 1500) and 60% B (900 / 1,500). If the company sold
1000 units of A and 2000 units of B, its actual sales mix would have been 33.3% A (1,000 /
3,000) and 66.6% B (2,000 / 3,000). The firm can apply the expected sales mix percentages to
actual sales; A would be 1,200 (3,000 x 0.4) and B would be 1,800 (3,000 x 0.6).

Based on the budgeted sales mix and actual sales, A’s sales are under expectations by 200
units (1,200 budgeted units - 1,000 sold). However, B's sales exceeded expectations by 200
units (1,800 budgeted units - 2,000 sold).

Assume also that the budgeted contribution margin per unit is $12 per unit for A and $18 for
B. The sales mix variance for A = 1,000 actual units sold * (33.3% actual sales mix - 40%
budgeted sales mix) * ($12 budgeted contribution margin per unit), or an ($804) unfavorable
variance. For B, the sales mix variance = 2,000 actual units sold * (66.6% actual sales mix -
60% budgeted sales mix) * ($18 budgeted contribution margin per unit), or a $2,376 favorable
variance.

Related Terms
Sales Price Variance Definition
Sales price variance is the difference between the price a business expects to sell its products or
services for and what it actually sells them for. more

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Variable Cost
A variable cost is a corporate expense that changes in proportion to production output. more

Return on Investment (ROI) Definition

Return on investment (ROI) is a performance measure used to evaluate the efficiency of an investment
or compare the efficiency of several investments. more

Cost Accounting Definition

Cost accounting is a form of managerial accounting that aims to capture a company's total cost of
production by assessing its variable and fixed costs. more

Cost-Volume-Profit (CVP) Analysis Definition

Cost-volume-profit (CVP) analysis looks at the impact that varying levels of sales and product costs
have on operating profit. more

Unit Sales As a Measure of Output for a Given Period

The unit sales number on a balance sheet indicates the actual numbers of a product sold in a given
reporting period. more

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