VOLUME AND MIX ANALYSIS
Basic Analysis of Mix Variance
The primary objective of the analysis is the isolation of volume and mix variance
components in actual vs. budget product profit analyses. Mix variance affects
profitability rates whereas volume variances, in contrast, do not. Secondarily, the
analysis must reflect logical consistency at all levels of the product hierarchy so that
volume and mix variances can be easily "tracked" from top to bottom of the product sales
budget.
Mix variance is a group dynamic. Mix variance does not exist when one considers a
single product. At the single product level, there is only volume variance; there is no mix
variance. Mix variance is created whenever 2 or more products are included in a
"product group". The only profit rate required for any analysis of volume and mix
variances is the budgeted profit rate. Budgeted profit rates are "locked in" at budget
finalization.
Mix variance arises from 2 factors whenever a product is considered as part of a group.
The first factor is the relationship between the product's budgeted profit rate and the
aggregate budgeted profit rate of the group; the budgeted profit rate of a product may be
higher or lower than the budgeted profit rate of the group. Note that the profit rate
referred to here is the budgeted profit rate. This relationship is "locked in" at budget
finalization and never changes during the budget year (a constant value). The second
factor is the relationship between the actual sales mix of the product (as part of its group)
and the budgeted sales mix of the product; the actual product sales mix changes
throughout the budget year but the budgeted product sales mix remains constant. Note
that the only factor, which varies during the budget year, is actual product sales mix.
. BPRDiff = (Budgeted Product Profit Rate - Budgeted Group Profit Rate)
. MixVar = (Actual Product Sales Mix - Budgeted Product Sales Mix)
The effect on mix variance of the group is a direct function of total actual sales for the
group (TotActGrpSls). Given these component parameters, we can measure the impact
of any given product's mix variance on the group (Mix Variance = MV) as follows:
. MV = (TotActGrpSls x MixVar x BPRDiff)
We can assume some example values for the purpose of illustrating the calculation:
. TotActPrdSls = $20,000 Total Actual Product Sales
. TotActGrpSls = $100,000 Total Actual Group Sales
. TotBudPrdSls = $30,000 Total Budget Product Sales *
. TotBudGrpSls = $200,000 Total Budget Group Sales *
. Actual Product Sales Mix = (TotActPrdSls / TotActGrpSls) = .20
. Budgeted Product Sales Mix = (TotBudPrdSls / TotBudGrpSls) = .15 *
. Thus MixVar = (.20 - .15) = .05
. Budgeted Product Profit Rate = .34 *
. Budgeted Group Profit Rate = .46 *
. Thus BPRDiff = (.34 - .46) = -.12 *
. Thus MV = ($100,000 x .05 x (-.12)) = -$600
* Constant throughout Budget Year
The only other component of the product's profit variance is volume variance (VV).
Order of calculation is important; MV must be calculated before VV. VV is a simple
residual calculation:
. VV = [(TotActPrdSls - TotBudPrdSls) x Budgeted Product Profit Rate] – MV
. Thus VV = [(-$10,000 x .34) - (-$600)] = [-$3,400 + $600] = -$2,800
As a result of the above calculations, we have determined that this product contributed an
unfavorable $2,800 toward its group's volume variance and contributed an unfavorable
$600 toward its group's profit rate (mix) deterioration. We have successfully split the
product's profit variance of $3,400 into the volume variance (-$2,800) and mix variance
(-$600) components that affect the group. The next step would be to subject each
component product of the group to this analysis, splitting each product's profit variance
into its component volume and mix variance contributions.
The volume variance and mix variance of the total group are summations of the
corresponding variances (VV and MV) of the individual products, which comprise the
group. We might have calculated VV and MV for the total group by some other method
but we would not have known about the contribution of the individual component
products to the total group. Performing the above calculation on a product-by-product
basis gives the important advantage of knowing the sources of the volume and mix
variance components of the total group; no other method provides us with such
invaluable information.
. TVV = Total Volume Variance = ∑VV
. TMV = Total Mix Variance = ∑MV