Example 3
The budgeted sales for the Milano Company for a period were:
Units Unit Total
contribution margin contribution
£ £
Product X 8 000 (40%) 20 160 000
Y 7 000 (35%) 12 84 000
Z 5 000 (25%) 9 45 000
20 000 289 000
and the actual sales were:
Unit
Units Total contribution
contribution margin
£ £
£
Product X 6 000 20 120 000
Y 7 000 12 84 000
Z 9 000 9 81 000
22 000 285 000
Assume that actual selling prices and unit costs are identical to standard costs/ prices. You are required
to calculate the sales margin variances.
Sales mix and sales quantity variances
Where a company sells several different products that have different profit margins, the sales
volume margin variance can be divided into a sales quantity (sometimes called a sales yield
variance) and sales mix variance. This division is commonly advocated in textbooks. The
quantity variance measures the effect of changes in physical volume on total profits, and the mix
variance measures the impact arising from the actual sales mix being different from the budgeted
sales mix. The variances can be measured either in terms of contribution margins or profit
margins. However, contribution margins are recommended because changes in sales volume
affect profits by the contribution per unit sold and not the profit per unit sold. Let us now
calculate the sales margin mix and quantity variances. Consider Example 3.
The total sales margin variance is £4000 adverse, and is calculated by comparing the difference
between the budgeted total contribution and the actual contribution. Contribution margins for the
three products were exactly as budgeted. The total sales margin for the period therefore consists of a
zero sales margin price variance and an adverse sales margin volume variance of £4000. Even
though more units were sold than anticipated (22 000 rather than the budgeted 20 000), and
budgeted and actual contribution margins were the same, the sales volume variance is £4000
adverse. The reasons for this arises from having sold fewer units of product X, the high margin
product, and more units of product Z, which has the lowest margin.
We can explain how the sales volume margin variance was affected by the change in sales mix by
calculating the sales margin mix variance. The formula for calculating this variance is:
(actual sales quantity - actual sales quantity in budgeted proportions)
x standard margin
If we apply this formula, we will obtain the following calculations:
Actual sales quantity Actual sales in Difference Standard Sales margin
budgeted Margin mix variance
proportions (£) (£)
Product 6 000 (27%) 8 800 (40%) = -2800 20 56 000A
X
Y 7 000 (32%) 7 700 (35%) = -700 12 8 400A
Z 9 000 (41%) 5 500 (25%) = +3500 9 31 500F
22 000 22 000 32 900A
To compute the sales quantity component of the sales volume variance, we compare the
budgeted and actual sales volumes (holding the product mix constant). The formula for
calculating the sales margin quantity variance is:
(actual sales quantity in budgeted proportion — budgeted sales quantity)
x standard margin
Applying this formula gives the following calculations:
Actual sales in Budgeted Sales Difference Standard Sales margin
budgeted Quantity Margin quantity variance
proportions (£) (£)
Product X 8 800 (40%) 8 000 (40%) = +800 20 16 000F
Y 7 700 (35%) 7 000 (35%) = +700 12 8 400F
Z 5 500 (25%) 5 000 (25%) = +500 9 4 500F
22 000 20 000 28 900F
By separating the sales volume variance into quantity and mix variances, we can explain how
the sales volume variance is affected by a shift in the total physical volume of sales and a shift
in the relative mix of products. The sales volume quantity variance indicates that if the original
planned sales mix of 40 per cent of X, 35 per cent of Y and 25 per cent of Z had been
maintained then, for the actual sales volume of 22 000 units, profits would have increased by
£28 900. In other words, the sales volume variance would have been £28 900 favourable instead
of £4000 adverse. However, because the actual sales mix was not in accordance with the
budgeted sales mix, an adverse mix variance of £32 900 occurred. The adverse sales mix
variance has arisen because of an increase in the percentage of units sold of product Z, which
has the lowest contribution margin, and a decrease in the percentage sold of units of product X,
which has the highest contribution margin. An adverse mix variance will occur whenever there
is an increase in the percentage sold of units with below average contribution margins or a
decrease in the percentage sold of units with above average contribution margins. The division
of the sales volume variance into quantity and mix components demonstrates that increasing or
maximizing sales volume may not be as desirable as promoting the sales of the most desirable
mix of products.
