Direct Material Mix Variance
Direct Material Mix Variance is the measure of difference between the cost of standard proportion of materials and the actual proportion of materials consumed in the production process during a period.
Direct Material Price Variance:
|=||Actual Quantity x Standard Price||-||Standard Mix Quantity x Standard Price|
|=||Standard Cost of Actual Mix||-||Standard Cost of Standard Mix|
|=||(Actual Mix Quantity - Standard Mix Quantity)||x||Standard Price|
As material mix variance is an extension of the material usage variance, the variance is based on the standard price rather than actual price since the difference between actual and standard material price is accounted for separately in the material price variance.
Cement PLC manufactured 10,000 bags of cement during the month of January. Consumption of raw materials during the period was as follows:
|Material||Quantity Used||Standard Mix Per Bag||Actual Price||Standard Price|
|Limestone||100 tons||11 KG||$75/ton||$70/ton|
|Clay||150 tons||14 KG||$21/ton||$20/ton|
|Sand||250 tons||26 KG||$11/ton||$10/ton|
Material Mix Variance will be calculated as follows:
Step 1: Calculate the total consumption of raw materials
Total Raw Materials Consumption (100 + 150 + 250) = 500 tons
Step 2: Calculate the Standard Mix
We need to calculate the quantity of each raw material which would have been consumed had the total usage of raw materials (500 tons) been based on the standard mix.
|Limestone:||500 tons units||x||11 / 51*||=||108 tons|
|Clay:||500 tons units||x||14 / 51*||=||137 tons|
|Sand:||500 tons units||x||26 / 51*||=||255 tons|
* Total Quantity under Standard Usage (11 + 14 + 26) = 51 KG per bag
Note that the sum of the standard mix of raw materials calculated above equals the actual total consumption of 500 tons. This is because in material mix variance, we are not concerned about the efficiency of raw material consumption but rather their relevant proportions.
Step 3: Calculate the Variance
|Material Usage Variance = [Actual Mix - Standard Mix (Step 2)] x Standard Price|
|Limestone:||(100 - 108)||x||$70||=||($560)||Favorable|
|Clay:||(150 - 137)||x||$20||=||$260||Adverse|
|Sand:||(250 - 255)||x||$10||=||($50)||Favorable|
|Total Usage Variance||($350)||Favorable|
Note: Actual price paid for the acquisition of materials shall be ignored since any variation between standard price is already accounted for in the material price variance..
Material Mix Variance quantifies the effect of a variation in the proportion of raw materials used in a production process over a period.
Material mix variance is a sub-division of material usage variance. While material usage variance illustrates the overall efficiency of raw material consumption during a period (in terms of the difference between the amount of materials which should have been used and the actual usage), material mix variance focuses on the aspect of proportion of raw materials used in the production process.
Material mix variance is only suitable for performance measurement and control where the proportion of inputs to the production process can be altered without reducing the effectiveness of the final product. It may not therefore be used in industries that require a high degree of precision in the input variables such as in the pharmaceuticals sector.
A favorable material mix variance suggests the use of a cheaper mix of raw materials than the standard. Conversely, an adverse material mix variance suggests that a more costly combination of materials have been used than the standard mix.
A change in the material mix must also be analyzed in the context of other organization wide implications that may follow. Some of the effects a change in direct material mix include:
- Change in the quality, performance and durability of the final product
- Price offered by customers may vary as a result of a change in perceived quality of the product
- Change in material mix may affect the workability of materials which may in turn affect labor efficiency