Cost Accounting

# What is Material Mix Variance?

Material mix variance is a measure of the deviation in the usage of different materials from standard or expected usage.

In other words, material Mix Variance measures the difference between the cost of the standard proportion of materials and the actual proportion of materials consumed in the production process during a period

Material Mix Variance is a key performance indicator (KPI) used in manufacturing operations to measure the impact of the difference between the actual mix of materials used in the production process and the budgeted or expected mix of materials.

It is a sub-component of Material Usage Variance, which measures the overall difference between the actual quantity and cost of materials used in production and the budgeted or expected quantity and cost of materials.

In this blog post, we will explain Material Mix Variance, its formula, and the factors that can impact it.

## What is the Purpose of Material Mix Variance?

Material Mix Variance measures the impact of using a different mix of materials than planned or budgeted for during production. It is the difference between the actual cost of materials used in production and the budgeted cost of materials based on the budgeted mix of materials.

For example, let’s assume that a company budgeted for a production run of 10,000 units of a product, with a budgeted mix of materials of 50% Material A and 50% Material B. However, during the actual production process, the company used 60% Material A and 40% Material B. Material Mix Variance will then measure the difference between the actual cost of materials used in production and the budgeted cost of materials based on the budgeted mix of materials.

## The formula for Material Mix Variance

The formula for Material Mix Variance is as follows:

Material Mix Variance = (Actual Mix Quantity – Budgeted Mix Quantity) x Budgeted Mix Price

Where:

• Actual Mix Quantity is the actual quantity of each material used in production.
• Budgeted Mix Quantity is the budgeted or expected quantity of each material used in production.
• Budgeted Mix Price is the budgeted or expected price per unit of each material.

Factors That Can Impact Material Mix Variance

Several factors can impact Material Mix Variance, including the following:

1. Changes in product mix: Material Mix Variance can be impacted if there is a change in the product mix. For example, if a company decides to produce more of a particular product that requires a different mix of materials, it can result in a Material Mix Variance.
2. Variation in quality of materials: If there is a variation in the quality of materials used in production, it can result in a change in the mix of materials. This can lead to a Material Mix Variance.
3. Production process changes: If changes are made to the production process, it can impact the mix of materials used in production. This can lead to a Material Mix Variance.
4. Seasonal changes: If there are seasonal changes in demand, it can impact the mix of materials used in production. For example, if a company produces more products during the holiday season, it may require a different mix of materials than during the rest of the year.
5. Material availability: If there are changes in the availability of materials, it can impact the mix of materials used in production. This can lead to a Material Mix Variance.

## Interpretation of Material Mix Variance

A positive Material Mix Variance indicates that the company used a better mix of materials than what was budgeted or expected, resulting in a cost savings. On the other hand, a negative Material Mix Variance indicates that the company used a worse mix of materials than what was budgeted or expected, resulting in a cost increase.

For example, if a company budgeted for a production run of 10,000 units of a product, with a budgeted mix of materials of 50% Material A and 50% Material B, and the actual cost of materials used in production was \$10,500. If the budgeted cost of materials, based on the budgeted mix of materials was \$10,000, then the Material Mix Variance would be calculated as follows:

Material Mix Variance = (60% – 50%) x \$20 Material Mix Variance = \$100

In this case, the Material Mix Variance is positive, indicating that the company used a better mix of materials than what was budgeted or expected, resulting in a cost savings of \$100.

## Treatment of Material Mix Variance in Books of Accounts

Material Mix Variance is a part of the Material Usage Variance and is included in the overhead manufacturing cost. The variance is shown in the cost of goods sold account and is adjusted against the cost of raw materials used in production.

When the Material Mix Variance is favourable, it is credited to the manufacturing overhead account, which reduces the cost of goods sold. On the other hand, when the Material Mix Variance is unfavourable, it is debited to the manufacturing overhead account, which increases the cost of goods sold.