Material Mix Variances

 

                                                                      Material Mix Variances

Material mix variance is a type of variance in cost accounting that measures the impact of using a different mix of materials than what was planned or expected. It is calculated by comparing the standard mix ratio of the materials to the actual mix ratio of the materials used in production, and then multiplying the difference by the standard cost of the materials.

 

The standard mix ratio represents the proportion of each material that should be used in a particular product or production process to achieve the desired quality and quantity. The actual mix ratio represents the proportion of each material that was actually used in production.

 

If the actual mix ratio differs from the standard mix ratio, this can result in a material mix variance. If the actual mix ratio uses more of the higher cost material than expected, this will result in an unfavorable variance. On the other hand, if the actual mix ratio uses more of the lower cost material than expected, this will result in a favorable variance.

 

Analyzing material mix variances can provide insight into factors that impact production costs, such as changes in raw material prices, production processes, or product design. This information can be used to identify opportunities for cost savings and process improvements.

 

Let's say a company produces 1,000 units of a product and uses two materials: Material A and Material B. The standard mix ratio for the materials is 60% Material A and 40% Material B. The standard quantity of Material A required per unit is 4 KG, and the standard cost per KG of Material A is INR  4. The standard quantity of Material B required per unit is 3 KG, and the standard cost per KG of Material B is INR 3.

 

The actual mix ratio for the materials used in production is 70% Material A and 30% Material B. The actual quantity of Material A used is 2,500 KG, and the actual quantity of Material B used is 1,000 KG.

 

Using this information, we can calculate the material mix variance as follows:

 

Actual Mix Proportion = 70% Material A and 30% Material B

Standard Mix Proportion = 60% Material A and 40% Material B

Difference = (70% - 60%) Material A + (30% - 40%) Material B = 10% Material A - 10% Material B

Standard Total Cost = (2,500 KG of Material A x INR4 per KG) + (1,000 KG of Material B x INR3 per KG) = INR 13,000

Material Mix Variance = (10%) x (INR 13,000) = INR 1,300 favorable variance

 

This means that the company used more of Material A than expected, resulting in a favorable variance of INR 1,300. The variance can be analyzed to determine the reasons for the change in the material mix, such as changes in supplier pricing or product design, and corrective actions can be taken to optimize the material mix and improve profitability.