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Hello, Mr Moffat.
Jones’ monthly absorption costing variance analysis report includes a sales mix variance, which indicates the effect on profit of actual sales mix differing from the budgeted sales mix. The following data are available:
PRODUCT X
Selling price = $12
(Variable Cost) = ($6)
(Fixed Cost) = ($2)
Standard net profit per unit = $4PRODUCT Y
Selling price = $11
(Variable Cost) = ($2)
(Fixed Cost) = ($3)
Standard net profit per unit = $6July sales (units):
PRODUCT X
Budget = 3,000
Actual = 2,000PRODUCT Y
Budget = 6,000
Actual = 8,000What is the favourable sales mix variance for July?
A) $8,000
B) $5,333
C) $4,000
D) $2,667My answer (which is wrong) is C) $4,000.
Actual mix = 2,000 units + 8,000 units = 10,000 units
Standard Mix = (10,000u x 4/10) + (10,000u x 6/10) = 4,000u + 6,000u
Standard Profit from Actual Mix = (2,000 units x $4) + (8,000 units x $6) = $56,000
Standard Profit from Standard Mix = (4,000 units x $4) + (6,000 units x $6) = $52,000
Difference = $4,000The correct answer is D) $2,667
10x – (2 x $4 + 8 x $6) = $2,667I will be really grateful, if you explain to me why is answer D correct, because I… I just don’t get it. I cannot even understand their solution.
Thank you.It is your standard mix that is wrong.
They budgeted on selling 9,000 in total of which 3,000 (1/3) are X and 6,000 (2/3) are Y.
Therefore standard mix for the actual total sales of 10,000 would be:
X: 1/3 x 10,000 = 3,333; Y: 2/3 x 10,000 = 6,667This would give a profit of (3,333 x $4) + (6,667 x $6) = $53,333
If you compare this with the standard profit for the actual mix of $56,000 you get a favourable variance of $2,667.
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