Direct Material Mix Variance

Direct material mix variance is the difference between the standard cost if direct material had been used in standard proportion, and the standard cost of direct material used in actual proportion. In other words, it compares the standards costs of the material used, had it been mixed in the standard mix ratio preplanned and the standard cost of the quantity that was actually used in actual proportion.

Direct material mix variance is the same as the product of:

  • the standard price per unit of direct material,
  • and the difference between standard mix quantity and actual quantity of direct material used.

Direct material mix variance is one of the two components of direct material quantity variance, the other component being direct material yield variance.

Formula

The formula to calculate direct material mix variance is therefore:

Direct Material Mix Variance
= Standard Cost of Actual Usage in Standard Mix – Standard Cost of Actual Mix
= SM × SP – AQ × SP
= (SM − AQ) × SP

Where,
SM is the standard mix quantity of direct material,
AQ is the actual quantity of material used, and
SP is the standard price per unit of direct material used.

Standard mix quantity is the quantity of a particular direct material which, if mixed with one or more different materials in a standard ratio, would have been consumed on the actual quantity of a product produced. Standard mix quantity is calculated by multiplying standard mix percentage of a given material by the total actual quantity of the material used. For example, if three materials A, B, and C are mixed in ratio 5:3:2 and actual quantity of material used is 2.5 kg then,

Standard mix quantity of material A
= 2.5 × 5 / (5 + 3 + 2)
= 2.5 × 50%
= 1.25 kg

Analysis

Direct material mix ratio is relevant where production involves two or more different direct materials in the production of a single product and it measures the effect of direct material being mixed in a different proportion to what was initially planned. This may result in, either higher or lower costs depending on whether the proportion of expensive materials used is higher or lower.

A positive value of direct material mix variance is generally favorable whereas a negative value is unfavorable. A negative value may indicate, for example, that the production process was not carried out precisely or that the quality for some ingredient material was not on par, resulting in wastage and making it hard to follow the planned mix ratio. To best evaluate the direct material mix variance, we therefore need to study it in the context of these relevant factors.

Example

A product T is produced by mixing three materials: P, Q and R in a standard mix ratio of 1:2:2. Actual materials consumed during the month ended May 31, 20X2 were 4,670g, 8,450g and 8,390g respectively. Standard prices are $0.04/g $0.03/g and $0.02/g per gram respectively. Calculate the direct material mix variance.

Solution

Total Actual Quantity
= 4,670 + 8,450 + 8,390g
= 21,510g

Material P's Standard Mix %
= 1 ÷ (1 + 2 + 2)
= 0.2

Material Q's Standard Mix %
= 2 ÷ (1 + 2 + 2)
= 0.4

Material R's Standard Mix %
= 2 ÷ (1 + 2 + 2)
= 0.4

MaterialPQR
Total Actual Quantity (g)21,51021,51021,510
× Standard Mix %0.20.40.4
Standard Mix Quantity (g)4,3028,6048,604
− Actual Quantity (g)4,6708,4508,390
Difference (g)– 368154214
× Standard Price ($/g)0.040.030.02
Individual Material Mix Variance ($)− 14.724.624.28
Total Direct Material Mix Variance ($)− 5.82

by Irfanullah Jan, ACCA and last modified on

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