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Product Mix and Price Variances

Computation of Product Mix Variance

Item Expected ($) Actual ($)
Gross Revenue 3,500, 000 3,500,000
Discount (325,000) (350,000)
Net Revenue 3,175,000 3,150,000
Lab testing cost (1,150,500) (1,400,500)
Gross contribution 2,024,500 1,749,500
Direct costs (salaries) (870,000) (870,000)
Net contribution 1,154,500 879,000

Product mix variance measures the departure of the actual performance, profitability, or contribution from the target output level. It is a critical monitoring and control tool used by the management to obtain insights regarding the fluctuation from the expected course (Franklin et al., 2019). The computation and examination are essential in improving the operational efficiency of an entity. The disparity is attributable to the changes in the proportions of the various products from the standard combination.

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In the scenario provided:

  • Actual discounts increased by $25,000 from the anticipated $350,000.
  • Lab testing costs grew by $250,000 from the expected $1,150,000.
  • Product Mix Variance = Actual gross contribution – budgeted gross contribution.
  • = $(1,749,500 – 2,024,500)
  • = $275,000

Determination of Price Variance

The price variance is the difference between the realized selling prices minus the budgeted or planned value. The divergence illustrates that some cost components exceed or fall below the expected standard. Additionally, the measurement helps managers understand why the fluctuations occurred and possible mitigation to minimize the adverse oscillation (Shim et al, 2012). The deviation indicates that the management did not make the expected profit from a sale of a given product or service due to a change in the selling price, which occurred during the period.

In the case of this regional reference laboratory, the actual net revenue realized from the period’s performance is $3,150,000. However, the facility had anticipated making $3,175,000, which falls short of the net earnings of the period by $25,000.

Thus:

  • Price Variance = Actual net revenue – Anticipated net revenue
  • = $(3,150,000 – 3,175,000)
  • = −$25,000

References

Franklin, M., Graybeal, P., & Cooper, D. (2019). Principles of accounting (1st ed). XanEdu Publishing Inc.

Shim, J. K., Siegel, J. G., & Shim, A. I. (2012). CFO fundamentals: Your quick guide to internal controls, financial reporting, IFRS, web 2.0, cloud computing, and more (1st ed). Wiley.

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StudyCorgi. (2022, May 3). Product Mix and Price Variances. Retrieved from https://studycorgi.com/product-mix-and-price-variances/

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StudyCorgi. 2022. "Product Mix and Price Variances." May 3, 2022. https://studycorgi.com/product-mix-and-price-variances/.

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