Definition: Direct material mix variance is a financial metric used to analyze the difference between the cost of the budgeted mix of materials used in production and the cost of the actual mix or materials used in the production process.
What Does Direct Material Mix Variance Mean?
What is the definition of direct materials mix variance? In other words, it’s a comparison between the cost of the mix that the organization planned to use in production and the cost of the mix that the organization actually used. This variance can tell an organization how cost effective their direct materials mix actually is.
The direct material mix variance formula can be calculated like the following:
DM Mix variance = standard unit cost x (standard mix – actual mix)
For each input, variance can be calculated and then all variances are added together to determine the total variance of the direct materials mix. If the standard quantity is equal to the quantity actually used, then the variance will be zero.
However, if the variance is not zero, then the organization can use this information to look into their direct materials mix and determine whether or not improvements can be made to minimize this variance. For example, if the mix needed to be altered due to an issue with a supplier, the organization may consider switching suppliers.
Let’s look at an example.
A company manufactures a product that uses inputs X and Y. The standard quantity of input X in the materials mix is calculated as 15 units. The actual quantity of material X is 20 units. Material X costs $5 per unit. What is the variance of material X?
Using the above formula, we can plug in the given values:
Mix variance =$5 x (15 – 20)
The variance is -$25. This means that the actual amount of material X used exceeded the budgeted amount in the mix. This led to an adverse cost variance of $25 for this material.
Define Direct Material Mix Variance: DMMV means the difference between the budgeted amount of materials used in production and the actual amount used.