As a small business owner, you have to keep track of the bottom line. Part of determining whether your business activity is generating a profit is establishing a budget at the beginning of a sales period that predicts sales volume against likely expenses. A variance is any deviation in factors that you used to create your budget. Sales mix variance analyzes the effect on profit if you sell a different mix of products than you anticipated selling in your budget.

Establishing a Sales Mix

Most retail businesses sell more than one product. With limited floor and shelf space, you must decide how much real estate to devote to an item. Typically, this decision is based on how well you expect the products to sell. Likewise, when you create a yearly budget to determine how much money your business will likely make, you assign a sales volume based on your expectations. For example, an owner of a bike shop may anticipate selling 100 low-end bikes and 25 high-end bikes. The percentage of anticipated sales allocated to each product is the sales mix.

Understanding Sales Mix Variance

Sales mix variance takes the sales percentages by product that you used to create your budget and compares it to actual sales or a different sales mix to determine if another configuration is or would have been more profitable. In the bike example, sales mix variance may show that if the shop owner sold five fewer low-end bikes but only two more high-end bikes, the shop would generate more profit, even though sales volume is lower. This analysis can lead to the shop owner allocating more floor space to the high-end bikes, since a single sale has a greater effect on the bottom line.

Calculating the Variance

To calculate sales-mix variance, start with the actual number of units your business sold of each product. Multiply that number by the actual sales mix percentage for the product minus the budgeted sales-mix percentage. Remember that the sales mix percentage is the product's percentage of total sales. Multiply that by the budgeted contribution margin per unit, where the contribution margin is the selling price per unit minus the unit's variable costs. This calculation results in the sales mix variance for each product in your mix, enabling you to determine if actual sales of each product resulted in a favorable or unfavorable shift in profitability from your original budget.

Making Use of Variance Analysis

Variance analysis can help you make changes to your business practices to ensure you're making as much profit as possible. However, the analysis of any one variable, such as sales mix, can only tell part of the story. Typically, many factors impact profitability, and variance analysis doesn't necessarily tell you the root cause of a change from your budgeted projections.