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CHAPTER SIX MEASURING MIX AND YIELD VARIANCES LEARNING OBJECTIVE Upon the completion of this chapter, you should be able to:

6.1



Calculate sales variances



calculate mix and yield variances for direct material and direct labor

Sales Variances

6.1.1 Sales Mix and Sales Quantity Variances Sales Mix Variance The sales mix variance is the difference between (1) budgeted contribution margin for the actual sales mix and (2) budgeted contribution margin for the budgeted sales mix. The formula for the computation of sales mix variance is:

Sales Quantity Variance The sales quantity variance is the difference between (1) budgeted contribution margin based on actual units sold of all products at the budgeted mix and (2) contribution margin in the static budget (which is based on budgeted units of all products to be sold at budgeted mix). The formula for the computation of sales quantity variance is:

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6.1.2 Market Share and Market Size Variances Market Share Variance The market share variance is the difference in budgeted contribution margin for actual market size in units caused solely by actual market share being different from budgeted market share. The formula for computing the market share variance is

Market Size Variance The market size variance is the difference in budgeted contribution margin at the budgeted market share caused solely by actual market size in units being different from budgeted market size in units. The formula for computing the market size variance is

EXAMPLE: The Payne Company manufactures two types of vinyl flooring. Budgeted and actual operating data for 2012 are as follows:

In late 2011, a marketing research firm estimated industry volume for commercial and residential vinyl flooring for 2012 at 800,000 rolls. Actual industry volume for 2012 was 700,000 rolls. REQUIRED: 1. Compute the sales-mix variance and the sales-quantity variance by type of vinyl flooring and in total. 2. Compute the market-share variance and the market-size variance. 2

3. What insights do the variances calculated in requirements 1 and 2 provide about Payne Company’s performance in 2012? SOLUTION: 1. Actual sales-mix percentage: Commercial = 25,200 ÷ 84,000 = 0.30, or 30% Residential = 58,800 ÷ 84,000 = 0.70, or 70% Budgeted sales-mix percentage: Commercial = 20,000÷80,000 = 0.25, or 25% Residential = 60,000÷80,000 = 0.75, or 75% Budgeted contribution margin per unit: Commercial = $10,000,000 ÷20,000 units = $500 per unit Residential = $24,000,000 ÷ 60,000 units = $400 per unit

2. Actual market share = 84,000 ÷ 700,000 = 0.12, or 12% Budgeted market share = 80,000 ÷ 800,000 units = 0.10, or 10%

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Budgeted contribution margin per composite unit of budgeted mix can also be calculated as follows:

Note that the algebraic sum of the market-share variance and the market-size variance is equal to the sales-quantity variance: $5,950,000F + $4,250,000U = $1,700,000F. 3. Both the total sales-mix variance and the total sales-quantity variance are favorable. The favorable sales-mix variance occurred because the actual mix comprised more of the higher margin commercial vinyl flooring. The favorable total sales quantity variance occurred because the actual total quantity of rolls sold exceeded the budgeted amount. The company’s large favorable market share variance is due to a 12% actual market share compared with a 10% budgeted market share. The market size variance is unfavorable because the actual market size was 100,000 rolls less than the budgeted market size. Payne’s performance in 2012 appears to be very good. Although overall market size declined, the company sold more units than budgeted and gained market share.

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6.2 Input Variances In Chapter 5, a single material was used in the manufacturing of the product. However, it is common for more than one material to be required in a production process. In a cotton fabric, for example, cotton from many parts of the world with the hope that the new mix and its costs will contribute to improved profits. Now we will study the calculation of material variances where multiple materials are used for manufacturing a product. In such case there are standard mix ratios for all the materials required for manufacturing the product. In actual production materials may not be used in the standard mix due to various reasons like not availability of a particular material, more quantities of a particular material has been used due to inferior qualities etc. Therefore, standard mix and actual mix may differ. In many cases, the new mix is accompanied by either a favorable or unfavorable yield of the final product. In such cases material usage variance is classified in two categories: a. Material mix variance (MMV) b. Material yield variance (MYV) or material revised usage variance (RMUV) MUV = MMV + MYV

6.2.1 Material Mix and Yield Variances Material Mix Variance (MMV) The proportion or ratio of one material to another material is called the mix. A mix variance shows the change in cost that results from changing the proportions of materials added to the production mix. It measures the effect of using a different combination of materials. Material mix variance is calculated by measuring the difference in cost, at standard prices, between the actual mix of quantities used and the standard mix of the total quantity used. MMV= (AQ-RSQ) x SP Where MMV = Material mix variance AQ = actual quantity used RSQ = Revised standard quantity SP = standard price 5

Material Yield Variance Yield can be defined as the amount of prime product manufactured from a given amount of materials. Material yield variance is that portion of the material usage variance which is due to the difference between standard yield specified and actual yield obtained. The standard yield it the output expected to be obtained from the actual usage of raw materials. Thus, a material yield variance measures whether a change in mix affected the yield and shows the difference in cost that result if the actual yield (output) varies from the standard quantity of yield determined for a given input of materials. The material yield variance (MYV) is computed as follows: MYV = (AY-SY) x Standard yield price** Where AY=Actual yield SY= Standard yield **The standard yield price is the standard material cost per unit of output. Example 1. Shalom Company uses three materials: Alpha, Beta, and Gamma, to produce its product Omega. The materials are mixed in the following proportions to yield one unit of Omega: Alpha Beta Gamma

60 kgs @ Br 15 per kg 80 kgs @ Br 20 per kg 100 kgs @ Br 25 per kg

During the month of May, 10 units were actually produced and materials consumptions were as follows: Alpha 640 kgs @ Br 17.50 per kg Beta 950 kgs @ Br 18.00 per kg Gamma 870 kgs @ Br 27.50 per kg REQUIRED: Calculate the following variances a. b. c. d. e.

Material cost variance Material price variance Material usage variance Material mix variance Material yield variance

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Solution: a. Computation of material cost variance(MCV) Actual costs (for 10 units output) Material

Quantity Used

Alpha Beta Gamma

640 kgs 950 870 Total

SP

Amount

Br 17.50 18.00 27.50

Br 11,200 17,100 23,925 Br 52,225

Standard costs for the actual production (10 units of actual output) Material Alpha Beta Gamma

Quantity Used 600 kgs 800 1,000 Total

SP Br 15.00 20.00 25.00

Amount Br 9,000 16,000 25,000 Br 50,000

Material cost variance (MCV) =Actual costs- Standard costs =Br 52,225- Br 50,000 =Br 2,225 U b. The influence of individual raw materials on the total material price variance can be computed as follows: MPV (Alpha) = (17.50-15.00) x 640

= Br 1,600 U

MPV (Beta) = (18.00-20.00) x 950

=

MPV (Gamma) = (27.50-25.00) x 870

1,900 F 2,175 U

=

Total MPV

Br 1,875 U

c. The influence of individual raw materials on the total material quantity variance can be computed as follows: MQV =(AQ-SQ)x SP MQV (Alpha) = (640-600) x 15.00

=

Br 600 U

MQV (Beta) = (950-800) x 20.00

=

3,000 U

MQV (Gamma) = (870-1,000) x 25.00

=

3,250 F

Total MQV Check:

Br 350 U

MCV = MPV + MQV =Br 1,875 U + Br 350 U = Br 2,225 U

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Where managers have discretion to make substitutions among types of materials, the material quantity variance can be broken into mix and yield variances. 

The material mix variance is the difference between actual and budgeted mix for the total quantity of inputs used, multiplied by budgeted prices (the total quantity of inputs used is held constant)



The material yield variance is the difference between actual and budgeted total quantity of inputs for actual output achieved, multiplied by budgeted prices (budgeted mix is held constant).

d. Material mix variance is the difference between actual quantity at standard rate for the total of all the material used and actual quantity based on standard mix at standard rate. The influence of individual raw materials on the total material mix variance can be computed as follows: MMV = (AQ-RSQ**)x SP MMV (Alpha) = (640-615) x 15.00

=

Br 375 U

= (950-820) x 20.00

=

2,600 U

=

3,875 F

MMV (Beta)

MMV (Gamma) = (870-1,025) x 25.00 Total MMV

Br 900 F

** Revised standard quantity (RSQ), i.e. actual quantity based on standard mix for each material is computed as shown below Actual quantity used = 640 + 950 + 870= 2,460 kgs Revised standard quantity of each material RSQ (Alpha) =2,460 x 60 =615 kgs 240 RSQ (Beta) =2,460 x 80 =820 kgs 240 RSQ (Gamma) =2,460 x 100 =1,025kgs 240 e. The influence of individual raw materials on the total material yield variance can be computed as follows: MYV =(SQ-RSQ)x SP MYV (Alpha) = (600-615) x 15.00

=

MYV (Beta) = (800-820) x 20.00

=

400 U

MYV (Gamma) = (1,000-1,025) x 25.00

=

625 U

Total MYV

Br 225 U

Br 1,250 U 8

Or computed alternatively, the MYV may be given as follows: MYV = (Actual yield –Standard yield) x Standard yield price = (10 units -10.25 units) x Br 5,000** per unit = Br 1,250 U. The unfavorable MYV indicates that actual yield is less than the standard yield. **Standard cost for 1 unit of actual output is computed as follows: Alpha

= 60 x 15

=

Br 900

Beta

= 80 x 20

=

1,600

Gamma

= 100 x 25

=

2,500

Standard cost per unit of output

Br 5,000

Standard yield =2,460 kgs x 1unit =10.25 units 240 kgs

6.2.2 Labor Mix and Yield Variances Labor efficiency variance (LEV) is further divided into the following subvariances: a. Idle time variance(ITV) b. Labor mix variance(LMV) c. Labor yield variance (LYV) or revised labor efficiency variance (RLEV). LEV= ITV + LMV + LYV Idle time variances. This is the portion of labor efficiency variance which is due to abnormal idle time; such as time lost due to machine breakdown, power failure, strike, etc. It is calculated by valuing idle hours at standard rate. Thus the formula is Idle Time Variance = Idle Time x Standard Rate Idle hours represent a loss, idle time variance is always unfavorable.

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Labor mix variance (LMV). This variance is similar to material mix variance. It arises only when more than one grade of workers is employed and the compositions of actual grade of workers differ from those specified in the standard. It is calculated with the help of the following formula: LMV = (AH-RSH) X SR Where AH= actual hours worked RSH= revised standard hours SR= Standard wage rate Labor yield variance. This is quiet similar to material yield variance. It reveals the effect on labor cost of actual output or yield being more or less than the standard yield. Its formula is LYV = (Actual Yield –Standard Yield) X Standard yield rate = (AY-SY) x SYR Standard yield rate is the standard labor cost per unit of output. Or computed alternatively LYV = (SH-RSH) X SR Where SH=standard hours for actual output RSH = revised standard hours SR= Standard wage rate EXAMPLE 1. Beza Compnay manufactures a particular product. The standard direct labor cost of Br 120 per unit of this product consists of the following: Grade of Workers Skilled Semi-skilled

Hours Rate per hour Amount 30 hours Br 2 Br 60 20 3 60 50 hours Br 120 During a period, 100 units of the product were produced; the actual cost was as follows Grade of Workers Skilled Semi-skilled

Hours 3,200 hours 1,900 5,100 hours

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Rate per hour Br 1.50 4.00

Amount Br 4,800 7,600 Br 12, 400

REQUIRED: Compute the following labor variances a. Labor cost variance b. Labor rate variance c. Labor efficiency variance d. Labor mix variance e. Labor yield variance Solution: a. Computation of labor cost variance Standards for 100 units of output Grade of Workers

Hours

Rate per hour

Skilled

3,000 hours

Semi-skilled

2,000

Amount

Br 2.00

Br 6,000

3.00

6,000

5,000 hours

Br 12, 000

Labor cost variance = Actual costs – standard costs = Br 12,400 – Br 12,000 =Br 400 U b. Labor rate variance(LRV) LRV = (AR-SR) X AH Grade of Workers Skilled = Semi-skilled=

(1.50-2.00) x 3,200 = (4.00-3.00) x 1,900 = Total LRV

Br 1,600 F 1,900 U Br 300 U

c. Labor efficiency variance(LEV) LEV (Skilled )

=

(3,200-3,000) x 2.00=

Br 400 U

LEV (Semi-skilled)

=

(1,900-2,000) x 3.00=

300 F

Total LEV

Br 100 U

LCV = LRV + LEV = 300 U + 100 U =Br 400 U d. Labor mix variance ,LMV = (AH-RSH) x SP LMV (Skilled )

=

(3,200-3,060) x 2.00=

Br 280 U

LMV (Semi-skilled)

=

(1,900-2,040) x 3.00=

420 F

Total LMV

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Br 140 F

Calculation of revised standard hours Revised Standard Hour (RSH) = SH of the grade x Total actual hours Total SH RSV (Skilled)

= 30/50 x 5,100 = 3,060 hours

RSV (Semi-skilled) = 20/50 x 5,100 = 2,040 hours e. Labor yield variance LMV = (SH-RSH) x SP LYV (Skilled ) LYV (Semi-skilled)

= =

(3,000-3,060) x 2.00=

Br 120 U

(2,000-2,040) x 3.00=

120 U

Total LYV LEV= ITV +LMV + LEV

=0 +Br140 F + Br 240 U

Br 240 U =Br 100 U

LCV = LRV +ITV +LMV + LYV =Br 300 U +0 +Br140 F + Br 240 U =Br 400 U Or computed alternatively LYV = (Actual yield –Standard yield) x Standard yield rate =(100 units-102* units) x Br 120 per unit = Br 240 U * Standard yield = 5,100 x 1 = 102 units 50

6.2.3 Productivity Measurement Productivity measures the relationship between actual inputs used (both quantities and costs) and actual outputs produced. The lower the inputs for a given quantity of outputs or the higher the outputs for a given quantity of inputs, the higher the productivity. Measuring productivity improvements over time highlights the specific input-output relationships that contribute to cost leadership.

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