If different materials can be substituted, the mix variance measures the cost of any variation from the standard mix of materials. Where,SM is the standard mix quantity of direct material,AQ is the actual quantity of material used, andSP is the standard price per unit of direct material used. For a full appreciation of the impact of the mix change, the sales variances would also have to be considered, although it is likely to take time for sales volumes to be affected. Any sales volume variance that does arise as a result of poor quality products is likely to arise in a different period from the one in which the mix and yield variances arose, and the correlation will then be more difficult to prove. In general, it can be assumed in exam questions that the production manager is responsible for the mix of input materials used. It can be tempting for production managers to change the product mix in order to make savings; these savings may lead to greater bonuses for them at the end of the day.

Materials mix and yield variances

To best evaluate the direct material mix variance, we therefore need to study it in the context of these relevant factors. 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. When there is more than one input material, the material usage variance can be split into material mix and yield variances. When we talk about the materials ‘mix’ we are referring to the quantity of each material that is used to make our product – ie we are referring to our inputs. When we talk about ‘yield’, on the other hand, we are talking about how much of our product is produced – ie our output.

Company

Find the approach that you prefer for the yield variance calculation and use this consistently. There are number of different ways to lay out a yield variance calculations. Beta Company processes three materials, namely, material A, material B, and material C, to produce its only product known as product K.

Analysis

Also, do not forget the material price variance in your analysis as this may provide additional information. This is calculated as the difference between the actual quantity of material valued at the actual cost and the actual quantity of material valued at the standard cost. The rationale embedded in the syllabus structure states that mixand yield variances and planning and operational variances areexplored and the link is made to performance management. Insyllabus Section D – budgeting and control (4) includes direct material mix and yield variances.

A company produces pre-cast concrete sections for the construction industry. The mix of materials used to produce the concrete can be varied and different mixes are suitable for different products. Discuss the issues that management should consider when setting standard material costs. This may have a detrimental effect on companyprofit if quality is reduced and this leads to a lower price or qualityfailure costs. Variances are the difference between actual performance andstandard, measured in cost terms. The significance of variances formanagement control purposes depends on the type of standard cost used.JIT and TQM businesses often implement an ideal standard due to theemphasis on continuous improvement and high quality.

What is Variance Analysis? Definition, Explanation, 4 Types of Variances

EXAMPLEWe will use this past exam question to demonstrate the calculation of the variances and analysis of performance. Most of the favourable variance can be attributed to the increasein overall market size. However, some can be put down to effort by thesales force which has increased its share from 20% to 20.5% (450,000/2,200,000). A company is operating in a fast changing environment and isconsidering whether analysing existing variances into a planning andoperational element would help to improve performance.

It is for management to judge their variousreasons for employing standard costing and, consequently, whether theiraims of continuous improvement and cost reduction render the systemredundant. A company sets its sales budget based on an average price of $14per unit and sales volume of 250,000 units. Competition was more intensethan expected and the company only achieved sales of 220,000 and had tosell at a discounted price of $12.50 per unit. The company was unableto reduce costs so profit per unit fell from $4 per unit to $2.50 perunit. It was estimated that the total market volume grew by 10% from1,000,000 units to 1,100,000 units.

• If the yield variance is adverse, it suggests that actual output is lower than the expected output.
• This variance separates the aggregate unit cost of each item excludingall the other variables.
• For Kappa Co it is worth noting that the standards set are not the responsibility of the production manager.
• • Direct material yield variance.Standard quantity of material specified for actual production at standard prices less the actual total material input in standard proportions at standard prices.
• Thus it is important to set the standard mix at the level which optimises profit taking all factors into consideration.

Having read this overview of these advanced variances please whenpreparing for your examination give some thought to what factors may have contributed to the variances shown above. When amending the mix, the production manager must take care however so as not to significantly affect the quality about form 8960, net investment income tax individuals, estates, and trusts of the final product. Standard costing and basic variance calculations should be familiar from earlier studies. If standards are used as a way of encouraging employees to improvetheir performance, motivation could be provided in the form of higherpay if targets are reached or exceeded.

Individuals might respond to standards in different ways, accordingto the difficulty of achieving the standard level of performance. Standard costing and adherence to a preset standard is inconsistentwith the concept of continuous improvement, which is applied within TQMand JIT environments. My Accounting Course  is a world-class educational resource developed by experts to simplify accounting, finance, & investment analysis topics, so students and professionals can learn and propel their careers.

(b) Prepare a similar reconciliation statement using planning and operational variances. (a) Prepare a statement reconciling budgetedcontribution for the period with actual contribution, using conventionalmaterial and labour variances. A transport business makes a particular journey regularly, and hasestablished that the standard fuel cost for each journey is 20 litres offuel at $2 per litre. New legislation has forced a change in thevehicle used for the journey and an unexpected rise in fuel costs. It isdecided retrospectively that the standard cost per journey should havebeen 18 litres at $2.50 per litre.

This, in turn, may result in differing yields, depending on the mix of materials that has been used. The extra work involved in maintainingup-to-date standards might limit the usefulness and relevance of astandard costing system. The materials mix variance measures the difference between the actual and standard mixture of materials. Direct Material Mix Variance is the measure of difference between the cost of standard proportion of materials and the actual proportion of materials consumed in the production process during a period.