COST AND MANAGEMENT

UNIT 3 SECTION 6 MIX AND YIELD VARIANCES

ACCOUNTING Unit 3, section 6: Mix and yield variances

Welcome to section 6 of unit 3. In the last two previous sections, we looked

at price variance, efficiency variance and overhead cost variances. In this
section, we will look at mix and yield variances.

Basically, the establishment of a standard product cost requires the

determination of price and quantity standards. In many companies, it is
possible to vary the mix of input materials and affect the yield. Where it is
possible to combine two or more raw materials, input standards should be
established to indicate the target mix of materials to produce a unit, or a
specified number of units of output.

By deviating from the standard mix of input materials, operating managers

can affect the yield and cost per unit of output. Such deviations can occur as
a result of a conscious response to changes in material prices, or
alternatively may arise from inefficiencies and a failure to adhere to the
standard mix. By computing mix and yield variances, we can provide an
indication of the cost of deviating from the standard mix.

By the end of the section, you should be able to:

 explain mix variance
 explain yield variance
 compute mix and yield variances

Mix Variance
After a standard specification has been established, a variance representing
the difference between the standard cost of formula materials and the
standard cost of the materials actually used can be calculated. This variance
is generally recognized as a mix (or blend) variance, which is the result of
mixing basic materials in a ratio different from standard materials
specifications. In a woolen mill, for instance, the standard proportions of the
grades of wool for each yarn number are reflected in the standard blend cost.
Any difference between the actual wool used and the standard blend results
in a blend or mix variance.

Industries like textiles, rubber, and chemicals, whose products must possess
certain chemical or physical qualities, find it quite feasible and economical
to apply different combinations of basic materials and still achieve a perfect
product. In cotton fabrics, it is common to mix cotton from many parts of
the world with the hope that the new mix and its cost will contribute to
improved profits. In many cases, the new mix is accompanied by either a
favorable or unfavorable yield of the final product. Such a situation may
make it difficult to judge correctly the origin of the variances. A favorable
mix variance, for instance, may be offset by an unfavorable yield variance,
or vice.

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Yield Variance
Yield can be defined as the amount of prime product manufactured from a
given amount of materials. The yield variance is the result of obtaining a
yield different from the one expected on the basis of input.

In the canning industry, it is customary to estimate the expected yield of

grades per ton of fruit purchased or delivered to the plant. The actual yield
should be compared to the one expected and should be evaluated in terms of
cost. If the actual yield deviates from predetermined percentages, cost and
profit will differ.

Since the final product cost contains not only materials but also labor and
factory overhead, a yield variance for labor and factory overhead should be
determined when the product is finished. The actual quantities resulting
from the processes are multiplied by the standard cost, which includes all
three cost elements. A labor yield variance must be looked upon as the
result of the quality and/or quantity of the materials handled, while the
factory overhead yield variance is due to the greater or smaller number of
hours worked. It should be noted that the overhead yield variance may have
a significant effect on the amount of over- or under-absorbed factory
overhead.

It must be noted that mix and yield variances are of no meaning where the
proportions of materials in a mix are not changeable and also when the
materials in the mix are discrete items. Thus the calculation of these
variances will be more meaningful in say the soap industry than in the
furniture industry.

Material Mix and Yield Variances

We have so far been considering material price and material usage
variances. These are the two basic material cost variances. For better
information to management the usage variance in some cases is sub-divided
into mix and yield variances. When specifications are set for mixing the
different kinds of materials to manufacture a product, material mix and yield
variances arises.

Material Mix Variance

Material Mix Variance (MMV) arises when the mix of materials used
differs from the predetermined mix included in the calculation of the
standard cost of an operation. Thus, MMV occurs when there is a mixture of
materials in the production of a product. The standard mix of a product
determines the combination of raw materials input to obtain a given output.
The materials mix variance will rise if a different mix of materials is used
than specified.

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The formula for computing the material mix variance is given by

(Quantity in actual mix – Quantity in standard mix proportions) 
standard Price.

This can be stated as the difference between the actual quantity of material
priced at the standard price and the total quantity in standard proportion,
priced at the standard price.

If the mixture is varied so that a larger than standard proportion of more

expensive materials is used, there will be an unfavourable variance. When a
larger proportion of cheaper materials is included in the mixture, there will
be a favourable variance.

Materials Yield Variance (MYV)

Yield in manufacturing terms is the quantity of the finished product
(output) expected from a given combination of input of materials. A yield
variance arises if the yield (output) obtained is different from the yield
(output) expected from the actual input. Direct materials yield variance may
be defined as the difference between the actual yield and the standard yield
of the actual material input both valued at the standard price of the
materials. The formula to calculate the materials yield variance is as
follows:

MYV = (Actual yield – Standard yield)  Average standard material

price.

Example 6.1
To produce one unit of a product, the standard specifications of a company
are as follows:
GH¢
Material X: 3kg @ GH¢1.50 per kg 4.50
Material Y: 2kg @ GH¢2.00 per kg 4.00
Mixed material X and Y: 5kg 8.50

The units of the product produced during January amounted to 1500. The
material used were as follows:
Material X: 5800kg
Material Y: 2200kg

You are required to compute the

(a) Total material usage variance
(b) Material mix and material yield variances.

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Solution 6.1
Usage Variance
X: (AQ – SQ)SP = (5800 – 3  1500)GHC1.50 = GH¢1950 U
Y: (AQ – SQ)SP = (2200 - 2  1500)GHC2.00 = GH¢1600 F
Total Usage Variance GH¢350 U

Material Mix Variance (MMV)

We are going to present the solution in a tabular form
Material AQu SQa Difference SP DMMV
GH¢ GH¢
X 5800 4800 1000 U 1.50 1500 U
Y 2200 3200 1000 F 2.00 2000 F
500 F

The material mix variance is GH¢500 favourable.

Material Yield Variance (DMYV)

Again we present the solution in a tabular form.
Material AQu SQa Difference SP DMMV
X 5800 4500 1300 U 1.70 2210 U
Y 2200 3000 800 F 1.70 1360 F
8000 8000 850 U

The material yield variance is GH¢850 unfavourable.

Note that the material usage variance (MUV) is equal to Material Mix
Variance and Material Yield Variance.
MUV = MMV + MYV
= GH¢500 F + GH¢850 U
= GH¢ 350 U

Labour Mix and Yield Variances

As we saw with material variances, material mix variance may be calculated
when there is more than one item of material used in production. In the
same way a labour mix variance may be calculated when more than one
type or grade of labour are involved in the production process.

Like the materials yield variance, a labour yield variance can also be
calculated and this gives a clear idea of the efficiency (or inefficiency)
attributable to a favorable (or unfavorable) yield.

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Exercise
The standard specifications of a company requires a combination of 5gm of
material A and 3gm of materials B, to produce one unit of a product.
The standard prices are:
Material A: GH¢1.60/gm
Material B: GH¢C2.00/gm
Actual production in a given month was 2600 units. To produce the 2600
units of output, the actual materials used were:
Material A: 12000kg
Material B: 8000kg

You are required to compute the total material usage variance and analyse it
into material mix and yield variances

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