UNIT FOUR: MEASURING MIX AND YIELD VARIANCES

 SALES VARIANCES

Sales variances can be used to analyze the performance of the sales function on broadly similar terms to
those for manufacturing costs. The most significant feature of sales variance calculations is that they are
calculated in terms of profit or contribution margins rather than sales value.

The sales-volume variance is the difference between a flexible-budget amount and the corresponding
static-budget amount.

o Sales-volume variance = Flexible-budget - Static-budget

 Sales Mix Variance

The sales-mix variance is the difference between budgeted contribution margin for the actual sales mix
and budgeted contribution margin for the budgeted sales mix.

Budget Data for June 2012

Variable Sales Sales Mix
Selling Cost per Contribution Volume in (Based on Contribution
Price Unit Margin per Unit Units Units) Margin
(1) (2) (3) = (1) – (2) (4) (5) (6) = (3) : (4)
Wholesale channel $13.37 $12.88 $0.49 712,000 80% $348,880
Retail channel 14.10 13.12 0.98 178,000 20% 174,440
Total 890,000 100% $523,320

Percentage of unit sales to wholesale channel = 712,000 units ÷ 890,000 total unit = 80%.

Actual Results for June 2012

Variable Sales Sales Mix
Selling Cost per Contribution Volume in (Based on Contribution
Price Unit Margin per Unit Units Units) Margin
(1) (2) (3) = (1) – (2) (4) (5) (6) = (3) : (4)
Wholesale channel $13.37 $12.88 $0.49 756,000 84% $370,440
Retail channel 14.10 13.17 0.93 144,000 16% 133,920
Total 900,000 100% $504,360

Percentage of unit sales to wholesale channel = 756,000 units ÷ 900,000 total unit = 84%.

The budgeted and actual fixed distribution-channel costs and corporate-sustaining costs are $160,500 and
$263,000, respectively.

The sales-volume variance is the difference between a flexible-budget amount and the corresponding
static-budget amount. The sales-volume variance shows the effect on budgeted contribution margin of the
difference between actual quantities of units sold and budgeted quantity of units sold.

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 Actual Results: Flexible Budget: Static Budget:
Actual Units of Actual Units of Budgeted Units of
All Products Sold All Products Sold All Products Sold
Actual Sales Mix Actual Sales Mix Budgeted Sales Mix
Actual Contribution Budgeted Contribution Budgeted Contribution
Margin per Unit Margin per Unit Margin per Unit
(1) (2) (3)

Wholesale 900,0000*.84*$0.49 = $370,440 900,0000*.84*$0.49 = $370,440 890,0000*.80*$0.49 = $348,880

Retail 900,0000*.16*$0.93 = 133,920 900,0000*.16*$0.98 = 141,120 890,0000*.20*$0.98 = 174,440
$504,360 $511,560 $523,320

Level 2 $7,200 U $11,760 U

Flexible-budget variance Sales-volume variance

Level 1 $18,960 U

Static-budget variance

Sales Mix Variance Example :

Budgeted
Actual Budgeted
Actual Units Contribution
of All Sales - Mix - Sales - Mix Margin Sales-Mix
Products Sold : Percentage Percentage ≥ : per Unit Variance
Wholesale 900,000 units * (0.84 – 0.80) * $0.49 per unit = $17,640 F
Retail 900,000 units * (0.16 – 0.20) * $0.98 per unit = 35,280 U
Total sales-mix variance $17,640 U

A favorable sales-mix variance arises for the wholesale channel because the 84% actual sales-mix
percentage exceeds the 80% budgeted sales-mix percentage. In contrast, the retail channel has an
unfavorable variance because the 16% actual sales-mix percentage is less than the 20% budgeted sales-
mix percentage. The sales-mix variance is unfavorable because actual sales mix shifted toward the less-
profitable wholesale channel relative to budgeted sales mix.

 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.

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  Market-Size Variance

The market-size variance is the difference in budgeted contribution margin at budgeted market share
caused solely by actual market size in units being different from budgeted market size in units.

Example: Assume that ABC Co. derived its total unit sales budget for April 2009 from a
management estimate of a 20% market share and a budgeted industry market size of 60,000 units
(0.20 * 60,000 units = 12,000 units). For April 2009, actual market size was 62,500 units and actual
market share was 16% (10,000 units, 62,500 units = 0.16 or 16%). Shows the columnar presentation
of how ABC sales-quantity variance can be decomposed into market-share and market-size variances.

Static Budget:
Actual Market Size Actual Market Size Budgeted Market Size
Actual Market Share Budgeted Market Share Budgeted Market Share
Budgeted Contribution Budgeted Contribution Budgeted Contribution
Margin per Unit Margin per Unit Margin per Unit

(62,5000*.16*$32) (62,5000*.20*$32) (60,0000*.20*$32)

$320,000 $400,000 $384,000

$80,000 U $16,000 F
Market-share variance Market-size variance

o Sales-volume variance = $64,000 U

The market-size variance is favorable because actual market size increased 4.17% [(62,500 – 60,000) ÷
60,000 = 0.417, or 4.17%] compared to budgeted market size. The market-size variance is influenced by
economy-wide factors and shifts in consumer preferences that are outside the managers’ control, whereas
the market-share variance measures how well managers performed relative to their peers. ABC Co.
products also experienced quality-control problems that were the subject of negative media coverage,
leading to a significant drop in market share, even as overall industry sales were growing.

 Input Variance
 Mix and Yield Variances: Materials and Labor

If it is possible to substitute one direct material input for another or one type of direct labor for another,
variances can occur.

A mix variance results whenever the actual mix of inputs differs from the standard mix.

A yield variance results whenever the actual yield (output) differs from the standard yield.

For direct materials, the sum of the mix and yield variances equals the material usage variance; for direct
labor, the sum is the labor efficiency variance.

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Direct Materials Mix and Yield Variances

The direct materials mix variance is the difference between the standard cost of the actual mix of inputs
used and the standard cost of the mix of inputs that should have been used.

Materials mix variance for each input = (AQ – SM) × SP

o SM = Standard mix proportion × Total actual input quantity

Standard mix quantity (SM) is the quantity of each input that should have been used given the total actual
input quantity.

Thus, the materials mix variance for all input materials = ∑ (AQ i – SM i) × Sp i

The direct materials yield variance is the difference between the standard cost of the actual yield of
output units and the standard cost of the yield of output that should have been produced. Steps to compute
the yield variance are as follows:

o Identify the total standard input units and the expected standard yield units. Use the standard
input-output relationship to compute the standard yield ratio.

Standard yield units

Standard yield ratio =
Standard input units

o Compute the standard cost of yield per unit (SPy).

Total input standard cost

SPy =
Standard yield units

o Compute the standard yield.

Standard yield = Standard yield ratio × Total actual input quantity
o Compute the yield variance
Yield variance = (Standard yield – Actual yield) × SPy

Labor Mix and Yield Variances

Labor mix and yield variances are computed in the same way as those for the materials mix and yield
variances.
Example; XYZ Company produces a Rainbow(mix) Color by mixing 3 Gallon of Yellow Color
(costing $2.25 per Gallon) and 4 Gallon of Red color (costing $7.50 per Gallon). The output is 5
Gallon of the compound. During August, 21,000 Gallon of Yellow Color, costing $46,500, were
purchased and used; 26,000 Gallon of Red Color, costing $198,000, were purchased and used. A
total of 37,000 Gallon of output were obtained.
Required: 1. Calculate the direct materials price and usage variances.
2. Calculate the direct materials mix and yield variances.

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1. MPV: Yellow Color: $46,500 – (21,000 × $2.25) = $46,500 – $47,250 = –$750 Favorable
Red Color: $198,000 – (26,000 × $7.50) = $198,000 – $195,000 = $3,000 Unfavorable

MUV: Total standard input = Actual yield / Yield ratio = 37,000 / [5/(3 + 4)] = 37,000 / .714 = 51,800
SQ(Yellow Color) = 51,800 × 3/7 = 22,200
SQ(Red Color) = 51,800 × 4/7 = 29,600

AQ SQ AQ – SQ (AQ – SQ)SP
21,000 22,200 –1,200 –$ 2,700
26,000 29,600 –3,600 – 27,000
–$29,700 Favorable
2. Mix variance
AQ SQ AQ – SQ SP (AQ – SQ)SP
21,000 20,143 857 $2.25 $1,928.25
26,000 26,857 –857 $7.50 – 6,427.50
–$4,499.25 Favorable
(21,000 + 26,000) × 3/(3 + 4) = 20,143
(21,000 + 26,000) × 4/(3 + 4) = 26,857

Yield variance = (Standard yield – Actual yield) × SPy

= (33,571 – 37,000) × $7.35 = –3,429 × $7.35 = –$25,203.15 Favorable
Where; Standard yield = (21,000 + 26,000) × 5/7 = 33,571
SPy = [(3 × $2.25) + (4 × $7.50)] / 5 Gallon = $36.75 / 5 = $7.35
.

Direct labor variances: price, efficiency, mix, and yield.

Ethio-Music employs two workers in his guitar-making business. The first worker, Nathan, has been
making guitars for 20 years and is paid $30 per hour. The second worker, Abreham, is less experienced,
and is paid $20 per hour. One guitar requires, on average, 10 hours of labor. The budgeted direct labor
quantities and prices for one guitar are as follows:

Quantity Price per Hour of Labor Cost for One Guitar

Nathan 6 hours $30 per hour $180

80
Abreham 4 hours $20 per hour

That is, each guitar is budgeted to require 10 hours of direct labor, comprised of 60% of Nathan’s labor
and 40% of Abreham’s, although sometimes Abreham works more hours on a particular guitar and
Nathan less, or vice versa, with no obvious change in the quality or function of the guitar.

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During the month of August, manufactures 25 guitars. Actual direct labor costs are as follows:

Nathan (145 hours) $4,350

Abreham (108 hours) 2,160
Total actual direct labor cost $6,510
Required

 What is the budgeted cost of direct labor for 25 guitars?

 Calculate the total direct labor price and efficiency variances.
 For the 25 guitars, what is the total actual amount of direct labor used?
 What is the actual direct labor input mix percentage?
 What is the budgeted amount of Nathan’s and Abreham’s labor that should have been
used for the 25 guitars?
 Calculate the total direct labor mix and yield variances. How do these numbers relate to
the total direct labor efficiency variance? What do these variances tell you?

 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.

Partial Productivity, the most frequently used productivity measure, compares the quantity of output
produced with the quantity of an individual input used. In its most common form, partial productivity is
expressed as a ratio:

Partial Productivity = Quantity of output produced

Quantity of input used

o The higher the ratio, the greater the productivity.

Total factor productivity (TFP) is the ratio of the quantity of output produced to the costs of all inputs
used based on current-period prices.

Total factor productivity = Quantity of output produced

Costs of all inputs used

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