Chapter 4

Variance: Mix, Yield, and Investigation of Sales Variances

Sales variance
Sales Variance: - is the difference between the actual result and the budgeted amount or
standard set. That is, the actual amount of anything and the amount it is expected to be according
to the standard or the budget. Thus, the budget or the standard is used as a point of reference or
bench mark to compare the actual.
Static budget or master budget is a budget planned at the start of the budget year or period based
on some level of output. Static budget is developed for a single planned output level.
Flexible-budget: - presents budgeted revenues and budgeted costs based on the actual output
level multiplied by standards. A flexible-budget is calculated at the end of the period when actual
output is known. While a static budget is developed at the start of the budget period based on the
planned output level. Thus a flexible budget enables managers to compute variances that provide
more information than the information from variance in a static budget.
Sales variance arises when the budgeted selling price or the variable cost are different from the
actual amount. Besides this a sales variance also occurs because of difference in the budgeted
sales mix and the actual sales mix if the company sales different products each with different
ratio of the total.
Sales volume variance is the sum of:
A) sales mix variance
B) sales quantity variance

Static Budget Variance

Flexible Budget Variance Sales Volume Variance

Price Variance Efficiency Variance Sales Mix Variance Sales Quantity Variance

Input Mix Variance Input Yield Variance Market Size Variance Market Share Variance

Variance Analysis for Multiple Products

Flexible budget variance for revenue is the difference between the actual revenue and the amount
in flexible budget for actual unit or volume of sales.
Sales volume variance is the difference between the amount in the budget based on actual sales
volume (flexible budget) and amount in the static budget.

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Illustration
Assume XYZ Company sales two products; A & B. the company has a budgeting system and
prepared a master budget for the products capacity to sale of 160,000 units of output.

XYZ Company
Budgeted Income Statement
For the year ended ...
Sales Br. 1,000,000
Variable Costs 600,000
Contribution Margin 400,000
Fixed Costs 300,000
Operating Income 100,000
Variance Analysis using flexible Budget

ABC Company
Income Statement
For the year ended …

Actual Flexible Flexible Sales Volume Static

Result Budget Budget Variance Budget
Variance

Units 160,000 160,000 160,000

Revenues Br.1,125,00 Br. 75,000 (F) Br.1,050,000 Br. 50,000(F) Br. 1,000,000
0

Variable costs 620,000 30,000(U) 590,000 10,000(F) 600,000

Contribution margin 505,000 45,000(F) 460,000 60,000(F) 400,000

Fixed costs 305,000 5,000(U) 300,000 - 300,000

Operating income 200,000 40,000(F) 160,000 60,000(F) 100,000

The sales mix represents the relative combination or proportion of products that make the
company’s total sales.
Sales Volume Variance: of a multiple product company is the summation of sales volume
variance for individual products by comparing actual units sold and original plan. And it can be
calculated as:
SVV =( Actual SalesVolume−Budget Sales volume ) x Budgeted Individual CM per unit

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Assume:

 Budgeted mix of sales = 3:1

 Total units sold Budgeted = 160,000 units
 Actual Sales = 110,000 units of A and 50,000 units of B
 Contribution Margin per unit = Br. 1 for A and Br. 7 for B

Compute SVV.
SVV for A = (110,000 – 120,000) x Br. 1 per unit = Br. 10,000 (U)
SVV for B = (50,000 – 40,000) x Br. 7 per unit = Br. 70,000 (F)
Total SVV Br. 60,000 (F)

Sales Quantity and Sales Mix Variances

Sales quantity variance is the difference between the actual sales volume of all products and the
budgeted sales volume of all products at the budgeted average contribution margin per unit.
Sales Quantity Variances of the whole product
SQV =( Actual units sales of all products−Budget Sales volume of all products ) x Budgeted Average CM per unit
Sales Quantity Variances of a single product
SQV (x )=( Actualunits sales of all products−Budget Sales volume of all products ) x ( Budgeted Sales Mix(x )% x B
Solution
SQV for A&B = (160,000 – 160,000) x 2.5 = 0
SQV for A = (160,000 – 160,000) x (0.75 x 1) = 0
SQV for B = (160,000 – 160,000) x (0.25 x 7) = 0
TOTAL----------------------------- = 0
Sales Mix Variance: is the difference between actual sales mix and budgeted sales mix
multiplied by actual sales of all products and individual budgeted contribution margin per unit.
SMV =( Actual sales mix−Budget Salesmix ) x ( Actual sales of all products x Budgeted CM per unit)
Solution
SMV for A = (0.6875 – 0.75) (160,000 x 1) = Br. 10,000 (U)
SMV for B = (0.3125 – 0.25) (160,000 x 7) = Br. 70,000 (F)
Total SMV = = Br. 60,000 (F)
Therefore, SVV = SQV + SMV
= 0 + 60,000 (F) = Br. 60,000 (F)
Managers would want to investigate the reason for the sales variance. Did the sales variance
result from competitors’ distribution problem or price increments? Or is there quality problem in
the competitors’ side or is that because of increased demand? Did the result from better customer

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service or growth in overall market? Further insight in to the causes of the sales quantity variance
can be gained by analyzing changes in the total market size of the industry.

Market Size and Market Share Variance

A company’s total quantity sales heavily affected by:

- Overall demand for the product of an industry.

- The company’s ability to maintain its market share.

The sales quantity variance can be sub divided into the market size variance and market share
variance. This can be computed as:
Market ¿ ¿ ( Actual Industry Sales Volume−Budget Industry sales volume ) x ( Budgeted market share % ) x ( Budgeted
Market share Variance=( Actualmarketshare %−Budget market share % ) x ( Actual Industry sales volume ) x (Budg
Example
Assume that XYZ Company in the illustration wants to maintain a 5% share in the industry
market of 3,200,000 units (5% x 3,200,000 = 160,000). And further the industry market uses
actually 4,000,000 units and got a 4 % share (160,000/4,000,000 = 4%).
Determine the Market Size and Market Share Variance.
Solution
Budgeted Industry sales = 3,200,000 units
Budgeted market share = 5%
Budgeted quantity to be sold = 160,000 units
Actual industry sales = 4,000,000 units
Actual quantity sold = 160,000 units
Actual market share = 4%
Market size variance = (4,000,000 – 3,200,000) (0.05 x 2.5)
= 800,000 x 0.05 x 2.5
= 100,000 (F)
Market share variance = (0.04 – 0.05) (4,000,000 x 2.5)
= (0.01) x 4,000,000 x 2.5
= 100,000 (U)
Therefore, SQV = Market size variance + Market share variance
100,000 (F) + 100,000 (U) = 0

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Input Variances
A. Direct Materials mix and yield variance
The concept for calculating the sales-mix variance and the sale quantity variance can also be
applied to the analysis of production inputs variances (Material and labor mix variances). This
input mix variance provides managers have some alternative way in combining and substituting
these inputs.
When inputs are substitutable, direct materials efficiency improvement relative to budget costs
can come from two sources:
1. Using a cheap mix of inputs to produce a given quantity of output, measured by the total
direct material mix variance and
2. Using less input to achieve a given quantity of output, measured by the direct materials
yield variance.
Keeping the actual total quantity of all direct materials inputs used constant, the total direct
materials mix variance is the difference between the budgeted costs for the actual mix of the
actual total quantity of direct materials used and the budgeted cost of the budgeted mix of actual
total quantity of direct materials used.
Holding the budgeted input mix constant, the direct materials yield variance is the difference
between the budgeted costs of direct materials based on the actual total quantity of direct
materials used and the flexible budgeted cost of direct materials based on the budgeted total
quantity of direct materials allowed for the actual output produced.
Mix variance=( Actual Mix %−Budget Mix % ) x ( Actual Quantity of all inputs ) x (Standard price)
Yeild Variance=( Actual Quantity of all inputs−Budget Quantity of all inputs ) x ( Budgted mix % ) x ( Standard Price)
Example: Consider the following:
To produce a unit of product X:

- 4 kg. of material A at Br. 15 per kg. and

- 6 kg of material B at Br. 25 per kg is needed.

Actually, 1,500 units of product X is produced using 6,000 kg of A and 10,000 kg of B.

Required: Calculate materials mix and yield variance for A and B.
Solution
Mix variance=( Actual Mix %−Budget Mix % ) x ( Actual Quantity of all inputs ) x (Standard price)
For Material A = (0.375 – 0.4) 16,000 x 15 = Br. 6,000 (F)
For Material B = (0.625 – 0.6) 16,000 x 25 = Br. 10,000 (U)
Yeild Variance=( Actual Quantity of all inputs−Budget Quantity of all inputs ) x ( Budgted mix % ) x ( Standard Price)
For Material A = (16,000 – 15,000) 0.4 x 15 = Br. 6,000 (U)
For Material B = (16,000 – 15,000) 0.6 x 25 = Br. 15,000 (U)

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Total material efficiency variance:
For Material A = MV + YV
= 6,000 (F) + 6,000 (U) = 0
For Material B = 10,000 (U) + 15,000 (U) = 25,000 (U)

B. Direct Labor mix and yield variance

DLMix variance=( Actual Mix %−Budget Mix % ) x ( Actual total hurs ) x(Standard price)
DL Yeild Variance=( Actual Total Labor hour−Budget total labor hour ) x ( Budgted mix % ) x ( Standard Price)

Example: Consider the following:

The budgeted labor price per a unit of output:

- 32 skilled labor hours at Br. 3 per hour

- 12 semi skilled labor hours at Br. 2 per hour
- 6 unskilled labor hours at Br. 1

Actually, 2,000 hours of direct labor was used in the week in the following manner:

- 1,120 hours of skilled labor at Br. 4 per hour

- 720 hours of semi skilled labor at Br. 3 per hour
- 160 hours of unskilled labor at Br. 2 per hour

The standard labor hours a week was 1,800 hours.

Determine the direct labor mix and yield variance for skilled, semi skilled and unskilled labors.
Solution
DL Mix variance=( Actual Mix %−Budget Mix % ) x ( Actual total hrs ) x( Standard price)
For skilled Labor = (0.56 – 0.64) 2,000 x 3 = Br. 480 (F)
For Semi skilled Labor = (0.36 – 0.24) 2,000 x 2 = Br. 480 (U)
For Unskilled Labor = (0.08 – 0.12) 2,000 x 1 = Br. 80 (F)
Total Direct labor mix variance = = Br. 80 (F)

DL Yeild Variance=( Actual Total Labor hour−Budget total labor hour ) x ( Budgted mix % ) x ( Standard Price)
For skilled Labor = (2,000 – 1,800) 0.64 x 3 = Br. 384 (U)
For Semi skilled Labor = (2,000 – 1,800) 0.24 x 2 = Br. 96 (U)
For Unskilled Labor = (2,000 – 1,800)0.12 x 1 = Br. 24 (U)
Total Direct labor yield variance = Br. 504 (U)

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Exercise
1. Suppose a Chemical company has the following input standards to produce nine gallons of a
single output, product X.

5 gallons of Material A at Br. 0.70 per gallon = Br. 3.50

3 gallons of Material B at Br. 1.00 per gallon = Br. 3.00
2 gallons of Material C at Br. 0.80 per gallon = Br. 1.60
10 gallons = Br. 8.10
The standard cost of a single product X is Br. 0.90 (8.10/9)
Suppose for simplicity, there is no inventories of direct materials are kept. Purchases are made
as needed, so that all price variance relate to materials used. Actual result shows that
1,000,000 gallons of the three inputs in total were used during a given period, in the following
manner:

450,000 gallons of Material A at actual cost of Br. 0.80 per gallon = Br. 360,000
330,000 gallons of Material B at actual cost of Br. 1.05 per gallon = Br. 346,500
220,000 gallons of Material C at actual cost of Br. 0.85 per gallon = Br. 187,000
= Br. 893,500
Finished product of product X was 92,070 gallons at standard cost of Br. 0.90 per gallon.
Total actual cost Br. 893,500
Total standard cost Br. 745,767
Total variance to be explained Br. 147,733 (U)
Required: Calculate price, efficiency, mix, and yield variance for each material.
2. Refer the above question, and assume the production process uses the following:
- One skilled labor hour at Br. 20
- Two unskilled labor hours at Br. 11
The actual labor hour is 9,000 hours consisting of the following:
- 3,400 hours of skilled labor at Br. 21
- 5,600 hours of unskilled labor at Br. 10
And the standard output is 10 gallons per hour. Thus, the standard hours of labor allowed
for actual output of 92,070is 9,207 hours.

Required; determine the direct labor mix and yield variance for skilled and unskilled labors.

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