Chapter Four: Measuring Mix and Yield Variances

CHAPTER FOUR
Measuring Mix and Yield Variances
03/29/2023 By: Gizachew Soboka 1

Learning objectives
After studying this chapter, you should be able to: •
 Distinguish between variance analysis procedures where
inputs cannot be substituted for one another and those where
inputs can be so substituted •
 Understand how direct materials yield and mix variances
highlight trade-offs among material inputs •
 Explain direct manufacturing labor yield and mix variances •
 Describe the insight gained from dividing the sales-volume
variance into the sales-mix and sales quantity variances •
 Explain how market-size and market-share variances provide
different explanations for a sales-quantity variance

Learning objectives
Explain the meaning of productive efficiency, and
describe the difference between technical and allocative
efficiency.
Define partial productivity measurement, and list its
advantages and disadvantages.
Explain what total productivity measurement is, and name
its advantages.
Discuss the role of productivity measurement in assessing
activity improvement.

4.1. Sales variances
 .

Variance analysis for multiple products
ABC Co. has three types of products:
 Product
X
 Product Y, and
 Product Z.
 It is currently examining results for August

2021.
Budgeted and actual results for August 2021
are as follows:

Cont…
Budget for August 2021 Actual for August 2021
Pro Selling Unit Sales Revenue Selling Unit Sales Revenue
duct price volum mix in Birr price volum mix in Birr.
per e per e
unit unit
X Br. 3,200 1,000 5% 3,200,000 Br. 2,600 2,400 10% 6,240,000
Y 2400 3,000 15% 7,200,000 1,600 6,000 25% 9,600,000
Z 900 16,000 80% 14,400,000 700 15,600 65% 10,920,000
Total 20,000 100% 24,800,000 24,000 100% 26,760,000

Static-budget variance
The static-budget variance for revenues is the difference
between the actual revenues and the budgeted revenues from
the static budget.
Static-budget Actual - Static-budget
variance = results amount
Product X = Br.6,240,000 - Br.3,200,000 = Br. 3,040,000 F
Product Y = Br.9,600,000 - Br.7,200,000 = Br. 2,400,000 F
Product Z = Br.10,920,000 - Br.14,400,000 = Br. 3,480,000 U
Total Br. 1,960,000 F

Flexible-budget variance
The flexible-budget variance for revenues is the difference
between the actual revenues and the flexible-budget amount
for the actual unit volume of sales.
Product X= Br. 6,240,000 – (Br. 3,200 x 2,400)

= Br. 6,240,000 - Br. 7,680,000 = Br. 1,440,000 U
Product Y = Br. 9,600,000 – ( Br. 2,400 X 6,000)
= Br. 9,600,000 - Br. 14,400,000 = Br. 4800000 U
Product Z = Br. 10,920,000 – (Br. 900 X 15,600)
= Br. 10,920,000 - Br. 14, 040,000 = Br. 3,120,000 U
Total Br. 9,360,000 U
Cont…
The Br. 9,360,000 unfavorable total variance arises
because ABC Co. sizably reduced the price for each
products relative to the budgeted price.
4.1.1 Sales-volume variance
The sales-volume variance shows the effect of the
difference between the actual and budgeted quantity of the
variable used to ‘flex’ the flexible budget.

Cont…
Product X = (2,400 – 1,000) x Br. 3,200 = Br. 4,480,000 F
Product Y= (6,000 – 3,000) x Br. 2,400 = Br. 7,200,000 F
Product Z= (15,600 – 16,000) x Br. 900 = Br. 360,000 U
Total = Br. 11,320,000 F
While the total sales-volume variance for revenues is Br.
11,320,000 favorable, there is a combination of favorable
variances for Product X and Product Y and an
unfavorable variance for Product Z.
 Managers can gain additional insight into sales-volume
changes by separating the sales-volume variance into a
sales-quantity variance and a sales-mix variance.

Sales-quantity variance
The sales-quantity variance is the difference between two
amounts:
1. the budgeted amount based on actual quantities sold of all
products and the budgeted mix, and
2. the amount in the static budget (which is based on the
budgeted quantities to be sold of all products and the
budgeted mix).

Cont…
Product X= (24,000 - 20,000) x 0.05 x Br. 3200 = Br. 640,000 F
Product Y= (24,000 - 20,000) x 0.15 x Br. 2400 = Br. 1,440,000 F
Product Z= (24 000 - 20 000) x 0.80 x Br. 900 = Br. 2,880,000 F
Total = Br. 4,960,000 F
This variance is favorable when the actual units of product
sold exceed the budgeted units of product sold.
ABC Co. sold 4000 more units than was budgeted. Hence, its
sales quantity variance for revenues is favorable.

4.1.2. Sales-mix variance
The sales-mix variance is the difference between two amounts:
the budgeted amount for the actual sales mix, and
1.
2. the budgeted amount if the budgeted sales mix had been
unchanged.
 The formula for computing the sales-mix variance is,
Product X= 24,000 x (0.10 - 0.05) x Br. 3,200 = Br. 3,840,000 F

Product Y = 24,000 x (0.25 - 0.15) x Br. 2,400 = Br. 5,760,000 F
Product Z = 24,000 x (0.65 - 0.80) x Br. 900 = Br. 3,240,000 U
03/29/2023 By: Gizachew Soboka Total = Br. 6,360,000 F 13
Cont…
A favorable sales-mix variance arises at the individual
product level when the actual sales-mix percentage
exceeds the budgeted sales-mix percentage.

Cont…
The concept behind the sales-mix variance for
revenues of Br. 6,360,000 F is best explained in terms
of the budgeted selling prices per composite unit of
the sales mix.
A composite product unit is a hypothetical unit with
weights related to the individual products of the
company.
The weights for the revenue-based variances are
calculated as follows in column 3 for the actual mix
and column 5 for the budgeted mix:

Cont…
Budgeted Actual Budgeted Budgeted Budgeted
Products SP/U sales-mix SP per sales-mix SP per
Percentage composite Percenta composite
unit for ge unit for
actual mix budgeted mix
(1) (2) (3) = (1) x (2) (4) (5) = (1) x (4)
Product X Br. 3200 0.10 Br. 320 0.05 Br. 160

Product Y Br. 2400 0.25 Br. 600 0.15 Br. 360
Product Z Br. 900 0.65 Br. 585 0.80 Br. 720
Total Br. 1505 Br. 1240

Cont…
The actual sales mix has a budgeted selling price per
composite unit of Br. 1,505 (where the composite unit
comprises 0.10 of Product X, 0.25 of Product Y and 0.65 of
Product Z).
The budgeted sales mix had a budgeted selling price per
composite unit of Br. 1240 (where the composite unit
comprises 0.05 of Product X, 0.15 of Product Y and 0.80 of
Product Z).
Thus, the effect of the 2021 sales-mix shift for ABC Co. is to
increase the budgeted selling price per composite unit by Br.
265 (Br. 1505 – Br. 1240). For the 24 000 units actually sold,
this increase translates to a favorable sales-mix variance of Br.
6 million.
4.1.3. Market-size and market-share
variances
Sales depend on overall market demand as well as the
company’s ability to maintain its share of the market.
Assume that the budgeted unit sales of 20,000 units came from
a management estimate of a 50% market share on the product
sales in August 2021 and an industry sales forecast of 40 000
units.
Budgeted Actual
industry volume industry volume
for August 2021 for August 2021
Product X 1,500 3,000
Product Y 6,000 9,000
Product Z 32,500 38,000
Total 40,000 50,000
Cont…
ABC Company’s actual market share was 48% of unit
volume (24 000 ÷ 50 000) in contrast to its budgeted share
of 50%.
Market-size variance
The market-size variance is the difference between two
amounts:
1. the budgeted amount based on the actual market size in
units and the budgeted market share, and
2. the static-budget amount based on the budgeted market
size in units and the budgeted market share.

Cont…
The formula and the 2021 amount for ABC Co. for
revenues are:
Market size = (50,000 – 40,000) x 0.50 x Br. 1240

variance
= Br. 6,200,000 F

Cont…
The budgeted average selling price per (composite) unit is
calculated by dividing the total budgeted revenues of Br.
24,800,000 by the total budgeted units of 20 000.
The Br. 6,200,000 market-size variance for revenues is
favorable because it is the additional revenue expected as a
result of the 25% increase in market size (50,000 ÷ 40 000 =
125% ), provided ABC Co. maintains both its budgeted
market share of 50% and its budgeted average selling price
of Br. 1240.

Market-share variance
The market-share variance is the difference between two
amounts:
the budgeted amount at budgeted mix based on the actual
1.
market size in units and the actual market share, and
2. The budgeted amount at budgeted mix based on actual
market size in units and the budgeted market share.
The formula Market-share variance is,

Cont…
Market-share = 50,000 x (0.48 - 0.50) x Br. 1240
Variance
= Br. 1,240,000 U
ABC Co. lost total market share from that budgeted –
from the 50% budgeted to the actual of 48%. The Br.
1,240,000 unfavorable variance highlights the
revenue impact of this 2 percentage-point decline in
market share.

4.2. Input variances
When inputs are substitutable,
mix refers to the relative proportion or combination of the
different inputs used within an input category such as
direct materials or direct labor to produce a quantity of
finished output.
Yield refers to the quantity of finished output units
produced from a budgeted or standard mix of inputs
within an input category.
Yield and mix variances are useful when examining direct
materials and direct-labor inputs.

Direct materials yield and mix
variances
When we initially examined materials and labor
variances, we saw that managers sometimes make
trade-offs between price and efficiency variances.
provide additional insight into the effect that yield
and mix factors have on operating income. .

Direct materials efficiency and price
variances
Consider a specific example of multiple direct materials
inputs and a single product output.
Lia Ltd makes cider. To produce cider of the desired
consistency, color and taste, Lia mixes three types of apples
grown in three different regions: Golden Delicious from
Brittany, British Coxes from Kent, and Jonagold from Italy.
Lia’s production standards require 1.6 tones of apples to
produce 1 tone of cider, with
50% of the apples being Golden Delicious,
30% British Coxes, and
 20% Jonagold.
The direct materials input standards to produce 1 tone of cider
are:
Cont…
0.80 (50% of 1.6) tone of Golden Delicious at Br. 70 per tone =
Br. 56.00
0.48 (30% of 1.6) tone of British Coxes at Br. 80 per tone Br.
38.40
0.32 (20% of 1.6) tone of Jonagold at Br. 90 per tone = Br.
28.80
Total standard cost of 1.6 tones of apples Br. 123.20
Budgeted cost per tone of apples is Br. 123.20 ÷ 1.6 tones = Br.
77.
Because Lia uses fresh apples to make cider, no stocks of
apples are kept. Purchases are made as needed, so all price
variances relate to apples purchased and used.

Cont…
Actual results for June 2021 show that a total of 6500 tones of
apples were used to produce 4000 tones of cider:
 3250 tones of Golden Delicious
at actual cost of Br. 70 per tone……………. Br. 227,500
2275 tones of British Coxes at
actual cost of Br. 82 per tone………………Br.
186,550
 975 tones of Jonagold at actual
cost of Br. 96 per tone……………………….Br. 93,600
6500 tones of apples…………………………Br. 507,650
Standard cost of 4000 tones of
cider at Br. 123.20 per tone ……………………Br.
492,800
Total variance to
03/29/2023 be explained
By: Gizachew Soboka ……………….Br. 14,850 U 28
Cont…
Given the standard ratio of 1.6 tones of apples to 1 tone of
cider, 6400 tones of apples should be used to produce
4000 tones of cider.
At the standard mix, the quantities of each type of apple
required are:
Golden Delicious 0.50 x 6400 = 3200 tones
British Coxes 0.30 x 6400 = 1920 tones
Jonagold 0.20 x 6400 = 1280 tones

The role of direct materials yield and
direct materials mix variances
When inputs are substitutable, direct materials
efficiency improvement relative to budgeted costs can
come from two sources:
1. using less input to achieve a given output, and
2. using a cheaper mix to produce a given output.
The direct materials yield and mix variances divide the
efficiency variance into two variances:
the yield variance focusing on total inputs used and
the mix variance focusing on how the inputs are
combined.
Total direct materials yield variance
Given that the budgeted input mix is unchanged, the
total direct materials yield variance is the difference
between two amounts:
1. the budgeted cost of direct materials based on
the actual total quantity of all direct materials
inputs used, and
2. the flexible-budget cost of direct materials based
on the budgeted total quantity of direct materials
inputs for the actual output achieved.

.
.
The direct materials yield variances are:

Golden Delicious= (6500 – 6400) x 0.50 x Br. 70
= 100 x 0.50 x Br. 70........................Br. 3500 U
British Coxes = (6500 – 6400) x 0.30 x Br. 80
= 100 x 0.30 x Br. 80 ……………….…Br. 2400 U
Jonagold =(6500 – 6400) x 0.20 x Br. 90
= 100 x 0.20 x Br. 90 ………………………Br. 1800 U
Total direct materials yield variance ……………….Br.7700 U
Cont…
The total direct materials yield variance is
unfavorable because Lia uses 6500 tones of apples
rather than the 6400 tones that it should have used to
produce 4000 tones of cider.
Holding constant the budgeted mix and budgeted
prices of apples, the budgeted cost per tone of apples
in the budgeted mix is Br. 77 per tone.
The unfavorable yield variance represents the
budgeted cost of using 100 more tones of apples
(6500 – 6400) x Br. 77 = Br. 7700 U.

Total direct materials mix variance
Given that the actual total quantity of all direct materials
inputs used is unchanged, the total direct materials mix
variance is the difference between two amounts:
1. the budgeted cost for the actual direct materials input mix,
and
2. the budgeted cost if the budgeted direct materials input mix
had been unchanged.

Cont…
The budgeted input mix (Golden Delicious, 50%; British
Coxes, 30%; and Jonagold, 20%), and
The actual input mix (Golden Delicious, 50%; British
Coxes, 35%; Jonagold, 15%).
The difference in costs between the two columns is the
total direct materials mix variance, attributable solely to
differences in the mix of inputs used.
The total direct materials mix variance is the sum of the
direct materials mix variances for each input.

Cont…
The direct materials mix variances are:
Golden Delicious= (0.50 - 0.50) x 6500 * Br. 70
= 0 * 6500 x Br. 70 ..........................Br. 0
British Coxes =(0.35 - 0.30) x 6500 x Br. 80
= 0.05 x 6500 x Br. 80 …………Br. 26,000 U
Jonagold =(0.15 - 0.20) x 6500 x Br. 90 =
=(-0.05) x 6500 x Br. 90 …………….Br. 29,250 F
Total direct materials mix variance …………Br. 3,250 F

Direct manufacturing labour yield
and mix variances
Direct manufacturing labor variances are calculated in
much the same way as direct materials variances. We again
use the Lia Ltd example to illustrate direct manufacturing
labor price, efficiency, yield and mix variances.
Lia has three grades of direct manufacturing labor: Grade 1,
Grade 2 and Grade 3.
Budgeted costs for June 2021 as follow:
3000 hours of Grade 3 labor at Br. 24 per hour ….Br. 72,000
900 hours of Grade 1 labor at Br. 12 per hour …..Br. 10,800
6000 total hours ………………………………..Br. 116,400
Cont…
Actual results for June 2021 show that the work was
completed in 5900 hours:
885 hours of Grade 1 labor at Br. 13 per hour .…..Br. 11,505
5900 total hours ……………………………..…Br. 118,000
Budgeted costs ……………………………….….Br. 116,400
Total direct manuf. labor variance to be explained Br. 1600 U

Total direct manufacturing labour yield variance
Keeping the budgeted input mix unchanged, the total
direct manufacturing labor yield variance is the
difference between two amounts:
1. the budgeted cost of direct manufacturing labor
based on the actual total quantity of all direct
manufacturing labor used, and
2. the flexible-budget cost of direct manufacturing
labor based on the budgeted total quantity of direct
manufacturing labor for the actual output achieved.

Cont…
The direct manufacturing labour yield variances are:

Grade 3 labor = (5900 – 6000) x 0.50 x Br.24
= (-100) x 0.50 x Br. 24 ……………Br.1200 F
Grade 2 labor =(5900 – 6000) x 0.35 x Br. 16
= (-100) x 0.35 x Br.16 ………………Br. 560 F
Grade 1 labor= (5900 – 6000) x 0.15 x Br.12
= ( -100) x 0.15 x Br.12 ………………Br. 180 F
Total direct manuf. labor yield variance …………Br. 1940 F
Total direct manufacturing labor mix variance
Taking the actual total quantity of all direct manufacturing
labor used as given, the total direct manufacturing labor mix
variance is the difference between two amounts:
1. the budgeted cost of inputs in the actual mix of direct
manufacturing labor, and
2. the budgeted cost of inputs in the budgeted mix of direct
manufacturing labor.

Cont…
The direct manufacturing labour mix variances are:
Grade 3 labor=(0.55 - 0.50) x 5900 x Br. 24
= 0.05 x 5900 x Br 24 ……………… Br. 7080 U
Grade 2 labor=(0.30 - 0.35) x 5900 x Br. 16
= (-0.05) x 5900 x Br. 16 …………….Br. 4720 F
Grade 1 Labor=(0.15 - 0.15) x 5900 x Br. 12
= 0 x 5900 x Br. 12 ……………………..…….0
Total direct manuf. labor mix variance …………...Br. 2360 U
The unfavorable mix variance occurs because a greater
proportion of work was done by the more costly Grade 3
labor.
Productivity Measurement
Productivity is concerned with producing output efficiently,
and it specifically addresses the relationship of output and
the inputs used to produce the output. Usually, different
combinations or mixes of inputs can be used to produce a
given level of output
Total productive efficiency is the point at which two
conditions are satisfied:
1. for any mix of inputs that will produce a given output, no
more of any one input is used than necessary to produce the
output, and
2. given the mixes that satisfy the first condition, the least
costly mix is chosen.
The first condition is driven by technical relationships
and, therefore, is referred to as technical efficiency.
Viewing activities as inputs, the first condition requires
the elimination of all non-value-added activities and
requires that value-added activities be performed with the
minimal quantities needed to produce the given output.
The second condition is driven by relative input price
relationships and, therefore, is referred to as allocative
efficiency
Input prices determine the relative proportions of each
input that should be used. Deviation from these fixed
proportions creates allocative inefficiency.
Productivity improvement programs involve moving
toward a state of total productive efficiency.
Technical improvements in productivity can be achieved
by,
 using fewer inputs to produce the same output,
 producing more output using the same inputs, or by

producing more output with relatively fewer inputs.

.

Fig. Technical Efficiency
Productivity improvement can also be achieved by trading off more

costly inputs for less costly inputs.

Technically Efficient Combination I:
Total Cost of Inputs = Br. 20,000,000
Technically Efficient Combination II:

Total Cost of Inputs = Br. 25,000,000
Fig. Input Trade-off Efficiency

Partial productivity measurement
Productivity measurement
is a quantitative assessment of productivity changes.
The objective is to assess whether productive efficiency has
increased or decreased.
Productivity measurement can be actual or prospective.
Actual productivity measurement allows managers to assess,
monitor, and control changes
Prospective measurement is forward looking, and it serves as
input for strategic decision making.
Specifically, prospective measurement allows managers to
compare relative benefits of different input combinations,
choosing the inputs and input mix that provide the greatest
benefit.
Productivity measures can be developed for each input
separately or for all inputs jointly. Measuring productivity
for one input at a time is called partial productivity
measurement
Productivity of a single input is typically measured by
calculating the ratio of the output to the input as follows:
Productivity ratio = Output ÷ Input
Because the productivity of only one input is being
measured, the measure is called a partial productivity
measure.

If both output and input are measured in physical
quantities, then we have an operational productivity
measure.
If output or input is expressed in dollars, then we have a
financial productivity measure.
Example
In 2020, Nevada Company produced 240,000 frames for
snowmobiles and used 60,000 hours of labor. What is the
labor productivity ratio?
Labor productivity ratio = 240,000 Frames ÷ 60,000 Hrs.
= 4 frames /hour

This is an operational measure, since the units are
expressed in physical terms.
If the selling price of each frame is Br. 30 and the cost of
labor is Br. 15 per hour, then output and input can be
expressed in dollars. The labor productivity ratio,
expressed in financial terms is,
Br. 30/frame x 240,000 frames = Br. 7,200,000
Br. 15/hr. x 60,000 hrs. = Br. 900,000
Labor productivity ratio expressed in financial terms
= Br. 7,200,000 ÷Br. 900,000).
= Br. 8 of revenue per birr of labor cost
Partial Measures and Measuring Changes in
Productive Efficiency
The labor productivity ratio of four frames per hour measures
the 2020 productivity experience of Nevada. By itself, the
ratio conveys little information about productive efficiency or
whether the company has improving or declining productivity.
It is possible, however, to make a statement about increasing
or decreasing productivity efficiency by measuring changes in
productivity.
To do so, the actual current productivity measure is compared
with the productivity measure of a prior period. This prior
period is referred to as the base period and serves to set the
benchmark or standard for measuring changes in productive
efficiency
Assume that 2020 is the base period and that the labor
productivity standard, therefore, is four frames per hour.
Further assume that late in 2020, Nevada decided to try a
new procedure for producing and assembling the frames
with the expectation that the new procedure would use
less labor.
In 2021, Nevada produced 250,000 frames using 50,000
hours of labor. the labor productivity ratio for 2021 is
Labor productivity ratio= 250,000 frames ÷50,000 Hrs
= five(5) frames per hour

The change in productivity is a one-unit-per-hour
increase in productivity (from four units per hour in
2020 to five units per hour in 2021).
The change is a significant improvement in labor
productivity and provides evidence supporting the
efficacy of the new process.

Advantages and disadvantages of partial measures
Advantages of Partial Measures
Partial measures allow managers to focus on the use of a
particular input.
They are easily interpreted by everyone within the
organization.
easy to use for assessing productivity performance of
operating personnel.
They provide feedback that operating personnel can relate
to and understand—measures that deal with the specific
inputs over which they have control.
Furthermore, for operational control, the standards for
performance are often very short run in nature.
Disadvantages of partial measures
They are used in isolation, can be misleading. A decline in
the productivity of one input may be necessary to increase
the productivity of another. Such a trade-off is desirable if
overall costs decline, but the effect would be missed by
using either partial measure.
For example, changing a process so that direct laborers
take less time to assemble a product may increase scrap
and waste while leaving total output unchanged. Labor
productivity has increased, but productive use of materials
has declined. If the increase in the cost of waste and scrap
outweighs the savings of the decreased labor, then overall
productivity has declined.

Total productivity measurement
Measuring productivity for all inputs at once is called
total productivity measurement. In practice, it may not be
necessary to measure the effect of all inputs.
Many firms measure the productivity of only those factors
that are thought to be relevant indicators of organizational
performance and success. Thus, in practical terms, total
productivity measurement can be defined as focusing on a
limited number of inputs, which, in total, indicates
organizational success.
Two commonly used approaches are
 profile measurement and
 profit-linked productivity measurement.

Profile Productivity Measurement
Producing a product involves numerous critical inputs
such as labor, materials, capital, and energy. Profile
measurement provides a series or vector of separate
and distinct partial operational measures. Profiles can
be compared over time to provide information about
productivity changes.
To illustrate the profile approach, we will use only two
inputs: labor and materials.

As before, Nevada implements a new production and
assembly process in 2021. This time, let’s assume that the
new process affects both labor and materials. Initially, let’s
look at the case for which the productivity of both inputs
moves in the same direction. The following data for 2020
and 2021 are available:
2020 2021
Number of frames produced 240,000 250,000
Labor hours used 60,000 50,000
Materials used (lbs.) 1,200,000 1,150,000

Productivity Measurement:
 Profile Analysis, No Trade-Offs
Partial Operational 2020 2021
Productivity Ratios Profile Profile
Labor productivity ratio 4.000 5.000
Material productivity ratio 0.200 0.217
In 2020,
Labor: 240,000/60,000; Materials: 240,000/1,200,000.
In 2021,
Labor: 250,000/50,000; Materials: 250,000/1,150,000

The 2020 profile is (4, 0.200), and the 2021 profile is (5,
0.217).
Comparing profiles for the two years, we can see that
productivity increased for both labor and materials (from
4 to 5 for labor and from 0.200 to 0.217 for materials).
The profile comparison provides enough information for a
manager to conclude that the new assembly process has
definitely improved overall productivity.
The value of this improvement, however, is not revealed
by the ratios.

Profit-linked productivity measurement
Assessing the effects of productivity changes on current profits
is one way to value productivity changes. Profits change from
the base period to the current period. Some of that profit
change is attributable to productivity changes.
 Measuring the amount of profit change attributable to
productivity change is defined as profit-linked productivity
measurement. Linking productivity changes to profits is
described by the following
Profit-Linkage Rule.
For the current period, calculate the cost of the inputs that
would have been used in the absence of any productivity
change and compare this cost with the cost of the inputs
actually used. The difference in costs is the amount by which
profits changed because of productivity changes.
To apply the linkage rule, the inputs that would have
been used for the current period in the absence of a
productivity change must be calculated. Let PQ
represent this productivity-neutral quantity of input.
To determine the productivity-neutral quantity for a
particular input, divide the current-period output by
the input’s base-period productivity ratio:
PQ = Current-period out-put ÷ Base-period
productivity ratio

To illustrate the application of the profit-linked rule, let’s
return to the Nevada example with input trade-offs. We must
add some cost information to the data. The expanded Nevada
data set is as follows
2020 2021
Number of frames produced 240,000 250,000
Labor hours used 60,000 50,000
Materials used (lbs.) 1,200,000 1,300,000
Unit selling price (frames) Br. 30 Br.30
Wage per labor hour Br. 15 Br. 15
Cost per pound of material Br. 3 Br. 3.50
Current output (2021) is 250,000 frames.
The base-period productivity ratios are 4 and 0.200 for labor
and materials, respectively.
Using this information, compute the productivity-neutral
quantity for each input.
PQ (labor) = 250,000 ÷ 4 = 62,500 hrs.
PQ (materials) = 250,000 ÷ 0.200 = 1,250,000 lbs.
For our example, PQ gives labor and material inputs that would
have been used in 2021, assuming no productivity change.
What the cost would have been for these productivity-neutral
quantities in 2021?
To compute the cost of productivity-neutral quantities, multiply
each individual input quantity (PQ) by its current price (P) and
add.
Cost of labor: PQ × P = 62,500 × Br. 15 = Br. 937,500
Cost of materials: PQ × P =1,250,000 × Br. 3.50 = 4,375,000
Total PQ cost ………………………………….Br. 5,312,500
The actual cost of inputs is obtained by multiplying the actual
quantity (AQ) by current input price (P) for each input and
adding:
Cost of labor: AQ × P = 50,000 × Br. 15 = Br. 750,000
Cost of materials: AQ × P =1,300,000 × Br. 3.50 = 4,550,000
Total current cost ………………………………Br. 5,300,000

Finally, the productivity effect on profits is computed by
subtracting the total current cost from the total PQ cost as
follows:
Profit-linked effect = Total PQ cost – Total current cost
= Br. 5,312,500 – Br. 5,300,000
= Br. 12,500 increase in profit
Summary of Profit-Linked Productivity Measurement as follow:
(1) (2) (3) (4) (2) – (4)
Input PQ* PQxP AQ AQxP (PQxP) – (AQxP)
Labor 62,500 Br. 937,500 50,000 Br. 750,000 Br. 187,500
Materials 1,250,000 4,375,000 1,300,000 4,550,000 (175,000)
Br. 5,312,500 Br. 5,300,000 Br. 12,500

The summary reveals that the net effect of the process
change was favorable. Profits increased by Br. 12,500
because of the productivity changes.
Notice also that profit-linked productivity effects can be
assigned to individual inputs. The increase in labor
productivity creates a Br. 187,500 increase in profits;
however, the drop in materials productivity caused a Br.
175,000 decrease in profits. Most of the profit decrease
came from an increase in materials usage—apparently,
waste, scrap, and spoiled units are much greater with the
new process.

Thus, the profit-linked measure provides partial
measurement effects as well as a total measurement effect
The total profit-linked productivity measure is the sum of
the individual partial measures. This property makes the
profit-linked measure ideal for assessing trade-offs.
Although there were substantial waste and scraps in the
new process, it is possible that the learning effects of the
new process are not yet fully captured and further
improvements in labor productivity might be observed. As
labor becomes more proficient at the new process, it is
possible that the materials usage could also decrease.

Price-Recovery Component
The profit-linked measure computes the amount of
profit change from the base period to the current
period attributable to productivity changes. Generally,
this will not be equal to the total profit change
between the two periods.
The difference between the total profit change and the
profit-linked productivity change is called the price-
recovery component. This component is the change in
revenue less a change in the cost of inputs, assuming
no productivity changes. It, therefore, measures the
ability of revenue changes to cover changes in the cost
of inputs, assuming no productivity change.

To calculate the price-recovery component, we first need
to compute the change in profits for each period. The
computation for Nevada Company is as follows:
2020 2021 Difference
Revenues Br. 7,200,000 Br. 7,500,000 Br. 300,000
Cost of inputs 4,500,000 5,300,000 (800,000)
Profit Br. 2,700,000 2,200,000 (500,000)
Price = Profit change – Profit-linked
recovery productivity
change
= (Br. 500,000) – Br. 12,500
= (Br. 512,500)
The increase in revenues would not have been
sufficient to recover the increase in the cost of the
inputs.
The increase in productivity provided some relief for
the price-recovery problem.
Increases in productivity can be used to offset price-
recovery losses.

Measuring changes in activity and
process efficiency
An activity-based responsibility accounting system focuses
on improving the efficiency of processes and activities.
Activities, for example, consume inputs such as labor,
materials, and energy, and they produce an output such as
hours of inspection or number of setups. Thus, it is possible
to measure changes in activity productive efficiency.
Measuring changes in activity efficiency can be an
important part of an activity-based management system.
Activity productivity analysis is an approach that directly
measures changes in activity productivity.

Similarly, a process produces an output, and it is also
possible to measure process productivity.
In fact, since processes are collections of activities with a
common goal, activity productivity changes must affect
process productivity.
Process productivity analysis measures changes in
process productivity

Activity Productivity Analysis
An activity can be viewed as an entity that transforms
inputs into an output. The inputs are the resources
consumed by an activity.
The key to activity productivity analysis is defining
activity output and an appropriate activity output
measure.
Once the output measure is identified, then both
profile and profit-linked productivity analyses are
possible.

Activity Productivity Mode

Illustration
Suppose that the activity is purchasing. The output of
purchasing is a purchase order, and the number of
purchase orders is a possible output measure. For
simplicity, assume that labor and materials (forms, postage
stamps, and envelopes) are the only resources consumed
by the activity. At the end of 2020, the purchasing activity
had been streamlined by redesigning the purchase order,
reducing the number of suppliers, and reducing the
number of distinct parts that needed to be ordered.

Activity data for purchasing for 2020 and 2021 follow.
The 2021 data reflect the effect of the activity
improvements.
2020 2021
Number of purchase orders 200,000 240,000
Materials used (lbs.) 50,000
50,000 Labor used (number of
workers) 40 30 Cost
per pound of material Br. 1 Br. 0.80
Cost (salary) per worker Br.
30,000 Br. 33,000

Activity Productivity Analysis Illustrated
Profile Analysis
2020 2021
Materials 4 4.8
Labor 5,000 8000

Profit-Linked Productivity Measurement
(1) (2) (3) (4) (2) – (4)
Input PQ* PQxP AQ AQxP (PQxP) – (AQxP)
Materials 60,000 Br. 48,000 50,000 Br. 40,000 Br. 8,000
Labor 48 1,584,000 30 990,000 594,000
Br. 1,632,000 Br. 1,030,000 Br. 602,000
Materials: 240,000/4; Labor: 240,000/5,000

Profile analysis reveals that productivity improved for
both partial input measures.
The value of these productivity improvements is Br.
602,000—with the majority of the value being created by
an increase in labor productivity.
Thus, changes in activity productivity can be assessed or
predicted using the same methodology available for
assessing manufacturing productivity.

Process Productivity Analysis
Processes are defined by activities with a common goal.
The common goal is usually defined as the output
produced by the process.
 A process’s output consumes the activities of the process,
which, in turn, consume resources (labor, materials, etc.).
This suggests that process productivity changes are
defined by two components:
1. changes in the efficiency of activities consuming
resources and (
2. changes in the efficiency of the process output’s
consumption of activities.
The second component treats activity outputs as inputs
and evaluates productivity by relating activities to the
output produced by the process.
 A partial measure of productivity is computed for each
activity that belongs to the process. These partial
measures are used for profile and profit-linked analyses.
The following table summarizes and illustrates the
productivity model for the second process component
(activity output efficiency).
Notice that the input for the productivity calculation of
this process component is simply the activity output
measure, and the output is the product of the process.
The cost per unit of input (i.e., activity output in this case)
is the activity rate derived from PQ and current prices.
 Process output must also be defined and measured. Each
organization has a variety of processes such as product
development, procurement, manufacturing, sales, order
fulfillment, and customer service.
Each process has one or more outputs. Manufacturing, for
example, may produce two or more products.
Where a process has multiple output measures,
productivity analysis is carried out for each type of output.
Inputs are measured by computing the demands that each
product (output) makes on each activity.

Process Productivity: Activity Output Efficiency

Process Productivity Mode
Total process productivity change is simply the sum of the
two components: Resource efficiency + Activity output
efficiency.
The sum of the two components should reveal the correct
effect of changes in both types of activities.
Also, it is possible to evaluate the effect on process
productivity resulting from trade-offs among activities
that make up the process.
Process improvement or innovation means finding new
ways of producing the process’s output.
This is accomplished by using activity selection, activity
reduction, activity elimination, and activity sharing.
The effect is to change the mix and quantity of
activities that define the process. Process productivity
analysis offers a way to measure the proposed and
actual economic effects of process improvement or
innovation.

.
U R
 .
FO
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P T
H A
F C
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Chapter Four: Measuring Mix and Yield Variances

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Chapter Four: Measuring Mix and Yield Variances

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CHAPTER FOUR

Measuring Mix and Yield Variances

03/29/2023 By: Gizachew Soboka 1

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 It is currently examining results for August

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Y 2400 3,000 15% 7,200,000 1,600 6,000 25% 9,600,000

Z 900 16,000 80% 14,400,000 700 15,600 65% 10,920,000

Total 20,000 100% 24,800,000 24,000 100% 26,760,000

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Product X= Br. 6,240,000 – (Br. 3,200 x 2,400)

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Product X= 24,000 x (0.10 - 0.05) x Br. 3,200 = Br. 3,840,000 F

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Product X Br. 3200 0.10 Br. 320 0.05 Br. 160

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Market size = (50,000 – 40,000) x 0.50 x Br. 1240

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The direct materials yield variances are:

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The direct manufacturing labour yield variances are:

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 producing more output using the same inputs, or by

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Productivity improvement can also be achieved by trading off more

03/29/2023 By: Gizachew Soboka 47

Technically Efficient Combination II:

Fig. Input Trade-off Efficiency

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 profit-linked productivity measurement.

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