! !

CHAPTER FIVE

Mix and Yield Variances

There are a variety of possible extensions to the basic variance analysis presented in previous
chapter. Although it is not practical to include all possible variations of variance analysis, one or
two additional types of analysis will provide you with a feel for the variations of variance analysis
found in practice. Material mix and yield variances provide a variance analysis extension that some
firms have found useful.
Most products are a combination of different materials and several types of labor. For such
products, particularly those that require precise recipes the mix of materials and labor should not
vary. Bottling plant managers at MOHA are not allowed to tamper with the formula used to make
Pepsi. Dairies mix precise amounts of chocolate and milk to produce chocolate flavored milk. Some
production environments, however, offer some flexibility. Different types of materials or classes of
labor may be substituted in a product. For example, orange juice manufacturers can mix Jimma and
Harar oranges in slightly different proportions. A fried chicken franchise may mix experienced
higher paid cooks with low paid helpers in their breading operation.
When materials or labor varies from their predetermined proportion, a mix variance results. A mix
variance is the cost that results from the difference between an actual mix and a standard mix.
Often mix changes can also impact the total output that is produced from a given amount of input.
For example, substituting cooks for helpers may result in higher quantity of breaded chicken pieces
because the cooks are faster and more experienced. A yield variance is the extra cost from the loss
in quantity that results when there is a change in the mix material or labor.
Material Mix and Yield Variance
When different types of materials may be used as substitutes for each other, a standard mix is
usually determined to insure a quality product at the lowest possible cost. If the actual material mix
varies from the standard mix, both quality and cost may be affected. The effect on cost can be
determined by separating the material quantity variance into two variances referred to as material
mix and material yield variances. In addition to the substitutability requirement, the unit of measure
for the various materials needs to be the same. Materials may be measured in gallons or pounds or
board feet, or some other measure, but the unit of measure must be the same for each ingredient. If
these two prerequisites are satisfied, material mix and yield variances can be calculated.
As said earlier, mix and yield variances for materials may be used when the materials are
substitutable for each other. 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 total material variance is the sum of material price variance and material quantity variance. The
material quantity variance is the difference between a flexible budget based on the actual quantity
used and a flexible budget based on the standard quantity allowed. The material quantity variance is
further separated into mix and yield variances. Material mix and yield variances are computed as
follows.
Direct Material Actual DM Budgeted Actual Qty Budgeted
Mix Variance = Mix - DM mix x of All DM x Price of
Percentage Percentage used DM input

Direct Actual Qty Budgeted Qty of Budgeted Budgeted

Material = of All DM - All DM Allowed x DM mix x Price of
Yield Used for Actual Output Percentage DM input
Variance

Total Material
Variance

Material Price Material Quantity

Variance Variance

Material Mix Material Yield

Variance Variance

EXAMPLE

Assume Bole Burger combines three ingredients in the production of the firm's popular hamburger.
The standard quantities and input prices of these materials are provided below for a normal
production batch of 2,000 pounds of hamburger.
Material Standard Mix Standard Inputs Standard Price
per pound
A 10% 200 Br1.00
C 50% 1,000 2.00
B 40% 800 3.00
2,000 lbs
The following data are provided for a recent production period in which 20,500 pounds of materials
were used to produce 20,000 pounds of hamburger.
Material Actual Quantities Used
A 2,460
C 9,225
B 8,815
20,500
The requirements are simply to calculate the materials quantity, mix and yield variances for this
situation.
! !

The standard quantities of inputs allowed for actual output are:

A = (200/2,000) x 20,000 = 2,000
B = (1,000/2,000) x 20,000 = 10,000
C = (800/2,000) x 20,000 = 8,000
The variances are calculated in the following manner:
Material Quantity Variance = (AQ - SQ)(SP)
A = (2,460 - 2,000) (1.00) = Br 460 U
B = (10,000 – 9,225) (2.00) = 1,550 F
C = (8,000 - 8,815) (3.00) = 2,445 U
Br 1,355U
Material Mix Variance = (AM- SM) (ATM)(SP)
A (0.12-0.10) x 20,500x 1.00 = Br 410 U
B (0.45– 0.50) x20,500 x 2.00 = 2,050 F
C (0.43 -0.40) x 20,500 x 3.00 = 1,845U
Br 205U
Material Yield Variance = (ATM - STM) (SM)(SP)
A (20,500-20,000)x 0.10x 1.00 = Br 50 U
B (20,500-20,000)x 0.50x 2.00 = 500 U
C (20,500-20,000)x 0.40x 3.00 = 600 U
Br 1150 U

The sum of the mix and yield variances must be equal to the material quantity variance. The status
of the material quantity variance is determined in the usual way, i.e., it is unfavorable if the actual
quantity used exceeds the standard quantity allowed. The mix variance is unfavorable if Actual Mix
> Standard Mix, i.e., the actual quantity exceeds the quantity called for by the standard mix. This is
unfavorable because it increases the cost of the product. The material yield variances represent a
measure of what the material quantity variances would have been if the actual mix proportions were
equal to the standard mix proportions. The yield variances are unfavorable when Actual Total
Material Used >Standard Total Materials allowed for Actual Output.
Labor Mix and Yield Variances
The idea of labor mix and yield variance is the same as material mix and yield variance. To
illustrate mix and yield variances, consider Birhanu Electric Works – an electrical contractor who
does new construction wiring. The typical crew consists of one experienced electrician and two
apprentice electricians. An experienced electrician can wire 10 fixtures per hour while an apprentice
can wire only 5 fixtures per hour. The standard and actual data is summarized as follows.
Birhanu Electric: Standard Cost Sheet for Ginbot

Labor Standard Standard Standard Standard Standard

Rate per Crew Mix Hours Labor Cost Output in
Hour Fixtures
Apprentice Br 15 2 (67%) 320 Br 4,800 1,600
Electricians
Master Br 40 1 (33%) 160 6,400 1,600
Electricians
Total 480 Br 11,200 3,200
! !

During Ginbot, Birhanu Electric wired 3,600 fixtures at a total labor cost of Br 15,000. The detailed
breakdown of the actual hours is shown as follows:

Labor Standard Rate Actual Actual Output

per Hour Hours in Fixtures
Apprentice Electricians Br 15 240 1,440
Master Electricians Br 40 240 2,160
Total 480 3,600

Labor Quantity Variance

To understand labor mix and yield variances, we will begin by computing the quantity variance for
the two types of labor, apprentice and master. The first table shows the standard wage rates and the
budgeted hours (480) for a budgeted output of 3,200 fixtures. Since the actual output is 3,600
fixtures (see the second table), the standard total hours for the actual output is 540 hours
[(3,600/3,200) x 480)]. Ignoring the mix, we can compute a quantity variance as simply the
difference between actual hours and the flexible budget for the standard hours earned on the basis of
the output of 3,600 fixtures. The labor quantity variance for Ginbot is:

3600/3200*320
LQV (Apprentices) = (AQ – SQ) x SP
= (240 – 360) x Br 15
= Br 1,800 F
LQV (Master) = (AQ – SQ) x SP
= (240 – 180) x Br 40
= Br 2,400 U
LQV (Combined) = Br 1,800 F + Br 2,400 U
= Br 600 U

Labor Mix Variance

Let us now consider the impact of a crew mix. For Ginbot, there is a mix variance because the
actual labor mix used differed from the standard labor mix. The third column of the second table
above shows that the actual apprentice labor was 50 percent rather than the expected 67 percent and
that the master electrician was 50 percent rather than 33 percent. The mix variance measures the
monetary effect of using a different mix. In our example, it is the higher than expected percentage
of master electrician hours. The mix variance uses the actual hours, but assumes that they are
distributed in the budgeted mix. This is because we want to isolate the effect of a change in mix
without adding the effect of a change in output as well. The formula for computing the mix variance
is as follows:

Direct Labor Actual DL Budgeted DL Actual Qty Standard

Mix Variance = Mix - Mix x of All DL x Rate per
Percentage Percentage Hours Used Hour

The electrician crew mix variance for Ginbot is computed as follows:

DLMV (Apprentice) = (.50 – .67) x 480 x Br15 = Br 1,200 F
DLMV (Master) = (.50 – .33) x 480x Br 40 = Br 3,200 U
Total Labor Mix Variance Br 2,000 U
The decrease in the percentage of apprentice labor used results in a favorable variance while the
increase in the use of master labor results in an unfavorable mix variance. The net effect of the mix
change is an unfavorable crew mix variance of Br 2,000. Because the total mix must equal 100
percent, there is always at least one favorable and one unfavorable mix variance if there is any
change in mix.
! !

Labor Yield Variance

The change in mix required more of the expensive master electricians. While this increased the total
wages paid, master electricians work faster and the yield from the same 480 labor hours has gone
up. Instead of the budgeted 3,200 fixtures we have 3,600 fixtures. In effect, the 480 hours at the
new mix has yielded 540 labor hours worth of output. This impact can be captured in the yield
variance, which shows us the productivity impact of the new mix. Again, to isolate the effect of a
change in the yield, we will hold the mix constant and assume that the earned hours and the actual
hours were both at the standard mix. The formula for computing the mix variance is as follows:
Direct Actual Budgeted Total Budgeted Standard
Labor Yield = Total - Labor Hours x DL mix x Rate per
Variance Labor Allowed for Percentage Hour
Hours Used Actual Output

The crew yield variance for Ginbot is computed as follows:

DLYV (Apprentice) = (480 – 540) x 0.67 x Br 15 = Br 600 F
DLYV (Master) = (480 – 540) x 0.33 x Br 40 = Br 800 F
Total Labor Yield Variance = Br 1,400 F
Note that the mix and yield variances together give additional information about the causes of a
quantity variance. When mix and yield variances are combined, they equal the quantity variance. In
our example, the mix and yield equal the combined quantity variance of Br 600 Unfavorable.
Total mix variance = Br 2,000 U
Total yield variance = Br1,400 F
Total Quantity variance = Br 600 U
We can see that despite the increased productivity of the master electricians, the decision to
substitute the higher paid labor has resulted in an overall unfavorable variance of Br 600. This was
because unfavorable mix variance was larger than the favorable yield variance. Birhanu is better off
sticking to its standard crew mix and avoiding the type of tradeoff between using cheaper labor it
did in Ginbot.
SALES VARIANCES
The idea of variance analysis can be extended to areas other than production. For example, an
analysis can be made on why actual revenue differed from budgeted revenue. If, for example, a
company budgeted to sell 10,000 units at Br 50 each but because of market forces had to reduce the
price to Br 48 and even so they were only able to sell 9,000 at this price, a variance occurs. Then:
Actual Sales Revenue = 9,000 x Br 48 = Br 432,000
Budgeted Sales Revenue = 10,000 x Br 50 = Br 500,000
Sales Variance = Br 432,000 – Br 500,000 = -Br 68,000 = Br 68,000 U
This variance is negative which means that less revenue was obtained than expected and is therefore
unfavorable and marked with U. This variance is made up of two elements: the reduction in volume
of 1,000 units and the reduction in selling price of Br 2 per unit. From the above example it can be
seen that two items will contribute to sales variance: the sales-price variance (SPV) and the sales-
volume variance (SVV). The sales-price variance arises because a company increased or decreased
its sales price when compared with the budgeted sales price. The sales-volume variance arises from
an increase or decrease in units sold. Generally speaking, sales variances can be analyzed by
splitting the total variance into six variance as shown below.
! !

Static-Budget
Variance

Flexible-Budget Sales-Volume
Variance Variance

Sales-Mix Sales-Quantity
Variance Variance

Market-Size Market-Share
Variance Variance

Example
Agere ltd sales three products in the Dembel City centre. The Company Budgeted to sell 10,000
units. The budgeted 10,000 units represent 50% market share. The details for the budgeted and
actual data for the year 1996 fiscal year are as follows:

Budgeted Data Actual Data

Produc Selling Quantity Sales Total Selling Unit Sales Total
t Price per Mix Revenu Price Volume Mix Reven
Unit e per Unit ue
A 12 1,000 10% 12,000 10 1,800 15%
18,000
B 20 3,000 30 60,000 25 4,800 40 120,00
0
C 15 6,000 60 90,000 15 5,400 45
81,000
10,000 162,000 12,000 219,00
0

Static-budget variance: is the difference between an actual result and a budgeted amount in the
static budget.

Static-Budget Variance= Actual Result- budgeted Amount

The Static-budget variance for Agere Ltd is computed as follows:
A= 18,000-12,000 = 6,000F
B= 120,000-60,000 =60,000F
C= 81,000-90,000 = 9,000U
Total SBV =57,000F
A. Static-Budget variance can be further split into Flexible-Budget and Sales-Volume variance.
1. Flexible-budget variance: Is the difference between the actual revenues and the flexible-budget
amount for the actual unit volume of sales. It is computed as: -
FBV=Actual Result- Flexible-budget Amount
The Static-budget variance for Agere Ltd is computed as follows:
FBV A=18,000- (12x 1,800) = 3,600U
B=120,000-(20x 4,800) =24,000F
C=81,000-(15 x 5,400) = 0 Total..............................20,400F
! !

2. Sales-volume variance: shows the effect of the difference between the actual and budgeted
quantity of variable used to flex the flexible budget. The sales-volume variance, which arises
from an increase or decrease in units sold, is calculated as:
SVV = (Actual Sales Quantity - Budgeted Sales Quantity) x Budgeted Selling Price per Unit
The Sales-volume variance for Agere Ltd is computed as follows:
SVV-A= (1,800-1,000) x 12= $9,600F
B= (4,800-3,000) x 20=$36,000F
C= (5,400-6,000) x 15= $9,000U
Total SVV=$36,600F
B. Subdivisions of sales-volume variance
1. Sales-mix variance: difference between (1) budgeted amount for the actual sales mix, and (2)
the budgeted amount if the budgeted sales mix had been changed. The formula for computing
the sales-mix variance in terms of revenue and the amount for Agere Ltd is:-

Actual Budgeted Actual Units Budgeted

SMV = Sales Mix - Sales Mix x Of All x Selling Price
Percentage percentage Products Sold Per Unit
SMV-A= (0.15-0.10) x 12,000 x 12=$7,200F
B= (0.40-0.30) x 12,000 x 20=$2,400F
C= (0.45-0.60) x 12,000 x 15=$27,000U
TSMV= $17,400U
2. 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). The formula for computing the sales-quantity variance in terms of revenue
and the amount for Agere Ltd is:-
Actual Units Budgeted Budgeted Sales Budgeted
SQV = Of All - Units Of All x Mix x Selling Price
Products Sold Products Sold percentage Per Unit

SQV-A = (12,000 -10,000) x 0.10x 12=

B = (12,000 -10,000) x 0.30x 20=
C = (12,000 -10,000) x 0.60x 15=
Market Share and Market Size Variance
Sales depend on overall market demand as well as the firm’s ability to maintain its share of the
market. The following table summarizes the budgeted and actual sales units for the industry.
Budgeted Industry Actual Industry
Quantity Quantity
Product A 1,800 2,200
Product B 6,200 8,000
Product C 12,000 14,800
Total 20,000 25,000

Agere Ltd can use the industry information to get further insight into the sales quantity variance by
dividing this variance into a market-size and market-share variance.
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. The formula and the amount for
Agere Ltd are: -
MSV= (Actual MSZ - Budgeted MSZ) x Budgeted MSR x Budgeted ASP
Where, MSV= Market Share Variance MSR= Market Share in Units
MSZ= Market Size in Units ASP= Average Selling Price per Unit
! !

MSV for Agere Ltd is computed as follows:-

MSV= (25,000-20,000) x 0.50x 16.20
= Br 40,500F
Market –share variance is the difference between two amounts: (1) the budgeted amount at
budgeted mix based on actual 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 and the amount for Agere Ltd are: -
Mkt-share Variance= (Actual MSR- Budgeted MSR)x Actual MSZ x Budgeted ASP
MSV for Agere Ltd is computed as follows:-
Mkt-share Variance= (0.48- 0.50) x 25,000x 16.20
=Br 8,100 U
! !

Assignment
The Gedion Electronics sells Konka and Gold Star brand TV sets. The Company operates in a
defined geographical location that has been enjoying tremendous growth in new home building and
sales. At the beginning of the year, Gedion had budgeted sales of 75,000 TV sets. Konka TVs were
budgeted for 80% and Gold Star for 20% of this total sales amount. Gedion budgeted to sell the
Konka brand for Br 2,600 each and the Gold Star for Br 2,000 each. Recent market information had
led Gedion to believe that it could expect 75% of the market for TVs in that area.
At year end, actual sales of TVs by Gedion Electronics were 84,000 TVs. Of this 58,800 represent
Konka and the remaining is Gold Star. Actual selling prices were Br 2,800 for the Konka and Br
1,500 for the Gold Star. The market information published immediately after the end of the year
showed sales of 120,000 Konka and Gold Star sold in the geographical area in which Gedion
Electronics operates.
Required: Compute
1. market-size variance________________
2. The market-share variance___________
3. Total sales-mix variance_____________
4. Total sales-quantity variance__________
5. Selling-price variance_______________
Productivity Measures
Productivity measures the relationship between actual inputs and actual outputs over two or more
periods. The lower the input for a given set of outputs or the higher the output for a given set of
inputs, the higher the level of productivity. Productivity measures examine two aspects of the
relationship between inputs and outputs. They evaluate
1. Whether more inputs than necessary have been used to produce a given level of output, and
2. Whether the best mix of inputs has been used to produce that output
Efficiency, mix and yield variances discussed earlier are some approaches used to getting the above
two points. However, productivity measure has two important features that distinguish it from
variance analysis. These features are: -
1. Unlike variance analysis productivity measures do not use information from budgets or
standards. They compare the relation between actual inputs and actual outputs across similar
organizations or over different time periods.
2. Mix and yield variance calculations only apply when substitutions occur within a given category
of inputs (that is within direct material or within direct labor). However, often substitution can
occur between direct material and direct labor, or between direct labor and capital. As a result,
productivity measures incorporate general substitutions between different types of input (materials
and labor).
To understand productivity measures use the following data for Awash Manufacturing
1996 1995
Output 850,000 1,020,000
Direct materials used in Kilo gram (1) 68,000 74,800
Cost of direct material per Kilogram (2) 28 30
Total cost of Direct materials used (3= [1x2]) 1,904,000 2,244,000
Direct labor hours used (4) 340,000 439,000
Direct labor cost per hour (5) 4.10 4.00
Total cost of direct labor used (6=[4x5]) 1,394,000 1,756,000
Total Cost of DM and DL (7=[3+5]) 3,298,000 4,000,000
Types of Productivity Measures
1. Partial Productivity Measures
A. Partial productivity compares the quantity of output produced with the quantity of a single input
consumed. It is called partial because it takes one input and ignores the other. The higher the PP
ratio, the higher the productivity. PP is expressed as follows:
PP= Quantity of Output Produced
! !

Quantity of Input Used

For Awash Mfg, The PP for material and labor for the year 1996 are as follows
DM Partial Productivity= 850,000/68,000=12.50
DL Partial Productivity = 850,000/340,000=2.50
The partial productivity for Awash Mfg. is summarized as follows:
1996 1995
Direct Material 850,000 =12.50 1,020,000=13.64
68,000 74,800
Direct Labor 850,000=2.50 1,020,000=2.32
340,000 439,000

Question: What do you understand from the above table?

Comparing changes in partial productivity and efficiency variances is important. The partial
productivity measures look at changes over time of actual output to actual input, while the
efficiency variance is comparing actual output to budgeted input for the current period.
A major usefulness of the partial productivity measures is that they focus on a single input; hence
they are simple to calculate and easy to understand at operational level. Managers and operators can
easily examine these numbers to understand the reason underlying productivity changes from one
period to the next. For example, decrease in the PP for labor may be caused by poor training of
labor, higher absenteeism, high labor turnover, poor incentive, etc.
The major drawback of partial productivity measure is that it focuses only on one input at a time
rather than all inputs simultaneously and hence does not allow managers to evaluate the trade-offs
among various inputs and the effect on overall productivity. The total factor productivity or total
productivity is a technique for measuring productivity that considers all inputs simultaneously.
2. Total Factor Productivity (TFP)
Total factor productivity is the ratio of the quantity of output produced to the quantity of all inputs
used, where the inputs are combined on the basis of current period prices.
TFP= Quantity of Output Produced
Cost of all input Used
As the above formula indicates, TFP considers all inputs simultaneously and also considers the
trade-offs across inputs based on current input prices. TFP has a financial objective.
The TFP for Awash Mfg. for the year 1996 is computed as follows:
TFP for 1996 = 850,000 = 0.258 per one birr
3,298,000

It is obvious that by itself the TFP of 0.25 unit of output per one birr is not helpful. It must be
compared against something. One comparison method is to compare TFP over time. Thus for
Awash Mfg. we can compare the TFP of 1996 with TFP of 1995. The TFP of 1995 is computed
using the output of 1995 and the inputs of 1995 at the inputs prices of 1996.
Cost of inputs used in 1995 Based on 1996 price = (74,800 x 28) + (439,000 x4.10)
= Br 3,894,300
! !

TFP for 1995 using = 1,020,000 = 0. 262 units of output per one birr
the price of 1996 3,894,300
Assignment
Ethio Limited manufactures a special floor tile which measures ! m x " m x 0.01 m. The tiles are
manufactured in a process which requires the following standard mix:

Material Quantity Price (Br) Labor Hours Rate (Br)

A 40 1.5 X 6.00 20
B 30 1.2 Y 4.00 15
C 10 1.4 10.00
80
Each mix should produce 100 square metres of floor tiles of 0.01 m thickness. During Hamle, 60
mixes were processed and the actual output was 4,600 tiles from an input of:

Material Quantity Price (Br) Labor Hours Rate (Br)

A 2,200 1.6 X 189 18
B 1,400 1.1 Y 231 16
C 400 1.5 420
For the month of Hamle, you are required to calculate total:
A. Material Price Variance__________ E. Labor Rate Variance_______________
B. Material Usage Variance________ F. Labor Efficiency Variance___________
C. Material Mix Variance__________ G. Labor Mix Variance________________
D. Material Yield Variance_________ H. Labor Yield Variance_______________