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ACC2008 Lecture 4

Advanced Variances
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Topic Overview Diagram

Advanced Variances

Planning and
Mix and Yield Sales Operational

Materials Labour Mix Quantity Benefits

Calculations
&Problems
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Advanced Material Variances – mix
and yield

u In many industries, e.g. process industries, input consists of more than

one type of material
u Material mix variance
Arises when the mix of materials used differs from the predetermined
mix included in the calculation of the standard cost of an operation
u Material yield variance
Arises when there is a difference between the standard output for a
given level of input and the actual output attained.
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The meaning of Mix variance

u For material or labour variance, a mix variance measures whether

the actual mix that occurred was more or less expensive than the
standard mix.
u If the mixture is varied so that a larger than expected proportion of
a more expensive material is used there will be an adverse
variance.
u When a larger than expected proportion of a cheaper material is
used there will be a favorable variance.
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The meaning of yield variance

u Similar to a materials usage variance.

u A single yield variance is calculated for all the materials as a whole.
u Calculated first of all in terms of units of material, and is converted
into a money value at the weighted average standard cost per unit
of material (shall be assessed for all the materials combined and the
labour team as a whole)
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Materials mix variance – individual
units method

u 1) write down the actual input (actual mix)

u 2) take the actual input in total and push it down one line
and then work it back in the standard proportions (standard
mix)
u 3) calculate the difference between 1 and 2. this is the mix
variance in terms of physical quantities, and must add up to
zero in total.
u 4)multiply by the standard price per kg
u 5) this gives the mix variance in financial terms
Materials mix variance – weighted average 7
method

u 1) write down the actual input (actual mix)

u 2) take the actual usage in total and push it down one line and
then work it back in the standard proportions (standard mix)
u 3) calculate the difference between 1 and 2. this is the mix
variance in terms of physical quantities, and must add up to zero in
total.
u 4) determine for each type of materials whether it is cheap or
expensive compared to a weighted average price
u 5)multiply the results from 3 and 4
u 6) this gives the mix variance in financial terms
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Materials Yield variance

u 1) calculate the standard yield (the expected output from the actual
input)
u 2) compare this to actual yield
u 3) the difference is the yield variance in physical terms
u 4) multiply by the standard cost per kg of output to get the yield
variance in financial terms
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Example 1

u A company produces a product with the following inputs in each batch:

Material Input (kg) Cost per kg ($) Total costs ($)

X 0.90 0.05 0.045
Y 0.10 0.21 0.021
Z 0.05 0.29 0.0145
Total 1.05 0.0805
u These inputs will provide 1kg of output
u The actual results show:
u Input = 22,880 kg
u Output=21,500 kg
u Use this information to calculate the materials yield variance
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Solution

u 1) value materials at the cost per output (the yield variance is based on output measure)
the cost per output = ?
expected output = ?
yield variance = (actual yield – standard yield) * standard cost per output
=?
u 2) value materials at the cost per input (based on input measure)
the cost per input =?
the expected input = ?
yield variance = (actual input –standard input) * standard cost per input
=?
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Example 2
u Hordru Ltd operates a standard costing system
u The standard direct material mix to produce 1,000 kilos of output is as follows:
Material Grade Input Quantity (kilo) Standard Price per kilo input
A 600 $1.10
B 240 $2.40
C 360 $1.50
u During April the actual output of the product was 21,000 kilos
u The actual materials issued to production were: Required:
a) Calculate material mix variance for each material
Material grade Quantity (kilos) grade and in total, using individual units method
A 14,000 b) Calculate material mix variance for each material
B 5,500 grade and in total, using weighted average method

C 5,500 c) Calculate the materials yield variance

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Example 2 - solution

u A) mix variance (individual units method)

Material A Material B Material C Total

1 Actual Input (kg) 14,000 5,500 5,500 25,000
2 actual input in 12,500 5,000 7,500 25,000
standard (50%) ( 20%) (30%)
proportions
3 Difference in 1,500 A 500 A 2,000 F
quantity
4 * Std Price $1.10 $2.40 $1.50
5 mix variance $1,650 A $1,200 A $3,000 F $150 F
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Example 2 - solution

u B) mix variance (Weighted average method)

u Weighted average = (600*$1.10 +240 *$2.40 + 360*$1.50)/1,200 kg =$1.48/kg
Material A Material B Material C Total
1 Actual Input (kg) 14,000 5,500 5,500 25,000
2 actual input in 12,500 5,000 7,500 25,000
standard proportions (50%) ( 20%) (30%)
3 Difference in quantity 1,500 F 500 A 2,000 F
4 * difference in price $0.38 $-0.92 $-0.02
(weighted average std (1.48-1.10) (1.48-2.40) (1.48-1.50)
price – ind. Material std
price)
5 mix variance $570 F $460 A $40 F $150 F
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Example 2 - solution

u C) Yield Variance (output measure)

u Standard cost per kg of output=(600*$1.10 +240 *$2.40 + 360*$1.50)/1,000 kg =$1.776/kg
u 1 Standard yield = 25,000 *1,000/1,200 = 20,833.33 kg
u 2 actual yield = 21,000 kg
u 3 difference = 166.67 F
u 4 *standard price / cost per kg of output = 166.67 F* $1.776
u 5 yield variance = 296 F
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Example 2 - solution

u C) Yield Variance (input measure)

u Cost per input = ?
u The expected input=?
u Yield variance =?
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Using mix and yield variances

u Mix variance might be calculated when there is a mix or two

or more items and the mix is controllable by management.
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Advanced labour variances

u Labour is likely to be a key factor in service industries.

u Use more than one grade of labor (skilled, semi-skilled, unskilled)
u Labour mix variance
Arises when the mix of labour used differs from the predetermined mix
included in the calculation of the standard cost of an operation
u Labour yield variance
Arises when there is a difference between the standard output for a given
level of input (measured in terms of hours) and the actual output attained.
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Labour mix – individual units method

u 1) write down the actual hours (actual mix)

u 2) take the actual hours in total and push it down one line
and then work it back in the standard proportions (standard
mix)
u 3) calculate the difference between 1 and 2. this is the mix
variance in terms of hours, and must add up to zero in total.
u 4)multiply by the standard rate per hour
u 5) this gives the mix variance in financial terms
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Labour mix – weighted average method

u 1) write down the actual hours (actual mix)

u 2) take the actual hours in total and push it down one line and
then work it back in the standard proportions (standard mix)
u 3) calculate the difference between 1 and 2. this is the mix
variance in terms of hours, and must add up to zero in total.
u 4) determine for each grade of labour whether it is cheap or
expensive compared to a weighted average price
u 5)multiply the results from 3 and 4
u 6) this gives the mix variance in financial terms
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Labour Yield variance

u 1) calculate the standard yield (the expected output from the actual
input)
u 2) compare this to actual yield
u 3) the difference is the yield variance in hours
u 4) multiply by the standard cost to get the yield variance in financial
terms
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Example 3

u A management consulting company had budgeted the staff

requirements for a particular job as follows:
u 40 hours of senior consultant at $100 per hour $4,000
u 60 hours of junior consultant at $60 per hour 3,600
Calculate the following
u Budgeted staff cost for job 7,600 variances:
u The actual hours recorded were: 1. Idle time variance
2. Labour mix (weighted
u 50 hours of senior consultant at $100 per hour $5,000
average method)
u 55 hours of junior consultant at $60 per hour 3,300 3. Labour yield variance
u Actual staff cost for job 8,300
u The junior consult reported for 10 hours of the 55 hours recorded there was
no work that she could do
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Example 3 - solution

u Idle time variance : the difference between actual hours worked and the
actual hours paid for, multiplied by the standard labour rate per hour.
u Idle time variance = 10 * $60 = $600 A

Senior hours Junior hours Total hours

Actual hours 50 45 95
Actual hours in 38 57 95
std proportion (40%) (60%)
Difference in 12 A 12 A
hours
* Difference in *-$24 *$16
rate ($76-$100) ($76-$60)
Mix variance $288 A $192 A $480A
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Example 3 - solution

u Yield variance
u Standard hours for the job 100
u Actual hours for the job 95
5F
Variance in hours * std cost per hour of input *$76
Yield variance $380F

Input measure or output measure?

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Limitations of mix variance

u 1. mix and yield variance are interdependent

u 2. if management able to achieve a cheaper mix without
affecting the yield, the standard becomes obsolete and the
cheaper mix should become the new standard mix
u 3. quality are likely to be affected
u 4. mix and yield variances based on standard prices.
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Sales mix and quantity – Example 4

u A furniture company manufactures high quality dining room furniture that is sold to major
retail stores.
u Extracts from the budget for last year are given below (left: Budgeted, right: Actual)
Tables Chairs Sideboards Tables Chairs Sideboards
Sales(units) 8,000 26,000 6,000 7,200 31,000 7,800
Selling price ($) 2,200 320 2,800 2,400 310 2,500
DM per unit ($) 1,000 160 1,200 1100 150 1300
DL per unit($) 400 60 600 450 60 600
Variable OH per unit ($) 40 6 60 60 8 80

u the budgeted direct labour cost per hour was $20.

u The actual direct labour cost per hour was $18.75. actual variable overhead cost per direct labour
hour was $2.50. the company operates a JIT system for purchasing and production and does not
hold any inventory.
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Example 4

u 1. calculate the sales mix contribution variance

Tables per unit Chair per unit Sideboard per unit

Selling price ($) 2,200 320 2,800
DM per unit 1,000 160 1,200
DL per unit 400 60 600
Var OH per unit 40 6 60
Contribution 760 94 940
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Example 4: weighted average
method
Actual Actual difference Variance Mix variance 1: Calculate the standard mix
sales sales at from ratio
quantity budgeted weighted 2: Calculate the sales
mix contributi quantities in proportion to the
on per standard mix
unit 3: Calculate the difference
between actual sales
quantities and the sales
Tables 7,200 9,200 2,000 A 760-354.1 811.8 A quantities in standard mix
Chairs 31,000 29,900 1,100 A 94-354.1 286.11 A 4: Calculate the standard
Sideboards 7,800 6,900 900 F 940-354.1 527.31 F contribution per unit
5: Calculate the variance for
46,000 46,000 570.6 A each product
6: Add the individual
Standard mix ratio =?
variances
Weighted contribution per unit =?
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Example 4: individual units method

Actual Actual difference Contributi Mix

sales sales at on Mix variance
quantity budgeted (‘000)
mix

Tables 7,200 9,200 2,000 A 760 1,520 A

Chairs 31,000 29,900 1,100 F 94 103.4 F
Sideboards 7,800 6,900 900 F 940 846 F
46,000 46,000 570.6 A
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Example 4

u 2. the sales quantity contribution variance.

Budgete Actual difference Contributi Mix

d sales sales at on Mix variance
quantity budgeted
mix

Tables 8,000 9,200 1,200 F $760 912F

Chairs 26,000 29,900 3,900 F $94 366.6 F
Sideboards 6,000 6,900 900 F $940 846 F
40,000 46,000 2,124.6 F
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Example 4

u 2. the sales quantity contribution variance.

Budgeted Contributi Mix

sales on Mix variance
quantity (‘000)

Tables 8,000 $760 6,080

Chairs 26,000 $94 2,444
Sideboards 6,000 $940 5,640
40,000 14,164

u Weighted average contribution = $14,164,000/40,000 = $354.1

u Sales quantity contribution variance = (46,000 -40,000) * $354.1 = $2,124. 6 F
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Benefits and problems of mix and
quantity variance

u Benefits: u Problems:
u Sales mix variance can allow identify trends in u variance interdependence
sales of individual elements
u Controllability
u Sales quantity variance can be used to
indicate the change of size of the market or u Relevant for related products
market share
u Sales mix variance indicate future direction for
sales strategies
u Sales mix variance can be used to gauge the
success or failure of new marketing campaigns
u Responsibility accounting improved
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Planning and operational variances

u Planning variance: the part of the variance caused by an inappropriate

original (ex-ante) standard
u Favourable when the ex post standard cost is lower than the original ex ante
standard cost
u Adverse when the ex post standard cost is higher than the original ex ante
standard cost

u Operational variance – the part of the variance attributable to decisions

taken within the business that has caused a change between the revised
standard and actual results
u Controllability and responsibility
u Planning (not under operational management control)
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Example 5

u ABC Ltd produces units and incurs labour costs. Details of actual and budget for period
9 are:
Budget Actual Standard per unit
Units 500 550
Labour hours 1,000 1,200 2
Labour cost ($) 5,000 5,100 10

u A change in technology subsequently to the preparation of the budget resulted in a

25% increase in standard labour efficiency, such that it is now possible to produce 5
units instead of 4 units using 8 hours of labour – giving a revised standard labour
requirement of 1.6 hours (thus $8 labour cost ) per unit.
u Required:
u Calculate all relevant labour variance for the period
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Example 5 - solutions

u Total variance = old standard cost – actual cost = ?

u Planning Variance: (ex ante standard – exp post standard)*Actual output
=?
u Operational variance:
Labour efficiency =ex post standard * (actual hours – ex post standard hours)
=?
Labour rate = (actual rate – ex post standard rate) * actual hours
=?
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Example 6

u Big plc set up a factory to manufacture and sell “advance” , a new

consumer product. The first year’s budgeted production and sales were
1,000 units. The budgeted sales price and standard costs for “advance”
were as follows:
u Standard sales price per unit $200
u Standard costs per unit
Raw materials (10 kg at $10) $100
Labour (6 hours at $8) 48
(148)
u Standard contribution per unit 52
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Example 6

u Actual results for the first year were as follows:

u Sales (1,000 units) $316,000
u Production costs (1,000 units)
u Raw materials (10,800 kg) 194,400
u Labour (5,800 hours) 69,600
u Actual contribution (1,000 units) 52,000
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Example 6

u The MD made the following observation on the actual results

u In total, the performance agreed with budget, nevertheless, in every aspect other than volume, there are
large differences.
u Sale were made at what was felt to be the highest feasible price, but we now feel that we could have
sold for $330 with no adverse effect on volume. Labour costs rose dramatically with increased demand
for the specialist skills required to produce the product, and the general market rate was $12.50 per hour
– although we always paid below the general market rate whenever possible.
u The raw material costs that was expected at the time the budget was prepared was $10 per kg.
however, the market price relating to efficient purchase of the material during the year was $17 per kg.
u It is not proposed to request a variance analysis for the first year’s results. In any event, the final
production was equal to the original budget, so operations must have been fully efficient.
u Required:
u Despite the MD’s reluctance to calculate it, produce an operational statement for the period ignoring
the impact of any planning variance.
u Calculate the impact of the planning variance for the business
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Example 6 - Solutions

u Budgeted contribution: ?
u Sales price variance = ?
u Cost variances (total =?):
Direct material price=?
Direct material quantity =?
Direct labour rate =?
Direct labour efficiency variance =?
u Actual contribution = ?
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Example 6 - Solutions
Ex ante Ex post Planning Actual Operational Variance
variance
Sales $200 *1,000= $330*1,000 130,000F $316*1,000 = $14,000A
$200,000 = $330,000 $316,000
DM $10*10,000 = $17*10,000 70,000 A $18*10800 = Price
$100,000 = $170,000 $194,400 =($18-$17)*10,800
= $10,800A
Quantity
=(10,80010,000)*$17
=$13,600A
DL $8*6,000 = $48,000 12.5*6,000 27,000 A $12*5,800 =$69,600 Rate
=$75,000 =($12.5-12)*5,800
=$2,900F
Efficiency
=(5,800-6*1,000)*$12.5
=$2,500 F
Total Variance = $33,000 A
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Benefits and problems of planning
variance

u Benefits: u Problems:

u More useful u Subjective

u Up to date u Time consuming

u Better for motivation u Can be manipulated

u Assess planning u Can cause conflict

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Group Project – Luckin Coffee
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Group Project – Luckin Coffee

u A group of max 5 persons

u 10-15 pages report
u Questions: Painful lessons from the Luckin Coffee scandal
u Summary
u Is Luckin coffee fraudulent?
u Pricing Decision
u Management Control System
u Balanced Scorecard Framework
u Big Data