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of £222,300 e.g. greater productivity from the material consumed. The total of the mix and
yield variance gives the material usage variance which is £191,925 favourable. This is a
huge variance and could indicate that the original budget is incorrect e.g. it could due to poor
planning. I would recommend prior periods should be investigated to see the overall trend of
these material variances.
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Example 5.6 part (b) continued
1.2 Merits and drawbacks of calculating material mix and yield variances
As mentioned before the material usage variance can be subdivided into a mix and yield
variance where there exist two or more ingredients that can be substituted for one another.
The sum of the material mix and yield variances will total the sum of the material usage
variance. X Ltd manufactures a product which uses three materials which are inter-
changeable. For this period X Ltd has been able to use cheaper materials (B & C) relative to
a more expensive material (A) to improve their situation e.g. lowering cost and therefore
increasing profit. The merit of using the mix calculation is that we can see exactly how much
money has been saved for each material as well as understanding the overall composite of
how materials were mixed together, something a material usage variance in isolation would
not have told us.
However the quality of the product does require careful inspection and it would be interesting
to see if there are any complaints from customers about the quality of the product. For
example mixing more water and less concentrated flavour to make a drink can certainly give
a favourable mix variance (water is cheaper) but it can have an effect on the quality of the
end product, in this case the taste of it. The chemical produced in the case of X Ltd could be
poorer quality or ineffective because of a deviation in mix. The same problem can be applied
to the yield, a favourable yield variance indicates you are short changing the customer e.g. X
plc may not be delivering exactly 23 kg of chemical for every unit of product P (ignoring
evaporation in the process) customers are getting less product for their money.
These problems in turn could have a damaging impact on the X Ltd brand image and
reputation, in turn leading to loss of customers and lower sales. Therefore the mix and yield
variances must be interpreted and used very carefully, ideally if the standard information is
correct you should have no variances at all. A short term favourable variance could result in
a poorer quality product and long term decline in sales.
I hope you find this information useful.
Signed: Accountant
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Example 5.7
Labour Mix calculation - individual valuation bases
Actual Mix Standard Mix Standard hours Standard rate
Partner 12 3 / 20 x 90 = 13.5 1.5 £100 150.00 (F)
Semi-senior 40 5 / 20 x 90 = 22.5 -17.5 £70 -1,225.00 (A)
Junior 38 12 / 20 x 90 = 54.0 16 £30 480.00 (F)
90 90.0 0.0 -595.00 (A)
Labour Mix calculation - average valuation bases
Actual Mix Standard Mix Standard rate - Average rate
Partner 12 13.5 1.5 £100 £50.50 -49.50 74.25 (F)
Semi-senior 40 22.5 -17.5 £70 £50.50 -19.50 -341.25 (A)
Junior 38 54.0 16 £30 £50.50 20.50 -328.00 (A)
90 90.0 0.0 (W1) -595.00 (A)
W1 Weighted average standard rate
(3/20 x £100) + (5/20 x £70) + (12/20 x £30) = £50.50
or £1,010 Std cost ÷ 20 Std hours = £50.50
Labour yield (productivity) variance
90 hours did yield 5.0 audits
90 audits should yield (90 hours/20 hours an audit) 4.5 audits
0.5 audits
x standard cost of an audit (£1,010)
£505(F)
Operating statement
5 audits should cost (based on standard mix of labour) 5 x £1,010 = £5,050
Labour mix variance £595 (A)
Labour yield variance £505 (F)
5 audits did cost (12 hours x £100) + (40 hours x £70) + (38 hours x £30) = £5,140
Note: the actual rates paid to all staff were the same as the standard rate
77
Example 5.9 (CIMA past exam question)
Sales quantity contribution variance
Economy Premium Deluxe
Selling price $2.80 $3.20 $4.49
Direct labour ($0.50) ($0.50) ($0.50)
Direct material ($1.00) ($1.60) ($2.20)
Variable overheads ($0.65) ($0.65) ($0.65)
Contribution $0.65 $0.45 $1.14
Actual Budget Difference Contribution Variance
sales at sales
budget mix quantity
(W1)
Economy 193,500 180,000 13,500 (F) $0.65 $8,775 (F)
Premium 387,000 360,000 27,000 (F) $0.45 $12,150 (F)
Deluxe 279,500 260,000 19,500 (F) $1.14 $22,230 (F)
860,000 800,000 60,000 (F) $43,155 (F)
Sales mix contribution variance
Actual Actual sales Difference Contribution Variance
sales at budget
quantity mix (W1)
Economy 186,000 193,500 7,500 (A) $0.65 $4,875 (A)
Premium 396,000 387,000 9,000 (F) $0.45 $4,050 (F)
Deluxe 278,000 279,500 1,500 (A) $1.14 $1,710 (A)
860,000 860,000 $2,535 (A)
Workings
W1 Actual sales at budget mix
Economy = 180 / 800 x 860,000 = 193,500
Premium = 360 / 800 x 860,000 = 387,000
Deluxe = 260 / 800 x 860,000 = 279,500
78
Example 5.10 Part (a)
Tip: It is important that all workings are clearly shown to support your financial
statement. Make sure also your layout is clear and easy to follow. Other formats of
presenting the information below would have been acceptable.
For actual costs you can derive these using the flexed budgeted cost (based on 29,600
services) and the total of the favourable or adverse variances given. Note that the
30,000 original budget for services would be irrelevant. It is always actual not
budgeted production volume that drives a cost variance.
Actual costs incurred for the six months ended
£
Flexed budgeted material cost (W1) 1,184,000
Material price variance 1,100 (A)
Material usage variance 22,000 (A)
Actual material cost 1,207,100
Flexed budgeted labour cost (W1) 976,800
Labour rate variance 130,671 (F)
Actual labour cost 846,129
Flexed budgeted variable overhead (W1) 444,000
Variable overhead expenditure variance 11,000 (A)
Actual variable overhead 455,000
Flexed budgeted fixed overhead (W1) 710,400
Fixed overhead expenditure variance 18,000 (A)
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