I debated about writing this post.

I had thought that maybe 4 parts discussing the different variances and their analyses were long enough. But then, I had a change of heart. Somehow 5 parts seem to be a rounder figure to end off a series. MJ the tutor presents her 5-part “Variance Analysis” series…ta-da! It does seem to have a better ring to it.

To recap, we’ve done the following variances:

- Sales variances and direct material variances
- Labour variances
- Overheads variances
- Planning variances

And today…. I promise that this will be the last of the series. Cross my heart. I reconsidered because it wouldn’t really be complete if I didn’t include the discussions about mixes and yields.

First though, we probably need to find out where do we get these mixes and yields from.

It would be a little impractical to think that all processes only used one kind of material in production. Likewise, not all production employees tend to perform the same process on the floor. Manufacturing operations can be slightly complex at times, involving different materials and labour to make a specific finished product. Mixes and yields are derived from the various types of materials and labour and their percentages that go into the process.

For today’s example, let’s focus on direct material only to help us calculate **mix and yield variances**. This should work the same way for labour mix and yield calculations as well. The simple reason for sticking with one element is so that the explanation can be clearer without a lot of factors getting in the way of understanding the calculation.

*Example information: Let’s take baking goods as our example. Baking goods are good examples as there are ingredient measurements that go into the making of it. We plan to produce a 2kg of cake by mixing 1kg of flour (material 1), 0.5kg of sugar (material 2) and 0.5kg of milk cocoa (material 3). At the time of planning, the standard price for flour is $10 per kg, $5 per kg of sugar and $4 per kg of milk cocoa. However, when we made it, the actual weight of the cake was still 2kg but the actual mix of ingredients were: 1.1kg of flour, 0.6kg of sugar and 0.3kg of milk cocoa. The prices of the ingredients also changed by the time we were preparing it. The prices were: $11 per kg of flour, $7.50 per kg of sugar and $5 per kg of milk cocoa. Calculate the mix variance.*

Since we’re only calculating the mix variance and not the price variance, we can immediately eliminate the information on actual prices. These figures are red herring information and we won’t be needing them. The standard prices would still be needed to quantify the mix and yield variance results.

Our actual total weight (of the cake) is the same as the standard total weight in this case. Actual weight of the cake was 2kg (1.1kg + 0.6kg + 0.3kg). Standard weight was 2kg (1kg + 0.5kg + 0.5kg). If it’s the same, then we don’t need to proportion the mix. We will just dive into the calculation.

**Material mix variance** for flour is calculated by taking the standard weight (1kg) and subtracting the actual weight (1.1.kg), and then we multiply the difference with the standard price ($10). This gives us the result of $1 adverse variance.

**Material mix variance** for sugar is calculated the same with standard weight (0.5kg) minus actual weight (0.6kg), and then multiplied with the standard price ($5) to give us the result of $0.50 adverse variance.

Finally, **material mix variance** for milk cocoa will give us the following: 0.5kg – 0.3kg = 0.2kg x $4 = $0.80.

Taking all the **material mix variances** of the various ingredients, this will sum up to an adverse variance of $0.70 [$1 (A) + $0.50 (A) – $0.80 (F)].

For the **material yield variance**, here’s how we get there by using the same example, just with added information.

*Example information: We plan to produce a cake by mixing 1kg of flour (material 1), 0.5kg of sugar (material 2) and 0.5kg of milk cocoa (material 3). We expect the output yield to be 92%. At the time of planning, the standard price for flour is $10 per kg, $5 per kg of sugar and $4 per kg of milk cocoa. When we eventually made the cake, the actual output was 1.9kg. Calculate the yield variance.*

First, we’ll need to calculate the standard cost of all the materials. We do this by working out the percentages of the standard mix for each material.

Material 1 – input for material 1 divided by total of all material input = 1kg/2kg = 50%

Material 2 – input for material 2 divided by total of all material input = 0.5kg/2kg = 25%

Material 3 – input for material 2 divided by total of all material input = 0.5kg/2kg = 25%

Then we use these percentages and work out the standard cost of all materials:

Material 1 – % of standard mix multiplied by standard cost = 50% x $10 = $5

Material 2 – % of standard mix multiplied by standard cost = 25% x $5 = $1.25

Material 3 – % of standard mix multiplied by standard cost = 25% x $4 = $1

Standard cost of all materials is worked out to be $5 + $1.25 + $1 = $7.25. However, because of the yield %, we’ll need to calculate this in at $7.25 x 100/92 = $7.88 per kg.

**Material yield variance** is drawn from the following:

Actual output = 1.9kgs

Expected output = 2kgs @ 92% = 1.84kgs

Calculation = Actual less expected then multiplied with the standard cost of materials = (1.9kgs – 1.84kgs) x $7.88 = $0.47. And since the actual output is higher than the expected, this variance is favourable.

This concludes our series.

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