ACCA F5: Chapter 11 - Advanced Variances

1 Material mix and yield A product contains more than one type of material and these materials are interchangeable.

1 Material mix and yield 1) Marterial price (expenditure) and material useage. 2) Did you pay the right amount for the materials? (This assumes that the mix etc are correct, just looking at cost). What was actually used for each material and what was actually paid. Compare to what was actually used and what should have been paid. 3) Material useage is the total of the mix and yield variance. Mix variance is looking at for our total actual useage, how does the actual mix compare to the standard mix.Actual amount used at actual cost for each material. Then break our actual useage total down as per the standard ratio, then using the standard cost for materials, calculate the price. The variance is the difference between the two. Yield variance - are we using too much material?Actual useage per material at the standard cost. Compare to the standard useage at standard cost.

1 Material mix and yield A favourable total mix variance would suggest that a higher proportion of a cheaper material is being used hence reducing the overall average cost per unit.

1 Material mix and yield An adverse total yield variance would suggest that less output has been achieved for a given input, i.e. that the total input in volume is more than expected for the output achieved.

1 Material mix and yield - cost- quality- performance measurement

1 Material mix and yield - the relationship between cost, quality and price. Reducing the cost of input materials by using a greater proportion of a cheaper material may reduce the quality of the product and lead to a reduction in the price that can be charged; - costs of reduced quality. Using a greater proportion of a cheaper input material may lead to higher quality failure costs; - impact on other variances. Increasing the proportion of a cheaper input material may result in increased labour costs or overhead costs if this leads to more time having to be spent producing a product. Increased rejects may lead to higher overhead costs

1 Material mix and yield In a performance measurement system managers are often rewarded for improving the performance of cost and/or revenues under their control. The production manager may be responsible for the material mix decision and, if the reward system is based on achieving cost savings, then the cheapest mix may be used. This may have a detrimental effect on company profit if quality is reduced and this leads to a lower price or quality failure costs. It may therefore be preferable to reward managers on the basis of total company profit so that the full impact of the mix decision is taken into account.

1 Material mix and yield - quality measures e.g. reject rate, time spent reworking goods, % waste, % yield - average cost of inputs- average cost of outputs - average prices achieved for finished products - average margins - % on-time deliveries - customer satisfaction ratings - detailed timesheets - % idle time

2 Sales mix and quantity variances Sales mix and quantity variances are based on the sales volume variance where there is more than one product being sold, and the products are (to some degree) inter-changeable. The sales mix profit variance explains how the change in sales mix contributed to the sales volume profit variance : it compares the actual sales quantity in the actual mix with the actual sales quantity in the standard mix, valued at the standard profit per unit.

2 Sales mix and quantity variances 1) Sales price variance, sales volume variance. 2) Sales price variance - did we sell at the right price? Actal sales at the actual price compared to the actual sales at the standard price. 3) Sales volume is did we sell as much as expected? Actual sales at standard price compared to budgeted sales at standard price. This can be broken down further into: Sales mix profit varianceActual sales per type at the standard profit, compared to actual sales broken down into the standard mix times the standard profit. Sales quantity profit varianceActual sales at standard mix at the standard profit, compare to budgeted sales at standard profit.

3 Planning and operational variances The standard is set as part of the budgeting process which occurs before the period to which it relates. This means that the difference between standard and actual may arise partly due to an unrealistic budget and not solely due to operational factors. The budget may need to be revised to enable actual performance to be compared with a standard that reflects these changed conditions.

3 Planning and operational variances

3 Planning and operational variances - Sales - Material - Labour

3 Planning and operational variances Sales volume is budgeted sales units compared to actual sales units. Multiply by profit/cont for the variance. Planning (Market size) - Original budgeted units compared to revised budgeted units. Multiply by standard margin for variance. If increased ist Fav, decreased avd. Operational (Market share) - Revised budget units compared to actual sales in units. Multiply by margin for variance.

3 Planning and operational variances Planning:Original flexed budget compared to revised flexed budget. Operational:revised flexed budget compared to actual results.