1. Strategic Variance Analysis Ms. Chathuri Senarath University of Kelaniya

2. Material mix and yield variance When a product requires two or more raw materials in its make-up, it is often possible to sub analyze the market usage variance into a material mix and a material yield variance. Material mix variance The difference between the actual total quantity used in the standard mix and the actual quantities used in the actual mix, valued at standards costs. (Standard mix for the total actual input – Actual input) x Standard price

3. Material yield variance The difference between the standard input for what was actually output, and the actual total quantity input (in the standard mix), valued at standards costs. (Standard yield from actual total input – Actual yield) Std. cost per unit of output

4. Applicability of materials mix and yield variances These variances can be very useful in the following instances. Proportions of materials in a mix are changeable and controllable Usage variance of individual materials is of limited value because of the variability of the mix.

5. Example: The standard material cost of product alpha is as below. Material A3kg @ Rs.4 per kgRs 12 Material B5kg @ Rs. 7.20 per kgRs 36 Rs 48 During the period 3, 2000 kgs of material A (costing Rs. 8,200) and 2,400 kgs of material B (costing Rs. 19,200) were used to produce 500 units of alpha. Required: Calculate the following variances. a)Price variances b)Mix variances c)Yield variances in total and for each individual material

6. In calculating a mix variance there is another method available (alternative method) in which the mix difference is valued by taking the price difference of standard and weighted average price (WAP). The weighted average price is calculated using the following formula. WAP= Total weighted cost Total weight With the WAP calculated, the mix variance now uses a new formula. ( Standard mix for – Actual input) The difference between total actual input the std price & the WAP

7. In the alternative mix calculation, the interpretation of the variance is very different to the normal interpretation. In this one we are looking to identify whether the item is cheap or expensive, and then look at what we have done with the quantity to get the interpretation. When, Std price > WAP The item is an expensive one: = buying less is Favorable = buying more is Adverse When, Std price < WAP The item is a cheaper one: = buying more is Favorable = buying less is Adverse

8. Sales mix and yield variances Mix and Yield formulas can also be applied to Sales Volume Variance, if there is more than one type of product or service sold. Such a calculation requires the normal mix and yield formulas to be customized. Mix Variance / Sales Mix Variance Yield variances / Sales Quantity profit Variance (Standard mix for total actual sales – Actual sales) Standard profit per unit ( Total budgeted sales – Total actual sales) Std. weighted average profit per unit

9. Exercise: Sinex Ltd manufactures three products, the DTS 01, the DTS 02 and DTS 03. The budgets relating to period 01 is as follows. The actual sales in period 01 were as follows. Units sales price RsProfit per unit RsBudgeted sales unitsSandard mix % DTS 015000200050050 DTS 027000300030030 DTS 0310000400020020 Units% DTS 0170047% DTS 0230020% DTS 0350033% 1500100%

10. Variances & Working Backwards

11. Working Backwards Interpretation is based on logical situation But any working backwards needs mathematical relationship

12. Example 01 Product “A” has the following standard direct material cost, 10 Kg’s of material X at £ 10 per Kg = £ 100 per unit During period 01, 1000 Kgs were purchased at a rate of £ 12. What if the variance was given & If actual Material price was not given ?

13. Example 02 A company budgets to sell 8000 units of product J for £ 12 per unit. The product cost consists of standard variable cost of £ 5 per unit and a standard full cost of £ 7. Actual sales were 7,700 units at £ 13.00 per unit. What if the variance was given & If actual sales price was not given ?

14. Working Backwards Interpretation is based on logical situation But any working backwards needs mathematical relationship