CHAPTER 4

MEASURING MIX AND YIELD VARIANCES

When calculating sales variances as part of variance analysis, one issue that arises is when a company
sells more than one product. Two possible scenarios can occur:

 If customers are unlikely to buy one product instead of another from the same company, then
separate sales volume variances can be calculated
 If, on the other hand, customers might substitute one product for another, then the concept of
sales mix is important and separate sales volume variances can be replaced by a combined sales
mix variance.

A mix variance occurs when the materials are not mixed or blended in standard proportions and it is a
measure of whether the actual mix is cheaper or more expensive than the standard mix. Or a mix
variance is created whenever the actual mix of inputs differs from the standard mix. A yield
variance arises because there is a difference between what the input should have been for the output
achieved and the actual input. Or a yield variance occurs whenever the actual yield (output) differs
from the standard yield.

4.1. Sales Volume Variance

The difference between the static-budget and the flexible-budget amounts is called the sales-volume
variance.
Sales Volume Variance (where standard costing is used):
= (Actual Unit Sold - Budgeted Unit Sales)   x Standard price Per Unit
Sales Volume Variance (where marginal costing is used):
= (Actual Unit Sold - Budgeted Unit Sales)   x    Standard Contribution per Unit
Sales volume variance (where absorption costing is used)
=(actual unit sold – budgeted unit sales ) x standard profit per unit

Explanation
Sales Volume Variance quantifies the effect of a change in the level of sales on the profit or contribution over
the period. Sales volume variance differs from other volume based variances such as material usage
variance and labor efficiency variance in that it calculates not just the variance in sales revenue as a result of
the change in activity but it quantifies the overall change in the profit or contribution.
The nature of the sales volume variance helps in forming a more meaningful analysis of other variances in the
preparation of the operating statement. For example, the material usage variance needs to take into account
only the difference between the actual consumption of material and the standard consumption of material for
the actual number of units sold since the sales volume variance already takes into account the variation in
material cost caused by the difference between budgeted and actual sales volume.
Sales volume variance should be calculated using the standard profit per unit in case of absorption costing
whereas in case of marginal costing system, standard contribution per unit is to be applied.

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Example: Samson Plc is a manufacturer of jeans trousers and jackets.
Information relating to Samson Plc's sales during the last period is as follows:
Trousers Units Jackets Units

Budgeted 12,000 5,000

Actual 10,000 8,000

Standard costs and revenues per unit of trouser and jacket are as follows:
Trousers Jackets
$ $

Revenue 20 50
Direct labor 5 10
Direct Material 6 15
Variable 4 10
Overheads
Fixed Overheads 2 5
Samson Plc uses marginal costing to prepare its operating statement.
Sales Volume Variance shall be calculated as follows:

Step 1: Calculate the standard contribution per unit

As Samson Plc uses marginal costing system, we need to calculate the standard contribution per unit.
Allocation of the fixed overheads may therefore be ignored.
Trousers Jackets
$ $

Revenue 20 50
Direct labor (5) (10)
Direct Material (6) (15)
Variable Overheads (4) (10)

Standard contribution per unit 5 15

Step 2: Calculate the difference between actual units sold and budgeted sales
Trousers Jackets
Units Units

Actual 10,000 8,000

Budgeted (12,000) (5,000)

Difference (2,000) 3,000

Step 3: Calculate the variance for each product
Trousers Jackets

Standard contribution per unit (Step 1) $5 $15

Actual Units Sold - Budgeted Sales (Step 2) x (2000 units) x 3000 units

Variance $10,000 Adverse $45,000 Favorable

Step 4: Add the individual variances
Sales Volume Variance ($10,000 - $45,000) =$35,000 Favorable    
Analysis

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 Favorable sales volume variance suggests a higher actual profit or contribution than the budgeted profit
or contribution.
Reasons for favorable sales volume variance include:
 Favorable sales quantity variance (i.e. higher total number of units sold than budgeted)
 Favorable sales mix variance> (i.e. higher proportion of the more profitable products sold than planned
in the budget)
Adverse sales volume variance indicated a lower actual profit or contribution than the budgeted profit or
contribution.
Causes for an adverse sales volume variance include:
 Adverse sales quantity variance (i.e. lower total number of units sold than budgeted)
 Adverse sales mix variance (i.e. higher proportion of the less profitable products sold than anticipated
in the budget)
Favorable sales volume variance can be achieved in case of a favorable sales mix variance even if the
total number of units of all products sold during the period are lower than the total budgeted units (and
vice versa).

Sales volume variance: has two parts these are;

1. Sale –mix variance:-
The sales-mix variance is the difference between (1) budgeted contribution margin for the actual sales
mix and (2) budgeted contribution margin for the budgeted sales mix. The formula and computations

SMV = actual unit of x actual sales - budgeted sales budgeted contribution

All product Sold mix percentage mix percentage margin per /unit
Explanation
Sales Mix Variance is one of the two sub-variances of sales volume variance (the other being sales quantity
variance). Sales mix variance quantifies the effect of the variation in the proportion of different products
sold during a period from the standard mix determined in the budget-setting process.
Analysis- Sales mix variance is only a relative measure of the variation in performance of an organization
and should be interpreted with care. For instance, an adverse sales mix variance may be perfectly fine where
a company is able to earn extra revenue through sale of lower margin products if such sales are in addition
to high sales of the products with higher margins.
Favorable sales mix variance suggests that a higher proportion of more profitable products were sold during
the period than was anticipated in the budget.
Reasons for favorable sales mix variance may include:

 Concentration of sales and marketing efforts towards selling the more profitable products

 Increase in the demand for the higher margin products (where demand is a limiting factor)

 Increase in the supply of the more profitable products due to for example addition to the production
capacity (where supply is a limiting factor)

 Decrease in the demand or supply of the less profitable products

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Reasons for unfavorable sales mix variance may include:

 Demand for the more profitable products being lower than anticipated

 Decrease in the production of the high margin products due to supply side limiting factors (e.g. shortage
of raw materials or labor)

 Sales team not focusing on selling products with higher margins due to for example lack of awareness or

misaligned performance incentives (e.g. uniform sales commission on the entire product range may not
motivate sales staff to compete for high margin sales)

 Increase in demand or supply of the less profitable products

2. The sales-quantity variance is the difference between (1) budgeted contribution margin
based on actual units sold of all products at the budgeted mix and (2) contribution margin in
the static budget (which is based on budgeted units of all products to be sold at budgeted
mix).

SQV = actual unit of - budgeted unit of  x budgeted sales x budgeted contribution

all product sold all product sold mix percentage margin per unit

Example: global air operate flight between New York and London, it has three class of services i.e., 1st
class, business and economy class. It is currently examining result for August 2007; unit volume is
measured in terms of a round trip- ticket. The budgeted and actual results of August are as follows.
Budgeted for August 2007
Sp/unit variable sales volume sales mix
Cost/unit In units percentage
1st class $ 3,200 $ 3000 100 5%
Business class 2,400 2300 3,000 15%
Economy class 900 800 16,000 80%

Actual results for August 2007

1st class $ 2,600 $ 2500 2,400 10%
Business class 1,600 1400 6,000 25%
Economy class 700 700 15,600 65%
Required: determine a) sales quantity variance
b) Sales mix variance and
c) Sales volume variance
a) Sales quantity variance
SQV= (Act Qty-Budgted Qty) * budgeted SM% *Budgeted CMU

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 1st class = (24,000-19,100)* 5 %* $ 200 = 49,000 F
Business class= (24,000-19,100)* 15 %* $ 100 =73,500 F
Economy class= (24,000-19,100)* 80 %* $ 100 =392, 000 F
514,500 F

b) Sales mix variance

SQV= Act Qty * (Act SM% -Budgeted SM %) *Budgeted CMU

1st class = 24,000* 10%- 5 %* $ 200 = 240,000 F

Business class= 24,000* 25% - 15 %* $ 100 =240,000 F
Economy class= 24,000* 65% - 80 %* $ 100 =360, 000 U
120,000 F
c) Sales volume variance
= SQV + SMV
= (514,500 + 120,000) = 634,500 F

Market-Share and Market-Size Variances

Market share is the company’s percentage of sales in a particular industry
Market size is number of buyer and seller of a product and service in a particular product
Market-Share Variance
The market-share variance is the difference in budgeted contribution margin for actual market size in
units caused solely by actual market share being different from budgeted market share. The formula for
computing the market share variance is as follows:

Market-share = actual market x (actual market - budgeted market) x budgeted contribution

Variance size in unit share share margin per unit
Market-Size Variance
The market-size variance is the difference in budgeted contribution margin at budgeted market share
caused solely by actual market size in units being different from budgeted market size in units. The
formula for computing the market size variance is as follows:

Market-size = (actual market -budgeted market) x budgeted market x budgeted contribution

Variance size size share margin per unit

In the Webb example, Webb had actual sales of 10,000 units and 12,000 budgeted units, at a budgeted
contribution margin of $32 per jacket. Assume that Webb derived its total unit sales budget for April
2011 from a management estimate of a 20% market share and a budgeted industry market size of 60,000
units (0.20 x 60,000 units = 12,000 units). For April 2011, actual market size was 62,500 units and actual
market share was 16% (10,000 units/ 62,500 units = 0.16 or 16%).

Market share variance = 62,500 units * (0.16 - 0.20) * $32 per unit
= $80,000 U
Webb lost 4.0 market-share percentage points—from the 20% budgeted share to the actual share of 16%.
The $80,000 U market-share variance is the decline in contribution margin as a result of those lost sales.

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 Some companies place more emphasis on the market-share variance than the market-size variance when
evaluating their managers. That’s because they believe the market-size variance is influenced by
economy-wide factors and shifts in consumer preferences that are outside the managers’ control, whereas
the market-share variance measures how well managers performed relative to their peers.

Market –size variance = (62,500 units - 60,000 units) * 0.20 * $32 per unit
= $16,000 F
The market-size variance is favorable because actual market size increased 4.17% [(62,500 – 60,000) ÷
60,000 = 0.417, or 4.17%] compared to budgeted market size.
Summery
Sales-Volume Variance = (Actual Quantity - Budgeted Quantity) x Budgeted CMu
Sales-Quantity Variance = [Actual Quantity (all) - Budgeted Quantity (all)] x Budgeted Sales Mix% x Budgeted CMu
Sales-Mix Variance = (Actual Sales Mix % - Budgeted Sales Mix %) x Actual Quantity (all) x Budgeted CMu
Market-Size Variance = (Actual Market Size - Budgeted Market Size) x Budgeted Market Share x BCMu
Market-Share Variance = (Actual Market Share - Budgeted Market Share) x Actual Market Size x BCMu
N.B. Sales volume variance = sales mix variance + sales quantity variance (market size variance + market sher
variance)

4.2. Input Variances

4.2.1. Direct Materials Mix and Yield Variances:
A. Direct Material Mix Variance:
The total direct materials mix variance is the difference between (1) budgeted cost for actual mix
of actual total quantity of direct materials used and (2) budgeted cost of budgeted mix of actual
total quantity of direct materials used(arises from a change in the relative proportion of inputs (a
materials or labor mix variance).).

Direct material = actual total quantity x actual direct material - budgeted direct budgeted price of direct
mix variance of All direct material input mix percentage material input mix percentage material inputs
input used
Explanation
Material Mix Variance quantifies the effect of a variation in the proportion of raw materials used in a
production process over a period.
Material mix variance is only suitable for performance measurement and control where the proportion of
inputs to the production process can be altered without reducing the effectiveness of the final product. It may
not therefore be used in industries that require a high degree of precision in the input variables such as in the
pharmaceuticals sector.

Analysis
A favorable material mix variance suggests the use of a cheaper mix of raw materials than the standard.

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Conversely, an adverse material mix variance suggests that a more costly combination of materials have been
used than the standard mix.

A change in the material mix must also be analyzed in the context of other organization wide implications that
may follow. Some of the effects a change in direct material mix include:

 Change in the quality, performance and durability of the final product

 Price offered by customers may vary as a result of a change in perceived quality of the product

 Change in material mix may affect the workability of materials which may in turn affect labor efficiency

B. Direct Material Yield Variance- Definition-Direct Material Yield Variance is a measure of cost
differential between output that should have been produced for the given level of input and the level of output
actually achieved during a period(measures the difference between expected output from a given level of
inputs and the actual output obtained from those inputs.).

Direct materials yield variance is the difference between (1) budgeted cost of direct materials based
on actual total quantity of direct materials used and (2) flexible-budget cost of direct materials based
on budgeted total quantity of direct materials allowed for actual output produced.
Direct material = actual total quantity - budgeted total quantity x budgeted direct x budgeted price of direct

Yield variance of all direct material of all direct material material input mix material inputs
Input used inputs allowed being used percentage
Example:-To produce ketchup of a specified consistency, color, and taste, Delpino mixes three types of
tomatoes grown in different regions: Latin American tomatoes (L), California tomatoes (C), and Florida
tomatoes (F). Delpino’s production standards require 1.60 tons of tomatoes to produce 1 ton of ketchup; 50%
of the tomatoes are budgeted to be L, 30% C, and 20% F. The direct material inputs budgeted to produce 1
ton of ketchup are as follows
0.80 (50% of 1.6) ton of L at $70 per ton $ 56.00
0.48 (30% of 1.6) ton of C at $80 per ton 38.40
0.32 (20% of 1.6) ton of F at $90 per ton 28.80
Total budgeted cost of 1.6 tons of tomatoes $123.20
Budgeted average cost per ton of tomatoes is $123.20 ÷ 1.60 tons = $77 per ton. Because
Delpino uses fresh tomatoes to make ketchup, no inventories of tomatoes are kept. Purchases are
made as needed, so all price variances relate to tomatoes purchased and used. Actual results for
June 2012 show that a total of 6,500 tons of tomatoes were used to produce 4,000 tons of
ketchup:

3,250 tons of L at actual cost of $70 per ton $227,500

2,275 tons of C at actual cost of $82 per ton 186,550
975 tons of F at actual cost of $96 per ton 93,600
6,500 tons of tomatoes 507,650

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 Budgeted cost of 4,000 tons of ketchup at $123.20 per ton 492,800
Flexible-budget variance for direct materials $14,850 U

Given the standard ratio of 1.60 tons of tomatoes to 1 ton of ketchup, 6,400 tons of tomatoes
should be used to produce 4,000 tons of ketchup. At standard mix, quantities of each type of
tomato required are as follows:

L: 0.50 * 6,400 = 3,200 tons

C: 0.30 * 6,400 = 1,920 tons
F: 0.20 * 6,400 = 1,280 tons

The direct materials mix variances are as follows:

L: 6,500 tons * (0.50 – 0.50) * $70 per ton = 6,500 * 0.00 * $70 = $ 0
C: 6,500 tons * (0.35 – 0.30) * $80 per ton = 6,500 * 0.05 * $80 = 26,000 U
F: 6,500 tons * (0.15 – 0.20) * $90 per ton = 6,500 * –0.05 * $90 = 29,250 F
Total direct materials mix variance $3,250 F
The total direct materials mix variance is favorable because relative to the budgeted mix,
Delpino substitutes 5% of the cheaper C for 5% of the more-expensive F.

The direct materials yield variances are as follows:

L: (6,500 – 6,400) tons * 0.50 * $70 per ton = 100 * 0.50 * $70 = $3,500 U
C: (6,500 – 6,400) tons * 0.30 * $80 per ton = 100 * 0.30 * $80 = 2,400 U
F: (6,500 – 6,400) tons * 0.20 * $90 per ton = 100 * 0.20 * $90 = 1,800 U
Total direct materials yield variance $7,700 U

The total direct materials yield variance is unfavorable because Delpino used 6,500 tons of tomatoes
rather than the 6,400 tons that it should have used to produce 4,000 tons of ketchup.

Analysis
A favorable material yield variance indicates better productivity than the standard yield resulting in lower
material cost.
Conversely, an adverse material yield variance suggests lower production achieved during a period for the
given level of input resulting in higher material cost.
4.2.2. Direct Labor Mix and Yield Variances
A labor mix variance (or team composition variance) can be calculated when more than one type or grade of
labor is involved in marking a product. It is a measure of whether the actual mix of labor grades is chapter or
more expensive than the standard mix. A labor yield variance (or labor output variances or team productivity
variance) can be calculated to see how productively people are working. The calculations are the same as
those required for materials mix & yield variances.

DL

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Example: Consider the following:
The budgeted labor price per a unit of output:
- 32 skilled labor hours at Br. 3 per hour
- 12 semi skilled labor hours at Br. 2 per hour
- 6 unskilled labor hours at Br. 1
Actually, 2,000 hours of direct labor was used in the week in the following manner:
- 1,120 hours of skilled labor at Br. 4 per hour
- 720 hours of semi skilled labor at Br. 3 per hour
- 160 hours of unskilled labor at Br. 2 per hour
The standard labor hours a week was 1,800 hours.
Determine the direct labor mix and yield variance for skilled, semi skilled and unskilled labors.
Solution
DL
For skilled Labor = (0.56 – 0.64) 2,000 x 3 = Br. 480 (F)
For Semi skilled Labor = (0.36 – 0.24) 2,000 x 2 = Br. 480 (U)
For Unskilled Labor = (0.08 – 0.12) 2,000 x 1 = Br. 80 (F)
Total Direct labor mix variance = = Br. 80 (F)

For skilled Labor = (2,000 – 1,800) 0.64 x 3 = Br. 384 (U)

For Semi skilled Labor = (2,000 – 1,800) 0.24 x 2 = Br. 96 (U)
For Unskilled Labor = (2,000 – 1,800)0.12 x 1 = Br. 24 (U)
Total Direct labor yield variance = Br. 504 (U)
Exercise
1. Suppose a Chemical company has the following input standards to produce nine gallons of a
single output, product X.

5 gallons of Material A at Br. 0.70 per gallon = Br. 3.50

3 gallons of Material B at Br. 1.00 per gallon = Br. 3.00
2 gallons of Material C at Br. 0.80 per gallon = Br. 1.60
10 gallons = Br. 8.10

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 The standard cost of a single product X is Br. 0.90 (8.10/9)
Suppose for simplicity, there is no inventories of direct materials are kept. Purchases are made
as needed, so that all price variance relate to materials used. Actual result shows that 100,000
gallons of the three inputs in total were used during a given period, in the following manner:

45,00 gallons of Material A at actual cost of Br. 0.80 per gallon = Br. 36,000
33,00 gallons of Material B at actual cost of Br. 1.05 per gallon = Br. 34,650
22,00 gallons of Material C at actual cost of Br. 0.85 per gallon = Br. 18,750
= Br. 89,350
Finished product of product X was 92,070 gallons at standard cost of Br. 0.90 per gallon.
Total actual cost Br. 89,350
Total standard cost Br. 82,863
Total variance to be explained Br. 6,487 (U)
Required: Calculate price, efficiency, mix, and yield variance for each material.
2. Refer the above question, and assume the production process uses the following:
- One skilled labor hour at Br. 20
- Two unskilled labor hours at Br. 11
The actual labor hour is 9,000 hours consisting of the following:
- 3,400 hours of skilled labor at Br. 21
- 5,600 hours of unskilled labor at Br. 10
And the standard output is 10 gallons per hour. Thus, the standard hours of labor allowed
for actual output of 92,070is 9,207 hours.

Required; determine the direct labor mix and yield variance for skilled and unskilled labors.

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