Fifth edition Alnoor Bhimani Charles T. Horngren Srikant M. Datar Madhav V. Rajan Farah Ahamed

Bhimani, Horngren, Datar and Rajan, Management and Cost Accounting, 5
th
Edition, Instructor’s Manual
© Pearson Education Limited 2012 Fixed manufacturing overhead
not given)

€320,000

€320,000
(39,000 × €8.00)
€312,000
↑
↑
€8,000 U
Never a variance Production-volume variance Total manufacturing overhead
( given)
€600,000
(€240,600 + €320,000)
€560,600
(€234,000 + €320,000)
€554,000
(€234,000 +
€312,000)
€546,000
↑
€39,400 U
↑
€6,600 U
↑
€8,000 U
↑ e. Spending variance f. Efficiency variance g. Production-volume variance Denominator level in hours
40,000
Production volume in standard hours allowed
39,000
Production-volume variance
1,000 hours
× €8.00 = €8,000 U

248
© Pearson Education Limited 2012
C HAP TE R 1 7
Measuring yield, mix and quantity effects
Teaching tips and points to stress
Input variances
When manufacturing fruit-flavoured drinks, sugar, fructose and corn syrup are to some extent substitutable sweeteners. In contrast, in a plant that produces frozen Mexican style ready meals, beef and chicken are not substitutable. Here, a substitution would change the fundamental character of the product. Chapters 15 and 16 focused on subdividing the FBV into price and efficiency variances and the static budget was not used in those calculations. Chapter 16 subdivides the SVV into the SMV and the SQV. For this purpose, the actual column is not used. This chapter subdivides the efficiency variance (a component of the FBV) into mix and yield components. For this purpose, neither the actual nor the static-budget column is used. As an alternative to the columnar method illustrated in Exhibit 17.1, remind students that price and efficiency variances can also be calculated using the formula approach described in Chapter
15. For each type of input, the price variance is
AQ
purchased
× Difference in price
=
AQ
purchased
× (BP – AP) For Aliya’s Jonagold apples, this is 975 tonnes × (tonne – tonne) = €5,850 U. The efficiency variance is
BP
× Difference in quantity
= BP
× (TBQIA – AQ
used
) where TBQIA is the total budgeted quantity of inputs allowed for the actual outputs. For Aliya, this is tonne × (1,280 tonnes – 975 tonnes) = €27,450 F. Mix variances arise only when inputs are substitutable. If there can be no substitutions, the mix of inputs is constant. The mix variance becomes 0 and the entire efficiency variance is attributable to the yield variance. The mix and yield exhibits in Chapter 17 each have three columns and students often fail to realise that it is NOT the same three columns in each exhibit. Emphasise that the three columns in Exhibit 17.2 area decomposition of the efficiency variance from Exhibit 17.1. Column 1 in Exhibit 17.2 corresponds to column 2 in Exhibit 17.1 and column 3 in Exhibit 17.2 corresponds to column 3 in Exhibit 17.1. The intuition behind the material (and labour) mix and yield variances is analogous to the intuition behind the sales mix and quantity variances. The yield variance tells us whether we used more or less total material (or labour) inputs than budgeted, given the actual number of

Bhimani, Horngren, Datar and Rajan, Management and Cost Accounting, 5
th
Edition, Instructor’s Manual
© Pearson Education Limited 2012 outputs. It is the difference between the actual and budgeted quantities of inputs at the budgeted mix (i.e. holding the mix constant. The material (labour) mix variance arises because the mix of materials (labour) differs from the budget. It is the difference between the actual and budgeted mix for the actual quantity of inputs (i.e. holding the total quantity of inputs constant. Yield and mix-variance calculations are, here, based on the budgeted price per unit of material or labour. Keeping prices constant at the budgeted amounts allows us to compare (1) the actual quantity of total inputs with the budgeted quantity and (2) the actual mix with the budgeted mix, without input prices affecting the results. However, companies differ in how they calculate mix and yield variances, so it is important that accountants gain a clear understanding of the definitions used in each individual company. If there is a material-mix variance, the variance must be F for at least one individual material and U for at least one other material. If we use a lower than budgeted percentage of some material inputs, then we must have used a higher than budgeted percentage of at least one other input (e.g. in the example in Exhibit 17.1, we cannot useless than 30% of British Coxes and less than 20% of Jonagold’s and less than 50% of Golden Delicious. The same intuition applies to labour-mix variances. Stress the intuition behind the labour yield and mix variances. The yield variance is the difference between budgeted and actual quantity of total labour-hours, at budgeted mix and budgeted prices. The mix variance is the difference between actual and budgeted mix, at actual total labour-hours and budgeted prices.

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