CHAPTER FIVE MEASURING YIELD, MIX AND QUANTITY EFFECTS Learning Objectives: After studying this chapter, you should be able to Distinguish between variance analysis procedures where inputs cannot be substituted for one another and those where inputs can be so substituted Understand how direct materials yield and mix variances highlight trade offs among material inputs Explain direct manufacturing labor yield and mix variances Describe the insight gained from dividing the sales volume variance into the sales mix and sales quantity variances Explain how market size and market share variances provide different explanations fora sales quantity variance INTRODUCTION Comparing actual results with budgets can help managers evaluate operations and focus on areas that deserve more attention. Chapter 4 illustrated various uses of variance information relating to direct materials, direct manufacturing labor, direct marketing labor, manufacturing overhead and marketing overhead. While Chapter focused on a single input in each cost category (for example, only one direct material, this chapter considers multiple inputs in each cost category (for example, many types of direct materials. Also, we discuss revenue and sales mix and quantity analysis for companies with multiple products. INPUT VARIANCES Here we focus on variance analysis for inputs in manufacturing organizations. Manufacturing processes often require that a number of different direct materials and different direct manufacturing labor skills be combined to obtain a unit of finished product. In the case of some materials and labor skills, this combination must be exact. For example, the manager of a Siemens plant that assembles laptop computers prespecifies the type of chip to be used in each computer. Substituting a Pentium®III fora Pentium®IV chip will alter the final product. We refer to these materials as non- substitutable materials. In the case of other materials, a manufacturer has some leeway in combining the materials. For example, to manufacture fertilizers, Cargill Fertilizers can combine materials (for example, elemental phosphorus and acids) in varying proportions. Elemental phosphorus and acids are substitutable materials. When inputs are substitutable, mix refers to the relative proportion or combination of the different inputs used within an input category such as direct materials or direct manufacturing labour to produce a quantity of finished output. Yield refers to the quantity of finished output units produced from a budgeted or standard mix of inputs within an input category. Yield and mix variances are useful when examining direct materials and direct- labour inputs. Consider, for example, the production of ice- cream. Ice-creams contain multiple material ingredients. Walls Nut n Crunch ice- cream, for example, has milk, cream, 1
cocoa, chocolate, caramel and different kinds of nuts. Managing the total quantity and mix of ingredients is essential to making high quality ice-cream at a competitive cost. Direct materials yield and mix variances help managers to achieve these goals. Recall from the previous Chapter that a variance is the difference between an actual result and a budgeted amount, when that budgeted amount is a financial variable reported by the accounting system. Budgeted figures discussed in this chapter can be obtained from Internally generated actual costs from the most recent accounting period, sometimes adjusted for expected improvement Internally generated standard costs based on best performance standards or currently attainable standards Externally generated target cost numbers based on an analysis of the cost structures of the leading competitors in an industry.