There are other acceptable approaches. Find the approach that you prefer for the yield variance calculation and use this consistently.
Material usage variance
If we add together the material mix and yield variances, we get a favourable usage variance of $580 ($913 – $333).
What do these calculations show about the performance of Kappa Co?
Over all there is a favourable mix variance. Looking at the individual variances, Gamma has a very small favourable variance. Beta has a large favourable variance and Alpha has a large adverse variance. Ignoring Gamma, we can focus our discussion on Alpha and Beta. Kappa Co has used relatively less of the more expensive material Beta, and relatively more of the cheaper material Alpha. Overall, the savings from using less Beta have outweighed the additional cost of the extra Alpha, thus resulting in a favourable total mix variance.
Is this a good thing?
To answer this, we also have to consider the yield variance as the change in mix could have made the final product more difficult to produce or could have resulted in more wastage than if the standard mix had been used. There is a direct relationship between the materials mix variance and the materials yield variance and while using a mix of materials which was different from standard, it has resulted in a saving of $913·33, it has however led to an adverse yield variance of $580 due to the significantly lower yield that Kappa Co obtained than if it had used the standard mix of materials.
Of course, the adverse yield variance could have been caused by additional factors other than simply the change of mix, but in an exam answer unless those other factors are given, it is acceptable to assume that the change in the mix has been the main reason for the lower yield.
The overall usage variance reported shows a $580 favourable variance, so it could be viewed that the change in the mix had a favourable impact overall.
For Kappa Co, if the only variance calculated was the favourable usage variance, then it would be assumed that the production manager had demonstrated a good performance and obtained more efficient production. When the mix and yield variances are considered, it is clear that the positive usage variance is caused by a change in the mix of inputs. It will need to be considered what impact this change of mix has had on the quality of the finished product and ultimately on sales. Again, this should be considered where information concerning this has been provided in the question.
Who is responsible?
In an analysis question involving variances, it is important to consider who is responsible for the variances. Some information on this should be provided in the question. For Kappa Co it is worth noting that the standards set are not the responsibility of the production manager. Also, as they are out of date (they were calculated five years ago), this could be contributing to the variances calculated.
In general, it can be assumed in exam questions that the production manager is responsible for the mix of input materials used. It can be tempting for production managers to change the product mix in order to make savings; these savings may lead to greater bonuses for them at the end of the day. However, if the quality of the product is adversely affected, this is damaging to the reputation of the business and hence its long‑term survival prospects. While substituting lower quality or cheaper input materials may in some cases lead to yield volumes that are the same as those achieved with higher quality materials, the yield may not be of the same quality.
The impact of a mix change
For a full appreciation of the impact of the mix change, the sales variances would also have to be considered, although it is likely to take time for sales volumes to be affected. Any sales volume variance that does arise as a result of poor quality products is likely to arise in a different period from the one in which the mix and yield variances arose, and the correlation will then be more difficult to prove.
Similarly, poorer quality materials may be more difficult to work with; this may lead to an adverse labour efficiency variance as the workforce takes longer than expected to complete the work. This, in turn, could lead to higher overhead costs, and so on.
Fortunately, consequences such as these will occur in the same period as the mix variance and are therefore more likely to be identified and the problem resolved.
Never underestimate the extent to which a perceived ‘improvement’ in one area (for example, a favourable materials mix variance) can lead to a real deterioration in another area (for example, decreased yield, poorer quality, higher labour costs, lower sales volumes, and ultimately lower profitability). Always make sure you mention such interdependencies when discussing variances in exam questions.
Written by a member of the Performance Management examining team