Mix Variance and Yield Variance
Mix Variance and Yield Variance:
Learning Objective of the article:
- Define and explain Mix Variance and yield variances.
- Why mix and yield variances are calculated?
Basically, the establishment of standard product cost requires the determination of price and quantity standards. In many industries, particularly of the process type, materials mix variance and materials yield play significant parts in the final product cost, in cost reduction, and in profit improvement.
Materials specification standards are generally set up for various grades of materials and types of secondary materials. In most cases, specifications are based on laboratory or engineering tests. Comparative costs of various grades of materials are used to arrive at a satisfactory materials mix, and changes are often made when it seems possible to use less costly grades of materials or substitute materials.
In addition, a substantial cost reduction might be achieved through the improvement of the yield of good product units in the factory. At times, trade offs may occur; e.g., a cost saving resulting from use of a less costly grade of materials may result in poorer yield, or vice versa. A variance analysis program identifying and evaluating the nature, magnitude, and causes of mix and yield variances is an aid to operations management.
Mix Variance:
Definition and Explanation:
After the standard specification has been established, a variance representing the difference between the standard cost of formula materials and the standard cost of the materials actually used can be calculated. This variance is generally recognized as a materials mix variance or blend variance, which is the result of mixing basic materials in a ratio different from standard materials specifications. Industries like textiles, rubber, and chemicals, whose products must posses certain chemical or physical quantities, find it quite feasible and economical to apply different combinations of basic materials and still achieve a perfect product. In cotton fabrics, it is common to mix cotton from many parts of the world with the hope that the new mix is accompanied by either a favorable or unfavorable yield of the final product. Such a situation may make it difficult to judge correctly the origin of the variance. A favorable mix variance, for instance, may be offset by an unfavorable yield variance, or vice versa. Thus any apparent advantage created by one may be canceled by the other.
Yield Variance:
Definition and Explanation:
Yield can be defined as the amount of prime product manufactured from a given amount of materials. The yield variance is the result of obtaining a yield different from the one expected on the basis of input. In sugar refining, a normal loss of yield develops because, on the average it takes approximately 102.5 pounds of sucrose in raw sugar form to produce 100 ponds of sucrose in refined sugars. Part of this sucrose emerges as black strap molasses, but a small percentage is completely lost.
In the canning industry, it is customary estimate the expected yield of grades per ton of fruit purchased or delivered to the plant. The actual yield should be compared to the one expected and should be evaluated in terms of cost. If the actual yield deviates from predetermined percentages, cost and profit will differ.
Since the final product cost contained not only materials but also labor and factory overhead, a yield variance for labor and factory overhead should be determined when the product is finished. The actual quantities resulting from the processes are multiplied by the standard cost, which includes all three cost elements. A labor yield variance must be looked upon as the result of the quality and /or quantity of the materials handled, while the factory overhead yield variance is due to the greater or smaller number of hours worked. It should be noted that the overhead yield variance may have a significant effect on the amount of over or under absorbed factory overhead.
Difficulties Encountered in Process Costing Procedures:Learning objectives of this article: What are the difficulties or Limitations in a process costing procedure? Certain difficulties likely to be encountered in actual practice should be mentioned with regard to process cost accounting procedures: The determination of production quantities and their stage of completion presents problem. Every computation is influenced by these figures. Since the data generally come to the cost department from operating personnel often working under circumstances that make a precise count difficult, a certain amount of double counts and unreliable estimates are bound to exist. Yet, the data submitted from the basis for the determination of inventory costs. Materials cost computations frequently require careful analysis In the illustrations materials are generally considered to the the cost of first department. In certain industries, materials costs are not even entered on production reports. When materials prices are influenced by fluctuating market quotations, the materials cost may be recorded in a separate report designed to facilitate management decisions in relation to the materials market. The discussion of lost units by shrinkage, spoilage, or evaporation indicates that the time when the loss occurs influences the final cost calculation. Different assumptions concerning the loss would result in departmental unit costs, which, in turn effect inventory costs, the cost of units transferred, and the completed unit cost. Another consideration involves the possibility of treating cost attributable to avoidable loss as an expense of the current period. Industries using process cost procedures are generally of the multiple product type. Joint processing cost must be allocated the the products resulting from the processes. Weighted unit averages or other bases are used to prorate the joint cost to the several products. If units manufactured are used as a basis for cost allocation, Additional clerical expenses are necessary if the labor hour or machine hour basis is used for charging overhead to work in process. Management must decide whether economy and low operational cost are compatible with increased information based on additional cost computations and procedures. It should be noted that some companies use both process costing and job order costing procedures for various purposes in different departments. This is particularly true when a parallel or selective cost flow format is required. Each system or method employed by a company must be based on reliable production and performance data which, when combined with output, budget, or standard cost data, will provide the foundation for effective cost control and analysis.
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Other Related Accounting Articles:
- Overall or Net Factory Overhead Variance
- Fixed Overhead Efficiency Variance
- Factory Overhead Efficiency Variance
- Direct Labor Yield Variance
- Managerial Usefulness/Importance of Variance Analysis
- Standard Costing and Variance Analysis Formulas
- Variable Overhead Efficiency Variance
- Factory Overhead Yield Variance
- Factory Overhead Volume Variance
- Factory Overhead Controllable Variance
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