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Here is a question;
Mix and yield variances
A chemical company has the following standard cost for producing 9 litres of a
lubricant:
? 5 litres of material P at $0.70 per litre
? 5 litres of material Q at $0.92 per litre.
There are no inventories of materials, and all material price variances relate to
materials used. Actual results showed that 100,000 litres of materials were used
during a particular period as follows:
? 45,000 litres of material P: cost $36,000
? 55,000 litres of material Q: cost $53,350
During the period 92,070 litres of the lubricant were produced.
Required
Calculate the total materials cost variance and analyse it into its price, usage, yield
and mix components.And this was my answer, expected yield is 90% so if 100,000 litres were input we would expect 90,000 liters output but we got 92070 of output so that we have a favourable yield of 2070* standard cost of output per unit (8.1) so that we get a favourable variance of $16767. I got 8.1 by doing (5*0.70) + (5*0.92) = 8.1. So is this correct?
I’m asking because my book get’s an answer of $1863 (F). so which is correct?
I think it is the usage/YIELD variance in your book’s solution:
USAGE
100,000 should produce 90,000
but produced 92,070
which means 2,070 F /9 litres of lubricant unit = 230 x 5 litres of P/Q = 1150 litres of each*
which means 1150 x 0.7 = 805 for P
and 1150 x 0.92 = 1058 for Q
total 1863 F
* or to put it another way 1150 litres of P + 1150 litres of Q = 2300 X 90% (as you point out) = 2070MIX actual @std mix actual@ actual mix variance price total
P 50,000 litres 45000 litres 5000 F 0.7 3500 F
Q 50,000 litres 55000 litres 5000 A 0.92 4600 A
T 100,000 100,0000 – 1100 AYIELD std@std mix actual@std mix variance price total
P 51150** 50000 1150 F 0.7 805 F
Q 51150** 50000 1150 F 0.92 1058 F
T 102300 100000 2300 F 1863 F** 92070/9=10230 X5 litres=51150 In other words it would take 51150 litres of each material to produce the 92070 litres of lubricant
PRICE
P 45000X0.7 = 31500 – 36000 = 4500A
Q 55000X0.92 = 50600 – 53350 = 2750A
TOTAL 7250 AI am not sure this is correct but I hope it helps
sorry TWO correctionS
USAGE
P 51150 45000 6150F @ 0.7 = 4305F
Q 51150 55000 3850A @ 0.92 =3542ATOTAL 763F
OR MIX+YIELD 1100 A + 1863 F = 763F as per my previous response
TOTAL
P 51150 @0.7 = 35805
Q 51150 @ 0.92 = 47058TOTAL AT STD COST = 35805 + 47058 = 82863
ACTUAL COST P 36000 + Q 53350 = 89350
VARIANCE 89350-82863 = 6487 A
OR PRICE+USAGE = 7250 A* – 763 F = 6487 A
* see PRICE in my previous answerI think it is ok now! I have calculated the yield variance twice in my previous response and labeled it usage…OOPS sorry.
I hope you can figure it out with this correction and get over my confusion…
All the best of luck for Monday
Cheersthank you you are correct but will I get more than one answer booklet in the exam, as the initial answer booklet just has 20 pages and I tend to use at least 24 pages for my F5 exam. So will I get more than one answer booklet?
If you don’t know, then please Mr. Moffat, please confirm this on his behalf. Thanks
hi there, sorry but i dont understand how you’ve worked out your total variance. i was thinking you compare the actual cost with the AQ.SP.
when you add the variance analysis above, are they not meant to add up to the total variance?
thanksHi Frank,
If you check both my answers you will see the solutions there. I got confused and calculated the yield twice and put it as usage in the first response.
To your question: Yes they add up because the USAGE variance 763 F can be broken down to MIX + YIELD (1100 A + 1863 F)
and the TOTAL variance is PRICE + USAGE (7250 A + 763 F = 6487 A)If you calculate the TOTAL on its own without breaking it down to any of its components then it goes something like this:
The 92070 litres of lubricant produced would take 92070/9 (which is what 5+5 litres of P and Q produce) = 10230 x 5 litres of P/Q (since we are lucky to have a 5:5 or 1:1 mix) = 51150 of each. Another way of looking at it is 51150+51150 = 102300 x 90% (which the yield rate as Gabriel points out initially) = 92070 litres of lubricant. I know it may be a bit confusing but you have to keep in mind that 5+5 litres produce 9 litres output. In other words it is not the standard approach where you have x+y litres producing 1 unit of output. If you understood that then we can proceed:
So 92070 litres of lubricant would take 51150 P and 51150 Q which would cost 51150*0.7= £35805 plus 51150*0.92 = £47058. Consequently the total cost of P+Q to produce 92070 litres of lubricant SHOULD BE 35805+47058 = £82863
BUT it took 45000 P and 55000 Q costing 36000 + 53350 respectively = £89350So it costed us to more produce 92070 litres of lubricant (£89350) than it should have costed us £82863 so the total variance is adverse 89350 – 82863 = £6487 A.
As you can realise from the narrative of the calculation it is a combination of usage (102300 litres total vs 45000+55000 = 100000 litres in total) and price (51150*0.7 + 51150*0.92 = 82863 vs 36000+53350=89350 actual total costs.
This is why price + usage variance will add up to the total variance.
Usage though can be broken down even further to mix and yield as we have a combination of 2 components and mix + yield variance will add up to the usage variance.The main point to commend is that even though we paid more than we should we had a better yield (1863 F). This indicates that we bought a better quality of materials. Given that the mix variance is adverse we also have mixed the materials in different way using less P and more Q which also helped to the end result of higher output.
I hope it is clear now
Good luckchrispantazis’s answer is correct:
Price variance $7250 (A)
Mix variance $1100 (A)
Yield variance $ 1863 (F)Total variance $6487 (A)
The check on the total variance is as follows:
Standard cost: for every 9 litres produced the cost should be $8.10, which is $0.90 per litre
Actual production at standard cost = 92070 x $0.90 = $82863
Actual total cost = $36000 + $53350 = $89350
Total variance = 89350 – 82863 = $6487 (A)chrispantazis’s answer is correct:
Price variance $7250 (A)
Mix variance $1100 (A)
Yield variance $ 1863 (F)Total variance $6487 (A)
The check on the total variance is as follows:
Standard cost: for every 9 litres produced the cost should be $8.10, which is $0.90 per litre
Actual production at standard cost = 92070 x $0.90 = $82863
Actual total cost = $36000 + $53350 = $89350
Total variance = 89350 – 82863 = $6487 (A)thanks for that, i got the mix, yield and price and usage variances, what was confusing me was the total cost and i was incorrectly adding up all the four variances expecting them to add up to total variance, my mistake.
am sorted now thanx
i love this site!!! OT
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