Mix Variance and Yield Variance:
Learning Objective of
- Define and explain mix 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 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
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
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.
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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