Calder Polymers: Material Mix and Yield Variances and a Purchasing Decision

Actual prices: A $21,320 / 4,100 = $5.20/kg; B $16,240 / 5,600 = $2.90/kg.

Price variances

• A: (5.00 − 5.20) × 4,100 = $820 adverse
• B: (3.00 − 2.90) × 5,600 = $560 favourable
• Total = $260 adverse

Mix variance (actual total input 9,700 kg, re-mixed to standard 40:60) Standard mix of 9,700 kg: A 3,880 kg; B 5,820 kg

• A: (4,100 − 3,880) × $5.00 = $1,100 adverse
• B: (5,600 − 5,820) × $3.00 = $660 favourable
• Total mix = $440 adverse

Yield variance Standard input for 950 tonnes = 9,500 kg. Excess input = 9,700 − 9,500 = 200 kg. Weighted average standard cost per kg = $38.00 / 10 = $3.80 Yield variance = 200 × $3.80 = $760 adverse

Check against the total variance Actual cost = 21,320 + 16,240 = $37,560 Standard cost of output = 950 × $38.00 = $36,100 Total variance = $1,460 adverse = 260 + 440 + 760. ✓

The favourable price variance on B is not good news in isolation. The $560 favourable price variance on B has been bought with a $440 adverse mix variance (too much cheap B, too little A) and a $760 adverse yield variance (200 kg of extra input for the same output). Net effect of the substitution: $560 F − $440 A − $760 A = $640 adverse. The purchasing manager has optimised a single line of the variance report at the expense of the whole process.

Responsibility:

• Do not judge the purchasing manager on price variance alone. The fair benchmark is the net effect of the quality decision: the extra waste and slower running are consequences of the buying decision, so the mix and yield variances should be reported to purchasing, with the production manager's waste only treated as their own if the input mix is within specification.
• The $820 adverse price variance on A arises outside the new supplier decision and should be pursued separately (market price movement, or buying small quantities).
• Report all three variances together as a single 'material cost of the raw-material sourcing decision' of $640 adverse, so the trade-off is visible.

Action: obtain test data on the alternative supplier of B; if the lower specification is confirmed, negotiate a price reduction large enough to fund the waste, or revert to the original supplier. Quantify at $640 adverse per month before renegotiating.

Standards set 30 months ago are unlikely to reflect current prices, the current process, or current product specification, so every variance computed against them is contaminated:

1. Price variances become meaningless. If A's market price has genuinely risen, part of the $820 adverse variance is a planning variance caused by the standard being out of date, not a controllable purchasing failure. Judging the buyer on it damages credibility and motivation.
2. Mix and yield variances are distorted if the 40:60 mix no longer matches the current recipe or the current grade of raw material available.
3. Motivation and slack. Managers stop taking the report seriously ('we always overspend on A') and hidden inefficiency can accumulate unnoticed beneath a permanent 'adverse' that nobody investigates.

Remedy: carry out a standards review - reset material prices to current achievable levels with responsibility for the price variance judged on purchasing performance against the market, and reset the mix and yield from up-to-date process data. If the review cannot be completed quickly, split the variance into a planning element (standard vs revised standard) and an operating element (revised standard vs actual) so managers are only held to the operating part.