Verda Chem - Separating Price, Mix and Yield Effects in a Blending Process
Verda Chem blends two raw materials into one finished product. The standard recipe for 1,000 kg of output is 750 kg of Material A at ₹40 per kg and 500 kg of Material B at ₹26 per kg; standard process loss is 20% of input. The production budget for the month was 8,000 kg of output, and actual results were:
Used: 6,300 kg of A at ₹41 per kg; 4,300 kg of B at ₹24 per kg. Output: 8,000 kg, with the balance lost in processing.
The purchasing manager obtained the ₹2 discount on B by switching to a lower-grade supplier and claims credit for a favourable price variance. The works manager says his team followed the recipe and blames the loss on the new material. Both will attend the monthly review, where the plant accountant must present a variance analysis that separates the effects and assigns them fairly. The factory's investigation policy is to examine any variance above 5% of the standard cost of that material.
1. Compute the material price, mix and yield variances and reconcile them to the total material cost variance.
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Standard for actual output of 8,000 kg: input 10,000 kg (8,000 ÷ 0.80) - A 6,000 kg, B 4,000 kg. Standard cost = (6,000 × ₹40) + (4,000 × ₹26) = ₹2,40,000 + ₹1,04,000 = ₹3,44,000. Actual = (6,300 × ₹41) + (4,300 × ₹24) = ₹2,58,300 + ₹1,03,200 = ₹3,61,500.
Total material cost variance = 3,44,000 − 3,61,500 = ₹17,500 A.
Price variance:
- A: (40 − 41) × 6,300 = ₹6,300 A
- B: (26 − 24) × 4,300 = ₹8,600 F
- Net = ₹2,300 F
Mix variance (actual input 10,600 kg in standard proportions 60:40 → A 6,360 kg, B 4,240 kg; standard cost ₹3,64,640): Actual quantity at standard price = ₹3,63,800. Mix variance = 3,63,800 − 3,64,640 = ₹840 F - the mix used slightly more of the cheaper B (40.6% against 40%).
Yield variance = 3,64,640 − 3,44,000 = ₹20,640 A.
Reconciliation: ₹2,300 F + ₹840 F + ₹20,640 A = ₹17,500 A ✓.
In physical terms, 10,600 kg was consumed to make what should have taken 10,000 kg - 600 kg of extra input at the weighted standard cost of ₹34.40 per kg (₹43,000 ÷ 1,250 kg). Actual loss was 24.5% against the 20% allowed.
2. Assess the purchasing manager's claim to credit and estimate how much of the adverse result his decision caused.
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The discount is worth 4,300 kg × ₹2 = ₹8,600 - real, cash, and properly attributable to purchasing. But the same decision changed the process: the loss rate moved from the 20% allowed to 24.5%, and the yield variance of ₹20,640 A is the money cost of the 600 kg of extra input consumed.
Attributing the yield loss is a matter of judgement, not arithmetic certainty. Supporting the link: the switch and the loss coincide in time; the mix variance is only ₹840 F, so the recipe itself was broadly followed; and the loss occurs in processing, not in stores. Against: some excess loss may be normal process variation, and the 6,300 kg of A at ₹41 (above standard) suggests wider supply pressure that month.
On a net basis the decision cost roughly ₹20,640 − ₹8,600 = ₹12,040 - the "saving" destroyed value.
The fair report: purchasing generated ₹8,600 of genuine price benefit, but the supplier change is associated with ₹20,640 of yield loss, so the price variance should not be credited in isolation or used as the basis of a bonus. Practical action: run a controlled trial of the original and the cheap B on the same equipment, then either re-set the standard mix and loss allowance or revert to the original supplier. If the cheap B is retained, the standard must be revised so that future yield variances measure genuine performance rather than a known material change.
3. How should these variances be reported for responsibility accounting, and what caveat applies to the mix variance?
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- Price variance → purchasing. Measured at purchase, largely within its control. Here ₹2,300 F, below the 5% investigation threshold (5% × ₹3,44,000 = ₹17,200).
- Yield variance → production. ₹20,640 A, well above the threshold, so it must be investigated. Report it alongside the physical figures (10,600 kg used against 10,000 kg allowed) so the manager sees the loss as well as the money.
- Mix variance → production, with a caveat. Normally the production manager controls what goes into the blender. At ₹840 F it is small and favourable; but if the mix was forced by the grade of B supplied, the effect belongs to purchasing and should be disclosed as such rather than quietly credited to production.
Reporting rules that make the statement useful: show each variance in rupees and in physical units; flag whether the cause is expected to recur; and never give one manager a favourable variance that arises from another manager's decision.
Caveat on the mix variance: it is not purely controllable. It responds to material availability, quality and machine performance, and a favourable mix variance can be the first symptom of a quality problem that appears as an adverse yield - exactly the pattern here. Reading the two together (₹840 F mix, ₹20,640 A yield) is what reveals the story; reading either alone would mislead the review.