Bhadrak Ceramics: A Material Variance That Hides a Quality Decision
Bhadrak Ceramics produces a glaze blend. The standard cost card for 1,000 kg of usable glaze specifies 600 kg of Material A at ₹40 per kg and 500 kg of Material B at ₹24 per kg; the process loses 100 kg of every 1,100 kg charged, and that loss is treated as normal. For the quarter just ended, output was 9,400 kg of usable glaze. The stores ledger shows 5,900 kg of A consumed at ₹43 per kg and 4,600 kg of B at ₹22 per kg. Material A is bought from a single approved vendor under an annual contract. Material B was switched to a new supplier mid-quarter after a quality complaint, and the works chemist reports that the new B carries a lower alumina content, which the kiln operators compensated for by charging more A to hold the glaze specification. The plant manager's quarterly report shows a single total material cost variance and blames the purchase department for buying dear. The CFO wants the variance broken into its parts and a view on who is accountable for each.
1. Compute the material price, mix, yield and usage variances for the quarter, showing your workings.
Read the worked answer
Standard for actual output. Standard input per 1,000 kg output = 1,100 kg, i.e. 1.1 kg per kg of output.
- Standard input for 9,400 kg = 10,340 kg: A = 600/1,100 × 10,340 = 5,640 kg; B = 500/1,100 × 10,340 = 4,700 kg.
- Standard cost per kg of output = ₹36,000 / 1,000 = ₹36; standard cost of output = 9,400 × 36 = ₹3,38,400.
- Actual cost = (5,900 × 43) + (4,600 × 22) = 2,53,700 + 1,01,200 = ₹3,54,900. Total variance = ₹16,500 adverse.
Price variance (actual qty × actual price − actual qty × standard price):
- A: (43 − 40) × 5,900 = 17,700 A; B: (22 − 24) × 4,600 = 9,200 F. Total ₹8,500 A.
Mix variance (actual mix vs standard mix in the actual total input of 10,500 kg):
- Revised standard: A = 600/1,100 × 10,500 = 5,727 kg; B = 4,773 kg.
- A: (5,900 − 5,727) × 40 = 6,920 A; B: (4,600 − 4,773) × 24 = 4,152 F. Total ₹2,768 A (say ₹2,760 A).
Yield variance (excess input valued at the weighted standard rate of 36,000/1,100 = ₹32.727):
- Actual input 10,500 − standard input 10,340 = 160 kg excess × 32.727 = ₹5,236 A.
Check: 8,500 + 2,768 + 5,236 = 16,504 ≈ ₹16,500 A. Usage variance = mix + yield = ₹8,000 A. All three reconcile to the total.
2. Interpret each variance: what actually drove the quarter's loss, and who is accountable for which part?
Read the worked answer
Price variance, ₹8,500 adverse - purchasing. Almost all of it is Material A: ₹43 against a contracted ₹40, an increase with no volume explanation. Because A is a single-vendor annual contract, this is a buying or contract-management failure and should sit with purchasing. Note the trap: B's ₹9,200 favourable price variance is not a success. B was switched precisely because of a quality complaint, and the cheap price is the cause of the downstream loss.
Mix variance, ₹2,768 adverse - production, but conditionally. Operators charged 5,900 kg of A where a standard mix would have used 5,727 kg, substituting expensive A for cheap B. Ordinarily that is a works decision. Here it was a rational response to a lower-alumina B: the operators protected the specification. So the variance is adverse in the cost report but the cause sits upstream in the vendor change. Accountability follows the cause, not the ledger.
Yield variance, ₹5,236 adverse - the real loss. 160 kg of excess input is material that went into the kiln and came out as scrap or rework. This is the largest single element and it is not a price issue at all; it is a process and quality issue.
Overall reading. Of the ₹16,500 adverse total, ₹8,500 is price and ₹8,000 is usage; within usage only ₹2,768 is mix and ₹5,236 is yield. The plant manager's single-line report suppresses exactly this distinction and lets the works side shelter behind a purchasing headline. The report should be redrawn by cause before any blame is allocated.
3. Recommend how the standard, the reporting and the vendor arrangements should change so the variance report measures performance fairly.
Read the worked answer
Reset the standard for B. A standard mix written for the old B is not a valid benchmark once alumina content changes. The chemist should state the specification required (alumina percentage, moisture, shrinkage) and the mix should be re-standardised against an approved input; until that is done, the mix and yield variances measure a specification mismatch, not efficiency.
Separate the quality decision from the price decision. Introduce a quality-adjusted comparison: value B at its price per unit of alumina delivered rather than per kg. On that basis the 'cheap' supplier may well be the expensive one, and the purchase price variance of ₹9,200 favourable disappears.
Move the price variance to where the decision is made. Price variance should be computed at the point of purchase and reported to the central buying team, not absorbed into a plant cost report the plant cannot control. Mix and yield should be reported to the works manager - but only variances computed against a mix the plant is authorised to use.
Behavioural fix. Require the vendor change to pass a quality gate before it takes effect, with the chemist and the works manager signing off, and hold a joint monthly review of price, mix and yield so that no function can optimise its own line at the expense of the total. Add a rework and scrap account so the ₹5,236 of yield loss appears in rupees the plant can act on.