Meridian Foods: Material Mix and Planning Variances
Meridian Foods bottles a premium cooking sauce. The standard material content of 900 litres of finished sauce is 600 kg of ingredient A at £2.00 per kg and 400 kg of ingredient B at £1.00 per kg; the process loses 10% of input volume through evaporation. In October the plant produced 4,500 litres. It used 3,100 kg of A costing £6,510 and 1,900 kg of B costing £1,805. The direct labour standard is 0.5 hours per litre at £12.00 per hour; actual labour was 2,300 hours costing £30,360. The purchasing manager bought A from an alternative supplier after the usual supplier failed to deliver. The market price of A had risen to £2.15 per kg at the time of purchase, a rise not reflected in the standard. The production director wants the purchasing manager's bonus cut because of the adverse material price variance, and the quality manager reports that the sauce consistency has changed, requiring extra thickening agent that is not in the standard.
1. Calculate the material price, mix and yield variances, and the labour rate and efficiency variances, for October.
Read the worked answer
Standard data per 900 litres: 1,000 kg input (600 A, 400 B) costing £1,600. Standard cost per litre of output = £1,600 ÷ 900 = £1.7778.
Output 4,500 litres = 5 standard batches, so standard input is 5,000 kg (3,000 A, 2,000 B) and standard material cost is 5 × £1,600 = £8,000.
Material price variance
- A: (2.00 − 2.10) × 3,100 = £310 adverse (actual price = 6,510 ÷ 3,100 = £2.10)
- B: (1.00 − 0.95) × 1,900 = £95 favourable (actual price = 1,805 ÷ 1,900 = £0.95)
- Total price variance = £215 adverse
Material mix variance (actual total input 5,000 kg, standard mix 3,000 A / 2,000 B)
- A: (3,000 − 3,100) × £2.00 = £200 adverse
- B: (2,000 − 1,900) × £1.00 = £100 favourable
- Mix variance = £100 adverse
Material yield variance
Input was exactly 5,000 kg, the standard quantity for 4,500 litres, so the yield variance is nil. Total material variance = 215 + 100 = £315 adverse, which agrees with £8,315 actual cost less £8,000 standard cost.
Labour
- Standard hours for 4,500 litres = 2,250; actual rate = 30,360 ÷ 2,300 = £13.20.
- Rate variance: (12.00 − 13.20) × 2,300 = £2,760 adverse
- Efficiency variance: (2,250 − 2,300) × £12.00 = £600 adverse
- Total £3,360 adverse
2. Split the material price variance into planning and operational elements and advise whether the purchasing manager's bonus should be reduced.
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Planning and operational split (ingredient A)
Revised standard price = £2.15 per kg, reflecting the market movement known at the time of purchase.
- Planning variance: (2.00 − 2.15) × 3,100 = £465 adverse - caused by an out-of-date standard, not by purchasing.
- Operational variance: (2.15 − 2.10) × 3,100 = £155 favourable - purchasing bought £0.05 per kg below the revised market price.
- Check: 465 adverse less 155 favourable = £310 adverse, the original price variance.
Advice
Reducing the bonus would be unfair and behaviourally damaging. The conventional price variance of £310 adverse is more than explained by the £465 planning element, which arose because the standard was not updated when the market moved. On a like-for-like basis the purchasing manager delivered a £155 favourable operational result, having also kept production running after the usual supplier failed. That is exactly the behaviour the bonus should reward.
The correct control response is procedural: introduce a standard-revision trigger when market prices move beyond an agreed threshold, and separate planning from operational variances in the monthly report so responsibility is assigned to the manager who controls the factor. The production director should also be aware that the £100 adverse mix variance and the thickening-agent complaint are operational issues within production's control, and that the A price rise may itself reflect a quality difference that is now driving extra processing cost.
3. Interpret the mix and yield variances and explain what they indicate about the production process and the standard itself.
Read the worked answer
The mix variance is £100 adverse because the actual input contained 62% A against a standard 60%: 3,100 kg rather than 3,000 kg of the dearer ingredient, offset by 100 kg less of the cheaper B. Something disturbed the planned recipe. Possible causes include a shortage or quality problem with B, deliberate substitution to protect yield, or loose mixing control on the line.
The yield variance is nil, and this is the important part of the interpretation. The process converted 5,000 kg of input into exactly the expected 4,500 litres, so the richer mix did not create waste. A favourable yield variance alongside an adverse mix variance is a common pattern: the plant may have used more of the expensive ingredient precisely to hold output up. Judged on mix alone the month looks poor; judged on mix plus yield the material usage total is £100 adverse on a £8,000 standard, which is only 1.25% and may be commercially acceptable.
The quality manager's report complicates the picture. If the higher A proportion changes consistency and forces extra thickening agent, the true cost is understated, because the thickening agent sits outside the standard. The accountant should quantify that extra cost, add it to the mix analysis, and consider whether the standard recipe and the standard price of A (now £2.15) both need revision. The performance report should show mix and yield together, never mix in isolation, and should flag quality consequences that the variance system does not capture.