Advanced Variance Analysis

By Justyna Wachulka-Chan •  Updated: 11/15/22 •  10 min read
What is advance variance analysis

Advanced Variances are part of P2 (Advanced Management Accounting) CIMA syllabus and seem to be problematic for most of the students. Here is our video about Mixed and Yield Variances and Planning and Operational Variances.

Recently we have released P2 Complete Video Course that covers that topic in more details. 

Currently we have video courses for P1, P2P3, E3 and F3

Hello, in this video  we’re gonna be having a look  at some of the advanced variances that are examinable  for CIMA PT Advanced Management Accounting  and the two sets of Advanced Variances  we’re gonna be looking at in this short video  are Mixed and Yield variances  and Planning and Operational variances. 

So let’s start off then, by looking at Mix and Yield.  Traditionally, we would calculate variances  for materials based on price and usage.  Now if there are more than one materials  input into a process  and there is an element of substitutability  between those products…  So for example, we might have… 

Going into a pasta sauce  we’re gonna be having to look at in a minute,  we might have some tomatoes and some onions  going into a pasta sauce,  you could have more onions and less tomatoes  and that would be a difference in mix  and it makes sense to consider the impact then  of a difference in mix. 

What we’re not gonna be looking at here is for example,  if you were making cars, it would be an odd thing to say  you can substitute steering wheels for tires,  you couldn’t really have  one more steering wheel and one less tire,  it just wouldn’t work. 

So if there’s an element of substitutability  between the materials, you’ve got more than one material,  then we can have a look at the impact  of the inputs being in a different mix to a standard  and the financial impact of that  and also the yield, the results, what came out, the outputs  from the process compared to what should’ve come out. 

So the mix and the yield variances between them  are a sub-analysis of the usage variance,  so that means, if you add together mix and yield,  you should get back to your traditional usage variance.  Easiest to see, as always I think, by looking at an example,  so we’re gonna have a look at that pasta sauce example now. 

So what we’ve got on the left-hand side here  is the standard cost card, so it’s just a standard recipe  for one batch of pasta sauce.  We have a kilo of onions goes in there  and we have a kilo of tomatoes,  the onions are relatively inexpensive at $2.00 a kilo,  the tomatoes, $4.00 a kilo,  so the cost of one batch of pasta sauce  is $6.00 worth of materials.  So that’s our standard, that’s our budget,  that’s our recipe. 

What actually happened in the period  we’re gonna be looking at is we made 550 batches  using 600 kilos of tomatoes and 530 kilos of onions,  so I can already tell, in terms of the mix there,  that we’ve used more onions than tomatoes  and in the standard mix it was equal amounts of each one,  so that must mean it’s a more expensive mix,  I’m expecting not good news  when it comes to the mix variance. 

So mixed variance, first of all then,  is trying to look at the financial impact of the inputs  having gone into the cooking process  at a different mix to standard.  So first of all, here’s our actual mix,  we actually put in 530 kilos of onions  and 600 kilos of tomatoes,  so in total, 1,130 kilos of material went in.  What we’re looking at now is that 1,130 kilos  in total that went in, if that went in in the standard mix  and that was half and half onions and tomatoes,  then that would have been 565 kilos of each. 

All we’ve done there is take the 1,130 total inputs  and split it 50/50 between the two.  So we’ve got ‘Actual inputs did take’  and ‘Actual inputs should take’,  I suppose we could change the word  from ‘take’ to ‘mix’ there, ‘Actual input did mix’  and ‘Actual input should mix’.  So we’ve got, for onions,  the actual inputs did go in, 530,  should have don 565, so we’ve used 35 less onions  than the standard mix, so that’s good news in itself,  multiply that by the standard price,  because this isn’t a price variance,  so it’s always valued up at standard,  just like the usage variances,  gives it a $70.00 favorable variance on onions. 

But when we look at tomatoes,  we actually used 600 kilos of tomatoes  compared to the standard recipe of 565,  so we were 35 over there and they are more expensive,  so 35 times $4.00 is $140.00 adverse,  so overall, we’ve got an adverse mix variance,  because we’re using more of a more expensive ingredient. 

So mix; inputs-focused,  yield; what’s come out, given what’s gone in.  So, our standard cost card  said we needed two kilos of materials to produce one batch,  so given that 1,130 kilos went in,  we would have expected that to produce,  divide that by two, 565 batches.  What it did yield was 550 batches,  which is not great again,  that’s 15 batches less than we would have expected. 

Now we are concerned about the mix of that 1,130,  because this isn’t the mix variance,  we’ve already looked at that,  so we’re just looking at it in total and we value that up,  remember that’s 15 batches of pasta sauce  and a standard cost of a batch of pasta sauce was $6.00,  so 15 x 6 gives us  an adverse yield variance of $90.00.  So if I take the mix and yield variance  and add them together,  that comes out to my overall usage variance on materials,  90 + 70 is 160 adverse. 

Now you can apply this to labor as well actually,  so you’d use different grades of labor,  as opposed to different types of material,  but you do very similar calculations there.  So that’s Mix and Yield then.  The other set of variances we’re gonna look at  is Planning and Operational variances,  which is essentially correcting the budget  to make it a fair benchmark.  What we traditionally do, is compare the actual results  with our original budget, our flexed original budget  and say; Is it favorable or adverse?  What we’re saying now is; If the budget needs revising,  because of either a mistake in the original budget  or things outside the organization’s control have happened,  like the market shrunk  or the worldwide price of something has gone up,  something like that, then we should correct the budget  for those things before we actually use them  to assess our actual performance. 

So what we’d do, first of all, is correct the budget  and that’s what we’re gonna call a Planning Variance  and then, once you’ve corrected the budget,  you then compare the actual results to that corrected budget  and that’s what we call the Operating Variance.  The planning variance plus the operating variance  should come back to the traditional variance overall,  but what we’re doing here  is ensuring we’ve got the correct accountability,  because the people who produce the actual results  should be held accountable for the operating variances  and the people who put the plans together  should be held accountable for the planning variances,  but let’s have a look at an example. 

So if we have an original budget  of 10,000 kilos of material  at $5.00 a kilo and that comes to $50,000  and let’s suppose we actually purchased 11,000 kilos  at $5.50 a kilo, that would come to $60,500,  so the traditional variance would just be to compare–  Suppose though, there’s an error in the original budget  and it should have said $6.10 rather than $5.00.  Let’s say the world price of this material  went up over the period,  it’s not fair to assess actual performance  with that original $5.00 if it’s now out of date,  so what we’re gonna do, first of all,  is correct that to $6.10. 

So we always flex to actual,  so 11,000 kilos originally cost $5.00  in the original budget,  but now we’re gonna correct that to $6.10,  so that means that we’re gonna increase the costs  for what we would have expected to have to pay to $67,100  and that’s an adverse variance,  because it’s increasing our costs. 

All planning variances are bad news,  whether they’re technically favorable or adverse,  it just means the plans weren’t right, that’s all,  but $12,100 is a planning variance  and we’d need to see the person  who put the budget together to discuss that. 

Now we’ve corrected that benchmark to $67,100,  we can now use that as a fair benchmark  for comparing to our actual performance,  so actually, a fair benchmark is $6.10,  it actually only cost us $5.50,  so by the time we multiply those each by 11,000 kilos,  that comes out to be $6,600 favorable,  so in actual fact,  our operational performance was very good,  ’cause the world price went up to $6.10,  we managed to get it for $5.50.

 So what started off as looking like  bad operational performance at $5,500  traditional adverse variance there, once you split it into  the planning and operational elements,  we can actually see this is a planning issue,  operationally, we actually performed quite well. 

Now the last thing I would say about planning variances  is that correcting the original budget  should be exceptional, it should be unusual,  because what you don’t want is for it to get to be a habit  in the organization of people being able to say;  Well, the budget was wrong,  that’s why actual is not looking great,  because the budget was wrong in the first place.  The budget is supposed to be…  Of course it’s not right, because it’s not actual,  no one ever said it had to be actual,  it was just a statement of what you think  the cost is going to be at a point in time  to give you that yardstick, that fair benchmark  to compare to actual performance. 

So it should be exceptional, so it doesn’t undermine  the original budget as a fair target.  So that’s our new variances for paper P2  Advanced Performance Management  or Advanced Management Accounting.  We’ve looked there at planning and operating variances  and mix and yield.  I hope that’s been useful to you  and I hope the studies are going well.  Best of luck with the real exam.  (bright piano music)   

Justyna Wachulka-Chan