## **Learning Outcomes**

After reading this article, you will be able to calculate, split, and interpret mix and yield variances for materials and labour. You will distinguish planning from operational variances, explain why these splits improve performance evaluation, and apply analytical techniques to real-world or ACCA exam scenarios.

## **ACCA Advanced Performance Management (APM) Syllabus**

For ACCA Advanced Performance Management (APM), you are required to understand how advanced variance analysis supports performance evaluation and control, particularly where multiple materials or labour types are involved. This article addresses:

- The calculation and meaning of mix and yield variances for both materials and labour
- The distinction between planning and operational variances and how this split improves accountability
- Application of variance analysis to scenarios with input substitution and yield measurement
- The use of advanced variances to inform management action, identify controllable factors, and recognise limitations

## **Test Your Knowledge**

_Attempt these questions before reading this article. If you find some difficult or cannot remember the answers, remember to look more closely at that area during your revision._

1. Which variance highlights process efficiency by assessing total output from a set of inputs?  
   a) Mix variance  
   b) Yield variance  
   c) Rate variance  
   d) Price variance

2. In a manufacturing setting, the proportion of cheaper ingredients used increases while premium ingredients decrease. Which variance captures the effect of this change?

3. True or false? Splitting variances into planning and operational components helps ensure managers are only judged on factors within their control.

4. Briefly explain why yield variances are particularly important when output from inputs can vary due to process losses or inefficiency.

## **Introduction**

Variance analysis is a key management tool for measuring operational performance against predefined standards. When products require combinations of materials or labour grades, basic variance analysis may not provide detailed feedback. Advanced variance analysis goes further by splitting usage or efficiency variances into mix and yield components. This highlights both the effect of changing proportions of inputs (mix) and the effectiveness with which total input is converted into output (yield).

In addition, separating total variances into planning and operational elements improves fairness and directs corrective action. This article explains these advanced variance calculations, their importance, and the justification behind planning versus operational splits. You will also practise analysis through worked examples and practical recommendations.

> **Key Term: mix variance**  
> The part of the usage or efficiency variance that results from using input quantities in different proportions from the standard mix.
>
> **Key Term: yield variance**  
> The part of the usage or efficiency variance that results from the difference between actual total output and expected output for the total input used.
>
> **Key Term: planning variance**  
> The part of a total variance arising because the original standard was unrealistic due to changes outside management control (e.g. market shifts, unforeseen events).
>
> **Key Term: operational variance**  
> The part of a total variance arising from management action or inaction, judged against a revised, realistic standard.

## Mix and Yield Variances for Material and Labour

Where products are made from several materials or labour types, the total usage (material) or efficiency (labour) variance can be decomposed as:

- **Mix variance:** Reflects the cost impact of differing from the standard input proportions.
- **Yield variance:** Reflects the impact on total output for a given total input.

### Material Mix Variance

Material mix variance quantifies the effect of substituting one material for another compared to the standard recipe, holding total input constant.

**Formula:**  
Material Mix Variance = (Actual input of each material – Revised standard input for actual total input) × Standard cost per unit

A positive mix variance may indicate cost savings from substituting cheaper materials, but might also affect output yield or quality.

### Material Yield Variance

Material yield variance measures difference in total output from the inputs used, relative to what should have been produced for that input quantity.

**Formula:**  
Material Yield Variance = (Actual output – Expected output for actual input) × Standard weighted average cost per unit of output

This variance isolates the effect of efficiency in converting total materials into finished output.

### Labour Mix and Yield Variances

The same analysis applies for labour where work is done by different grades or rates. Changing the mix affects costs and potentially efficiency.

- **Labour mix variance:** The effect of using a different combination of staff grades than standard, holding total hours worked constant.
- **Labour yield variance:** The effect on total output (or services delivered) compared to the output expected from the hours worked.

## The Planning and Operational Variance Approach

Traditional variance analysis might hold managers responsible for all deviations from standard, regardless of cause. Splitting variances separates the effect of planning (non-controllable, e.g. unrealistic standards or unforeseen circumstances) from operational (controllable, i.e. actual performance vs. revised achievable standard) factors. This improves clarity in performance evaluation.

### **Worked Example 1.1**

**A food company specifies a standard recipe for 1,000 units as: 600kg of X (cost \$1/kg) and 400kg of Y (cost \$2/kg). In a period, the company uses 650kg of X and 410kg of Y (total input 1,060kg) to produce 950 units. Calculate the material mix and yield variances.**

> **Answer:**  
> **Step 1:** Calculate standard mix for actual input (1,060kg):  
> X: 1,060 × (600/1,000) = 636kg  
> Y: 1,060 × (400/1,000) = 424kg  
> **Mix variance:**  
> X: (650 – 636) × \$1 = \$14 A  
> Y: (410 – 424) × \$2 = (\$28) F  
> Total: \$14 A + (\$28) F = \$14 F  
> **Step 2:** Standard output from 1,060kg input = 1,060 units  
> Yield variance: (950 – 1,060) × [(600 × \$1) + (400 × \$2)] / 1,000  
> = (–110 units) × \$1.80 = \$198 A  
> The small favourable mix was outweighed by the substantial adverse yield.

### **Worked Example 1.2**

**A service firm budgets 300 hours per week: 180 hours senior staff (\$20/hr), 120 hours junior staff (\$10/hr). Actual hours: 160 senior, 140 junior; output (completed jobs) same as budgeted. Calculate the labour mix variance.**

> **Answer:**  
> Standard total hours: 300  
> Standard mix for actual total hours: 300 × (180/300) = 180 senior; 120 junior  
> Actual: 160 senior (20 fewer), 140 junior (20 more)  
> Mix variance:  
> Senior: (160 – 180) × \$20 = $(400) A  
> Junior: (140 – 120) × \$10 = \$200 F  
> Net: $(200) A  
> The shift to more junior hours results in an adverse mix variance, even though total hours and output are unchanged.

## Splitting Variances: Planning vs Operational

When circumstances outside management control cause a standard to become outdated (e.g. input price spike, machine failure), the variance can be split as follows:

- **Planning variance**: Difference between original and revised (achievable) standard.
- **Operational variance**: Difference between revised standard and actual result.

This ensures managers are assessed only on factors within their control.

### **Worked Example 1.3**

**In the example above, suppose a supply shortage required the company to alter the standard mix to X 650kg, Y 410kg (for 1,000 units) from this period onward. How would the mix variance be split?**

> **Answer:**
>
> - **Planning mix variance:** Difference between original and revised standard mix (not controllable this period).
> - **Operational mix variance:** Difference between revised standard mix (now 650kg X, 410kg Y) and actual usage.  
>   This split isolates the uncontrollable impact due to revised supply conditions.

### **Exam Warning**

> In exam scenarios, always check if the question requires calculation or discussion of planning and operational splits. If management was notified of a standard change, only operational variances relate to their performance.

## Interpretation and Limitations

Mix variances signal cost effects of input substitutions but may mask deeper process problems if a yield variance arises. Always analyse both together. Yield variances often point to waste, inefficiency, or quality changes. In service settings, yield can highlight productivity issues.

Mix and yield variances are most relevant when inputs can be substituted flexibly and total outputs are measurable. If no substitution or output variability exists, detailed mix/yield analysis may not add value.

### **Revision Tip**

> Split between planning and operational variances when changes to standards arise from factors outside managers' control. Only operational variances should be used for evaluating managerial performance.

## **Summary**

Advanced variance analysis provides greater detail than basic price and usage/rate variances, separating effects of changing input combinations and overall conversion efficiency. Planning/operational splits further improve fairness and clarity. Always interpret variances in context, paying attention to both mix and yield effects and the cause of deviations.

## **Key Point Checklist**

_This article has covered the following key knowledge points:_

- Define and calculate material and labour mix and yield variances
- Explain how mix and yield variances split the usage/efficiency variance
- Distinguish planning from operational variances and understand their purpose
- Apply variance splitting in scenarios involving updated standards
- Interpret mix and yield variances for management control and process improvement
- Recognise limitations and ensure variance analysis is only used where appropriate

## **Key Terms and Concepts**

- mix variance
- yield variance
- planning variance
- operational variance

Advanced operating and planning variances - Mix and yield material and labour