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Nasihu Ltd. has the following standards for producing an alcoholic beverage:
Concentrate 590N – 50 litres @ Ug.Sh.100 = Ug.Sh. 5,000
Concentrate KAG – 50 litres @ Ug.Sh.300 = Ug.Sh.15,000
100 litres Ug.Sh.20,000
Every 100 litres of input should yield 80 litres of Chovi, the finished product.
The production manager is supposed to make the largest possible amount of finished product for the least cost. He has some leeway to alter the combination of materials within certain wide limits, as long as the finished product meets specified quality standards. Actual results showed that 400,000 litres of Chovi were produced during last week. The raw materials used in this production were 280,000 litres of 590N and 240,000 litres of KAG. No price variances were experienced during the period. Required:
- A presentation of yield and mix variances. (13 marks)
- Comment on the performance of the manager. (7 marks)
Answer for the above Question
Yield and Mix Variances
Standard costs of finished products is Shs.20,000 = Shs.250 per liter
80
280,000 liters of 590N @ Shs.100 =Shs.28,000,000
240,000 litters of KAAG @ Shs.300 Shs.72,000,000
520,000 = 100,000,000
Good output was 400,000 liters @ a standard
Cost of 250 per litter = 100,000,000
Material efficiency variance = Shs. 0 liter
The difference in quantities were.
| (1) | (2) | |||
| Budgeted | Actual | |||
| Material | Calculation | Liters | Liter | Differences |
| 590N | 0.5(500,000) | 250,000 | 280,000 | -30,000 |
| KAG | 0.5 (500,000) | 250,000 | 240,00 | +10,000 |
| TOTAL | 500,000 | 520,000 | -20,000 |
Shs.
Yield variances
590 N -30,000 x Sh.200 =- 6,000,000 (U)
KAG +10,000 x Sh.200 = +2,000,000 (f)
– 4,000,000 (U)
Mix Variances
590N -30,000 x (100 – 200) shs.= +3,000,000 (F)
KAG +10,000 x (300 – 200) sh.= +1,000,000 (F)
4,000,000 (F)
b) The manager apparently altered the mix by introducing a higher proportion of the less expensive ingredients. However, this resulted in an equal trade off. As you might suspect the yield of good product is likely to suffer from a higher than normal proportion of the cheaper ingredient. If this phenomenon would
not occur, there would be a higher proportion of the cheaper ingredient at all times.
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