Measurement, Yield

& Productivity
Aman Nogia

2806

Anurag 2845
Madhur Khanna

2857

Repalli Durga Babu 2820

Sampath Kumar AP 2868
Tenzin Lhonden

2873

STRUCTURE OF PRESENTATION

PRODUCTIVITY & SALES VARIANCES

INPUT VARIANCES
YIELD

MEASUREMENT

PARTIAL PRODUCTIVITY
TOTAL FACTOR PRODUCTIVITY

VARIANCE ANALYSIS

OBJECTIVES
Sales Variances:
Sales Volume Variance
Sales Quantity Variance
Sales Mix Variance

Market Variances
Market Size Variance
Market Share Variance

Input Variances
Direct Material Variances
Direct Labor Variances

A GLIMPSE
Sales varianceis the difference between actualsalesand budget sales. It is
used to measure the performance of a sales function, and/or analyze business
results to better understand marketconditions.
Reasons why Actual Sales vary from Budgeted :
(a) The volume sold varied from plan (sales volume variance)
(b) Sales were at a different price from what was planned (sales price
variance).
(c) Both scenarios could also simultaneously contribute to the variance.

 Sales Price Variance: The sales price variance reveals the difference in
total revenue caused by charging a different selling price from the
planned or standard price.
Sales Volume Variance is further sub-divided into two variances.
Sales Mix Variance
Sales Quantity Variance

AN EXAMPLE : SALES VARIANCE

A Co. plan to to sell 5 products at Rs.3 each, for a budgeted sales of:
(5*Rs.3)=Rs.15. In Actual, 6 products were sold at Rs.2 each, for an
actual sales of: (6*Rs.2)=Rs.12. The total variance was thus (Rs.12
Rs.15)=Rs.3 Unfavourable or minus Rs.3, since total sales was less than
planned.
So With the above example, We are clear that the Sales Variance occur
on the difference between Actual Sales and the Budgeted Sales.

AN EXAMPLE : SALES PRICE VARIANCE

In the example, the sales price variance was 6*(Rs.2Rs.3)= -Rs.6
unfavourable or minus Rs.6, since the sales price was less than
planned.
As 6=Actual Quantity sold
Rs.2=Actual Selling Price
Rs.3=Planned Selling Price

SALES VARIANCE (contd.)

Sales Volume Variance
Sales Volume Variance is the measure of change in profitor contributionas a
result of the difference between actual and budgeted sales quantity.

FORMULA:
1. Sales Volume Variance(where absorption costing is used):
= (Actual Unit Sold - Budgeted Unit Sales) x Standard ProfitPer Unit

2. Sales Volume Variance(where marginal costing is used):

= (Actual Unit Sold - Budgeted Unit Sales) x Standard ContributionPer Unit

Sales Volume Variance quantifies the effect of a change in the level of sales
on the profit or contribution over the period.
Sales volume variance differs from other volume based variances such
asmaterial usage varianceandlabor efficiency variancein that it calculates
not just the variance in sales revenue as a result of the change in activity
but it quantifies the overall change in the profit or contribution.

 The nature of the sales volume variance helps in forming a more

meaningful analysis of other variances in the preparation of the
operating statement.
For example, the material usage variance needs to take into account
only the difference between the actual consumption of material and
the standard consumption of material for the actual number of units
sold since the sales volume variance already takes into account the
variation in material cost caused by the difference between budgeted
and actual sales volume.

AN EXAMPLE : SALES VOLUME VARIANCE

Sales Volume Variance is calculated as: Budgeted selling price*(Actual
sales volume Budgeted sales volume)
With the above example,
Sales Volume Variance : Rs.3*(6-5)=3 units favourable.
Where, Rs.3=Budgeted Selling Price
6=Actual Sales Volume
5=Budgeted Sales Volume

TOTAL VARIANCE
Sales Price Variance + Sales Volume Variance = Total Variance
That is, The total variance can thus be seenalgebraicallyto be (minus
Rs.6) plus (plus Rs.3), giving (Rs. 3). Or: -6+3=-3.
(-Rs.6) = As we got from Sales Price variance.
(+3) = As we got from Sales Volume variance.

 Sales Quantity Variance

Sales Quantity Variance measures the change in standard profit or
contribution arising from the difference between actual and anticipated
number of units sold during a period.
FORMULA:
1. Sales Quantity Variance (Where Marginal Costing is used):
= (Budgeted sales - Unit Sales at Standard Mix) x Standard Contribution

2. Sales Quantity Variance (Where Absorption Costing is used):

= (Budgeted sales - Unit Sales at Standard Mix) x Standard Profit

Sales quantity variance is an extension of thesales volume variancewhich

demonstrates the impact of a higher or lower sales quantity as compared to

budget.
The difference between sales volume variance and sales quantity variance is

that the former is calculated using the actual sales volume whereas the latter is
calculated using the sales volume of products in the proportion of standard mix.

 Example
Aliengear Inc. is a small company that specializes in the manufacture and
sale of gaming
computers. Currently, the company offers two models of gaming PCs:
Turbox - A professional gaming PC with a water-cooling system priced at
$2,500
Speedo - An entry level gaming PC with standard fan cooling priced at $1,000
Aliengear budgeted sales of 1,600 units of Turbox and 2,400 units of Speedo

The sales team at Aliengear managed to sell 1,300 units of Turbox and 3,700 units of
Speedo during the last year.
Calculation of Sales Mix Variance:
Step 1: Calculate the standard mix ratio

Turbox :1,600 / (1,600 + 2,400) % = 40%

Speedo :100% - 40% = 60%
Step 2: Calculate the sales quantities in proportion to the standard mix

Total sales during the period: 1,300 Turbox + 3,700 Speedo = 5,000 units

Unit Sales at Standard Mix:

Sales of Turbox in standard mix @ 40% of 5,000 = 2,000 units
Sales of Speedo in standard mix @ 60% of 5,000 = 3,000 units
Step 3: Calculate the difference between budgeted sales quantities and
the sales quantities in standard mix.
Turbox
Speedo
Units
Units
Budgeted sales quantities (as per
question)

1,600

2,400

Unit sales at standard mix (Step

2)

(2000)

(3000)

400 Favorable

600 Favorable

Difference

Step 4: Calculate the standard contribution per unit

Turbox($)
Revenue
2,500
Variable cost
(1,500)
Standard contribution per
1,000
unit
Step 5: Calculate the variance for each product
Turbox

Speedo($)
1,000
(750)
250
Speedo

Standard contribution per unit

(Step 4)

$1,000

$250

Actual quantity - Standard mix

(Step 3)

x (400 units)

x 600 units

$400,000
Favorable

$150,000
Favorable

Variance

 Step 6: Add the individual variances

Sales Quantity Variance = ($400,000 + $150,000) = $550,000
Adverse
The sum of sales mix variance and sales quantity variance is equal to sales
volume variance.

 Sales Mix Variance

Sales Mix Variance measures the change in profit or contribution
attributable to the variation in the proportion of the different products
from the standard mix.
FORMULA
1. Sales Mix Variance(where standard costing is used):
= (Actual Unit Sold - Unit Sales at Standard Mix) x Standard ProfitPer
Unit

2. Sales Mix Variance(where marginal costing is used):

= (Actual Unit Sold - Unit Sales at Standard Mix) xStandard
ContributionPer Unit

Sales Mix Variance is one of the two sub-variances of sales volume

variance (the other being sales quantity variance).
Sales mix variance quantifies the effect of the variation in the
proportion of different products sold during a period from the standard
mix determined in the budget-setting process.

 Example
Aliengear Inc. is a small company that specializes in the manufacture and
sale of gaming
computers. Currently, the company offers two models of gaming PCs:
Turbox - A professional gaming PC with a water-cooling system priced at
$2,500
Speedo - An entry level gaming PC with standard fan cooling priced at $1,000
Aliengear budgeted sales of 1,600 units of Turbox and 2,400 units of Speedo

The sales team at Aliengear managed to sell 1,300 units of Turbox and 3,700 units of
Speedo during the last year.
Calculation of Sales Mix Variance:
Step 1: Calculate the standard mix ratio

Turbox :1,600 / (1,600 + 2,400) % = 40%

Speedo :100% - 40% = 60%
Step 2: Calculate the sales quantities in proportion to the standard mix

Total sales during the period: 1,300 Turbox + 3,700 Speedo = 5,000 units

Unit Sales at Standard Mix:

Sales of Turbox in standard mix @ 40% of 5,000 = 2,000 units
Sales of Speedo in standard mix @ 60% of 5,000 = 3,000 units
Step 3: Calculate the difference between actual sales quantities and the
sales quantities in standard mix.
Turbox
Speedo
Units
Units
Actual sales quantities (as per
question)

1,300

3,700

Unit sales at standard mix (Step

2)

(2000)

(3000)

(700) Adverse

700 Favorable

Difference

Step 4: Calculate the standard contribution per unit

Turbox($)
Revenue
2,500
Variable cost
(1,500)
Standard contribution per
1,000
unit
Step 5: Calculate the variance for each product
Turbox

Speedo($)
1,000
(750)
250
Speedo

Standard contribution per unit

(Step 4)

$1,000

$250

Actual quantity - Standard mix

(Step 3)

x (700 units)

x 700 units

$700,000
Adverse

$175,000
Favorable

Variance

 Step 6: Add the individual variances

Sales Mix Variance = ($700,000 - $175,000) = $525,000 Adverse
Sales mix variance is adverse in this example because a lower proportion
(i.e. 26%)
of Turbox (which is more profitable than Speedo) were sold during the
year as
compared to the standard mix (i.e. 40%).

 Market Share Variance

Market share means the percentage of the market that a company or organization
claims. Market share variance occurs when a difference exists between the actual
market share of a company and the expected/budgeted market share.

Market share variance looks exclusively at the change in a company or

organizations percentage of the market.
FORMULA:
Market-Share Variance

= (Actual Market Share - Budgeted Market Share) x Actual

Market Size x Budgeted Average CMu

 Market Size Variance

Market size describes the entire scope of a single market.

Market size variance helps a company determine whether a decrease or increase

in sales stems from an increase or decrease in the size of the market.

It uses market size variance to determine whether the total market for its
product grew, or whether the companys share of that market shrank.
FORMULA:

Market-Size Variance =(Actual Market Size - Budgeted Market Size) x Budgeted

Market Share x Budgeted Average CMu

DIRECT MATERIAL VARIANCES

Direct Material Mix Variance
It is the measure of difference between the cost of standard proportion
of materials and the actual proportion of materials consumed in the
production process during a period.
FORMULA:

Direct Material Mix Variance:

= Actual Quantity x Standard Price - Standard Mix Quantity x Standard
Price
= Standard Cost of Actual Mix

- Standard Cost of Standard Mix

= (Actual Mix Quantity - Standard Mix Quantity) x Standard Price

DIRECT MATERIAL VARIANCES contd

Material Mix Variance quantifies the effect of a variation in the proportion of raw
materials used in a production process over a period.
A favorable material mix variance suggests the use of a cheaper mix of raw materials
than the standard.
A change in direct material mix include:
Change in the quality, performance and durability of the final product
Price offered by customers may vary as a result of a change in perceived quality of the
product
Change in material mix may affect the workability of materials which may in turn affect
labor efficiency

DIRECT MATERIAL VARIANCES contd

Direct Material Yield Variance
Direct Material Yield Variance is a measure of cost differential
between output that should have been produced for the given level of
input and the level of output actually achieved during a period.
FORMULA:
Direct Material Yield Variance:
= (Actual Yield - Standard Yield) x Standard Material Cost Per Unit

DIRECT MATERIAL VARIANCES contd

Material Yield Variance measures the effect on material cost of a change in
the production yield from the standard.
A favorable material yield variance indicates better productivity than the
standard yield resulting in lower material cost.
Conversely, an adverse material yield variance suggests lower production
achieved during a period for the given level of input resulting in higher
material cost.

DIRECT LABOR VARIANCES

Direct Labor Rate Variance
Direct Labor Rate Variance is the measure of difference between the
actual cost of direct labor and the standard cost of direct labor utilized
during a period.
FORMULA:
Direct Labor Rate Variance:
= Actual Quantity x Actual Rate - Actual Quantity x Standard Rate
= Actual Cost - Standard Cost of Actual Hours

DIRECT LABOR VARIANCES contd

A favorable labor rate variance suggests cost efficient employment of direct
labor by the organization.
Reasons for a favorable labor rate variance may include:
Hiring of more un-skilled or semi-skilled labor (this may adversely impact labor efficiency
variance)
Decrease in the overall wage rates in the market due to an increase in the supply of labor
which may be caused, for example, due to the influx of immigrants as a result of the
relaxation of immigration policy
Inappropriately high setting of the standard cost of direct labor which may, in the
hindsight, be attributed to inaccurate planning

DIRECT LABOR VARIANCES contd

An adverse labor rate variance indicates higher labor costs incurred
during a period compared with the standard.
Causes for adverse labor rate variance may include:
Increase in the national minimum wage rate
Hiring of more skilled labor than anticipated in the standard (this should be
reflected in a favorablelabor efficiency variance)
Inefficient hiring by the HR department
Effective negotiations by labor unions

DIRECT LABOR VARIANCES contd

Direct Labor Efficiency Variance
Direct Labor Efficiency Variance is the measure of difference between the
standard cost of actual number of direct labor hours utilized during a period
and the standard hours of direct labor for the level of output achieved.

FORMULA:
Direct Labor Efficiency Variance:
= Actual Hours x Standard Rate

- Standard Cost

Standard Cost of Actual Hours

Standard Hours x Standard Rate

DIRECT LABOR VARIANCES contd

A favorable labor efficiency variance indicates better productivity of
direct labor during a period.
Causes for favorable labor efficiency variance may include:
Hiring of more higher skilled labor (this may adversely impact labor rate variance)
Training of work force in improved production techniques and methodologies
Use of better quality raw materials which are easier to handle
Higher learning curve than anticipated in the standard

DIRECT LABOR VARIANCES contd

An adverse labor efficiency variance suggests lower productivity of
direct labor during a period compared with the standard.
Reasons for adverse labor efficiency variances may include:
Hiring of lower skilled labor than the standard (this should be reflected in a
favorablelabor rate variance)
Lower learning curve achieved during the period than anticipated in the standard
Decrease in staff morale and motivation
Idle time incurred during a period caused by disruption or stoppage of activities

DIRECT LABOR VARIANCES contd

Direct Labor Idle Time Variance
Labor Idle Time Variance is the cost of the standby time of direct labor
which could not be utilized in the production due to reasons including
mechanical failure of equipment, industrial disputes and lack of orders.
FORMULA:
Idle Time Variance: = Number of idle hours x Standard labor rate
It illustrates the adverse impact on the profitability of an organization as a result of
having paid for the labor time which did not result in any production.

DIRECT LABOR VARIANCES contd

Reasons for idle time may include:
Disruption of production activities due to mechanical failures
Lack of purchase orders especially in case of seasonal businesses
Industrial disputes

EXAMPLE
DM is a denim brand specializing in the manufacture and sale of hand-stitched jeans
trousers. DM manufactured and sold 10,000 pairs of jeans during a period.
Information relating to the direct labor cost and production time per unit is as follows:
Per Unit
Direct Labor

Actual Hours Standard Hours

Per Unit
Per Hour Per Hour
0.50

0.60

$12

Actual Rate

Standard Rate

$10

During the period, 800 hours of idle time was incurred. In order to motivate and retain
experienced workers, DM has devised a policy of paying workers the full hourly rate in
case of any idle time.
Note: 0.65 hours per unit of actual time includes the idle time.

EXAMPLE contd..
Labor rate variance shall be calculated as follows:
Step 1: Calculate Actual hours
Actual Hours = 10,000 units x Actual Price = 5,000 hours.
Step 2: Calculate the actual cost
Actual Cost = Actual Hours x Actual Rate = 5,000 hours (Step 1) x $12 per hour = $60,000.
Step 3: Calculate the standard cost of actual number of hours
Standard Cost of actual hours = Actual Hours x Standard Rate
= 5,000 hours (Step 1) x $10 per hour = $50,000.
Step 4: Calculate the variance
Labor Rate Variance = Actual Cost - Standard Cost of the Actual Hours
= $60,000 (Step 2) - $50,000 (Step 3) = $10,000 Adverse.

EXAMPLE contd..
Labor efficiency variance shall be calculated as follows:
Step 1: Calculate Actual hours
Actual Hours = 10,000 units x 0.5 hours per unit = 5,000 hours.
Step 2: Calculate the standard cost of actual number of hours
Standard Cost of Actual Hours = Actual Hours x Standard Rate = 5,000 hours x $10 per hour=
$50,000.
Step 3: Calculate the standard hours
Standard hours = 10,000 units x 0.60 hours per unit = 6,000 hours.
Step 4: Calculate the standard cost
Standard Cost = Standard Hours x Standard Rate = 6,000 hours (Step 3) x $10 per hour = $60,000.
Step 5: Calculate the variance
Labor Efficiency Variance = Standard Cost of Actual Hours - Standard Cost = $10,000 Favorable.

SUMMARY
Variance analysis is an important part of an organization's information system.
It performs the following functions:
Planning, Standards and Benchmarks - Variance analysis encourages forward thinking and a
proactive approach towards setting performance benchmarks.
Control Mechanism - Variance analysis facilitates 'management by exception' by
highlighting deviations from standards which are affecting the financial performance of an
organization.
Responsibility Accounting - Variance analysis facilitates performance measurement and
control at the level of responsibility centres (e.g. a department, division, designation, etc.).

Productivity Measurements

Objectives
Productive efficiency
Partial productivity measurement
Total productivity measurement
Importance of productivity measurement

Productive efficiency
Productivityis an average measure of the efficiency of
production.
It can be expressed as the ratio of output to inputs used in
the production process, i.e. output per unit of input.
Total productive efficiency is a point at which the following
two conditions are satisfied:
Technical efficiency
Allocative efficiency

Technical Efficiency
the condition where no more of any one input is
used than necessary to produce a given output.

Technical efficiency:

Technical efficiency improvement occurs when less inputs are used to

produce the same output or more output are produced using the same
input.

Allocative Efficiency
Allocative efficiency: Of the two combinations that produce the same output, the
least costly combination would be chosen.

Productivity Measurement
a quantitative assessment of productivity changes
can be actual or prospective
is forward looking
serves as input for strategic decision making
allows managers to compare relative benefits of different input combinations

Productivity ratio = Output Input

Operational Productivity Measure
Partial measure where both input and output are expressed in physical terms.

Financial Productivity Measure

Partial measure where both input and output are expressed in dollars.

Partial Productivity Measurement

Measuring productivity for one input at a time
Labor Productivity
Quantity (or value) of output / labor hrs
Quantity (or value) of output / shift

Machine Productivity
Quantity (or value) of output / machine hrs

Energy Productivity
Quantity (or value of output) / kwh

Capital Productivity
Quantity (or value) of output / value of input

Contd
2009

2010

Number of frames produced

240,000 250,000
Labor hours used
60,000
50,000
Materials used (lbs.)
1,200,0001,150,000

Total Productivity Measurement

Multifactor Productivity: Ratio of output to a group of inputs such
as labor and material
Total Productivity: (includes all inputs in an organization i.e. labor,
materials, overheads, capital)
Total Productivity = Output/All inputs

EXAMPLE
10,000 Units Produced
Sold for $10/unit
500 labor hours
Labor rate: $9/hr
Cost of raw material: $30,000
Overhead: $15,500

Example : All-Factor Productivity

EXAMPLE
Output

TFP =
Labor + Materials + Overhead

(10,000 units) * ($10)

TFP =
(500)*($9) + ($30,000) + ($15,500)

TFP = 2.0

Importance of Productivity Measurement

Describes how well the resources of an organization are being used to
produce output.
Planning, monitoring, and improving performance.
Facilitate comparison of performance of different companies within a
market or industry.
Set improvement targets for organization.
Motivating employees through payment of incentive for high
productivity.

SUMMARY
Partial productivity is concerned with efficiency of one particular
characteristics.
Multi factor productivity is an index of output obtained from more than
one of the resources used in product/service.
Total productivity is the broadest measure of productivity & is
concerned with the performance of entire plant/organization.