Advanced Variance Analysis
Control
Advanced Variance Analysis
Syllabus tag: KASNEB CPA | Advanced Level | CA34S3 Advanced Management Accounting | Topic 5 Advanced Variance Analysis
Lesson objectives
By the end of this topic, you will be able to:
- Split a variance into planning and operational elements
- Compute materials mix and yield variances
- Compute sales mix and quantity variances
- Interpret variances in a modern manufacturing environment
- Explain the limitations of standard costing
Why this matters
CA25 computed price and usage variances against a fixed standard. This topic asks a harder question: was the standard itself right? A manager should answer for the part they controlled, not for a standard set before the market moved.
Planning and operational variances
Where the original standard has become unrealistic, it is revised with hindsight into an ex post standard, and the total variance is split:
- Planning variance = (Original standard − Revised standard) × Actual output. Not controllable; it measures how wrong the standard was
- Operational variance = Revised standard versus actual. Controllable; it measures performance
Worked example. The standard was 5 kg at KES 240 per kg. A world shortage means a realistic standard was KES 265. Actual: 4.8 kg per unit at KES 272, for 9,000 units.
| Variance | Working | KES |
|---|---|---|
| Planning (price) | (240 − 265) × 5 × 9,000 | 1,125,000 A |
| Operational price | (265 − 272) × 4.8 × 9,000 | 302,400 A |
| Operational usage | (5 − 4.8) × 9,000 × 265 | 477,000 F |
| Total | 950,400 A |
Checking independently: (5 × 9,000 × 240) − (4.8 × 9,000 × 272) = 10,800,000 − 11,750,400 = 950,400 adverse. The three parts reconcile.
The interpretation is the point. Under the old method the buyer faced a total adverse variance of 950,400. Split properly, 1,125,000 of it was a market movement nobody in the company could prevent, and the buyer's own performance was 302,400 adverse on price while production saved 477,000 on usage. Two people are judged fairly instead of one being blamed.
The obvious danger is that managers revise standards after the event in whatever direction flatters them. The revised standard must be set on objective evidence, and ideally approved independently.
:::checkpoint A production manager argues that an adverse usage variance arose because the purchasing department bought inferior material at a lower price. Explain how planning and operational analysis would, and would not, help resolve the dispute. :::
Mix and yield
Where inputs are substitutable — a blend, a feed formulation, an alloy — the usage variance splits further:
- Mix variance — the effect of using inputs in different proportions from standard
- Yield variance — the effect of getting more or less total output from the inputs used
Worked example. Standard mix: 60% of material X at KES 300 per kg, 40% of Y at KES 180. Actual usage 11,000 kg: 7,150 kg of X and 3,850 kg of Y.
Standard mix of the actual total: X 6,600 kg, Y 4,400 kg.
| Standard mix | Actual | Difference | × Std price | Variance | |
|---|---|---|---|---|---|
| X | 6,600 | 7,150 | (550) | 300 | 165,000 A |
| Y | 4,400 | 3,850 | 550 | 180 | 99,000 F |
| 66,000 A |
More of the expensive material and less of the cheap one was used, so the mix variance is adverse.
But a favourable yield may follow. Richer mixes often produce more output. The two variances must be read together: an adverse mix that produces a larger favourable yield is a good decision, not a control failure. Reporting the mix variance alone would condemn it.
Sales variances
Sales mix variance — the effect of selling a different combination of products from that budgeted, valued at standard margin.
Sales quantity variance — the effect of selling a different total volume in the standard mix.
Together they make up the sales volume variance from CA25. The split matters because selling more of a low-margin product while total units meet budget produces a favourable quantity variance and an adverse mix variance — the volume target was met and the profit was not.
Standard costing in a modern environment
The technique was designed for stable, repetitive, labour-intensive manufacturing. Several criticisms follow:
- Short product life cycles mean a standard is out of date before it settles
- Customised production means there is no standard unit
- Automation makes labour variances trivial and overhead variances hard to attribute
- Continuous improvement conflicts with a standard that treats last period's performance as the target — Kaizen costing sets a declining standard instead
- Focus on cost can damage quality and delivery, which the customer values
- Variances are backward-looking, reported after the period has closed
The response is not to abandon variance analysis but to use it where conditions suit it, alongside non-financial measures of quality, delivery and cycle time.
:::checkpoint A company with a six-month product life cycle and largely automated production still reports full monthly variances against annual standards. Identify two reasons this is of limited value and suggest what should replace it. :::