Question 5
| Material | Kilograms | Price per kilogram ($) |
|---|---|---|
| Lye | 0·25 | 10 |
| Coconut oil | 0·6 | 4 |
| Shea butter | 0·5 | 3 |
| Material | Kilograms |
|---|---|
| Lye | 34,080 |
| Coconut oil | 83,232 |
| Shea butter | 64,200 |
Required:
(a) Calculate the total material mix variance and the total material yield variance for September. (8 marks)
(b) In October the materials mix and yield variances were as follows:
Mix: $6,000 adverse
Yield: $10,000 favourable
The production manager is pleased with the results overall, stating:
‘At the beginning of September I made some changes to the mix of ingredients used for the soaps. As I expected, the mix variance is adverse in both months because we haven’t yet updated our standard cost card but, in both months, the favourable yield variance more than makes up for this. Overall, I think we can be satisfied that the changes made to the product mix are producing good results and now we are able to produce more batches and meet the growing demand for our product.’
The sales manager, however, holds a different view and says:
‘I’m not happy with this change in the ingredients mix. I’ve had to explain to the board why the sales volume variance for October was $22,000 adverse. I’ve tried to explain that the quality of the soap has declined slightly and some of my customers have realised this and simply aren’t happy but no-one seems to be listening. Some customers are even demanding that the price of the soap be reduced and threatening to go elsewhere if the problem isn’t sorted out.’
Required:
(i) Briefly explain what the adverse materials mix and favourable materials yield variances indicate about production at Safe Soap Co in October.
Note: You are NOT required to discuss revision of standards or operational and planning variances. (4 marks)
(ii) Discuss whether the sales manager could be justified in claiming that the change in the materials mix has caused an adverse sales volume variance in October. (3 marks)