- Analyze the variance between the expected amount of materials purchased and the actual amount of materials purchased
You are the purchasing manager at a large tent manufacturer. Your production manager just walked in your office fuming! “What is this fabric you are buying? We are using twice as much per tent as we budgeted for, and labor is going to be through the roof!” You had gotten a deal on the fabric, but it was the same quality you had always been buying, so you tell the production manager, “the fabric is fine. It must be a lack of training on your production floor!” The CEO walks in to mediate the problem. Is it a quality problem? A training problem? An equipment problem? How do we know? This is a common issue that may come up in the manufacturing environment.
Take a look at this video for further examples:
In our previous examples, we expected to purchase 10,500 units of raw materials. When we purchase an amount different from our expected amount we call it a material yield variance. This can happen for a variety of reasons:
- We buy more because the quality is low and we have waste or production scrap.
- We buy less because the quality is high and we have less waste and scrap.
- We buy more because there are production issues.
- Poor training of production workers.
- Problems with the production equipment causing waste.
- New workers who are just learning their job, so a learning curve produces more waste.
- We buy less because of production issues.
- Our production workers are experienced and know how to make the best use of the materials.
- Our production equipment was upgraded recently giving a better yield than the old equipment.
- We invest in training employees and get ideas from them to improve production processes.
What else can you think of that may create a material yield variance? Who do we look at when we need to buy more?
Let’s look at an example:
Mary, Production Manager: We needed more raw material because the quality of the last batch was terrible. There was waste, and we couldn’t even use parts of it. It is Ben—Purchasing Manager—fault.
Ben, Purchasing Manager: There is nothing wrong with the raw materials we brought in. We ordered from the same supplier, and it is the same you have been getting all along. You just aren’t training your workers well, and they are creating the waste.
Mary, Production Manager: Wait, the machines have been breaking down a lot, and we have to scrap material every time it shuts down. It is Ray—the Maintenance Manager’s—fault.
Ben, Purchasing Manager: Yes, let’s get Ray in here. It is his fault we have needed to purchase more raw materials for production.
Well that got out of hand fast! Poor Ray hasn’t even had a chance to defend himself! How might you tackle this situation?
- Quantity Variance. Authored by: Freedom Learning Group. Provided by: Lumen Learning. License: CC BY: Attribution
- Causes of Material Variances. Authored by: Croesus Financial Training. Located at: https://youtu.be/LO-2HqggRbs. License: All Rights Reserved. License Terms: Standard YouTube License