Direct Material Variances: Review of the Mix and Yield Variances.

Abstract Various articles and textbooks have developed different models for the calculation of the direct material variances. This has led to considerable confusion. This paper examines the area of direct material variance, provides definitions, and establishes evaluation criteria. Correct calculation of direct material variances (i.e., price variance, direct material mix variance MY, and direct material yield variance YV) are a function of the production function assumed and the calculation model's ability to comply with the established variance analysis criteria. The three production functions are: (1) partial linear substitution, (2) the fixed proportion production function, and (3) the nonlinear production function. The three criteria are: (1) the computational models of MV and YV must be constructed in conformity with their definitions, (2) the computational models of MY and YV must be consistent with the characteristics of the underlying production function, and (3) the total of MV and YV must be equal to the total direct material quantity variance. This paper reviews the existing direct material variance calculation models. It suggests that Hasseldine's fixed-proportion production function model is the only one that meets the criteria and recommends its use. For partial linear substitution, this paper recommends the model proposed by Killough and Leininger, and for the nonlinear production function, none of the existing models fit all of the established criteria, so this paper develops a new model and recommends Its use.