Direct Material Yield Variance Formula, Example
Standard costing and basic variance calculations should be familiar from earlier studies. However, due to various factors like machine inefficiencies or quality issues, the factory actually produces only 920 bottles from 1000 liters of raw juice during a specific period. Let’s consider a practical example of yield variance in a factory that produces bottled fruit juice. As discussed in Chapter 4, overhead may already be recorded at standard. When students hear this they inevitably ask me where the rest of the difference went.
8.2 Yield Variances
A static budget (column F) and a flexible budget (column G) are both shown below. For the flexible budget, I used the same assumptions as the static budget but changed the volume to 110 units (compare cells F3 and G3). Variance analysis moves incrementally from one extreme to the other, comparing just one standard-versus-actual result at a time. This leads to variances that tell you how much of total budget variance is due to each cause.
Formula to Calculate Yield Variance
- The credit will be the actual cost, usually credited to either cash or accounts payable.
- The total material variance is divided into the price and usage variances.
- That is, a PDOH rate usually includes both variable and fixed overhead costs.
- Variance analysis moves incrementally from one extreme to the other, comparing just one standard-versus-actual result at a time.
The firm can record the price variance as part of its entry recording purchase of new direct materials. The credit will be the actual cost, usually credited to either cash or accounts payable. Product costs, such as direct labor and direct materials are among the most important of these cost variances.
1.3 The Profit Equation and Variance Analysis
If you can remember that actual quantity will be different for quantity and price variances, you can calculate direct materials variances in a way that is very similar to direct labor variances. Continuing with the example let’s say actual direct labor costs were $25,000. The firm could calculate the direct labor variance as an unfavorable variance of $5,000, but that doesn’t help much because that information doesn’t lead to an action. Is that $5,000 unfavorable variance due to higher direct labor prices? If the firm knew which standard used to build the budget had fallen short, it would suggest an action. According to standards, the company was allowed to use an input of 35,574 tons to produce an output of 32,340 tons (the actual output).
If the direct materials yield variance proves that the company is producing less than originally planned for a given level of input, the company can review their operations for ways to become more efficient. Intuitively, producing more products with the same level of inventory while keeping quality constant can help the organization improve profitability. Thus it is important to set the standard mix at the level which optimises profit taking all factors into consideration. When forming the budget, variable and fixed overhead are typically added together as total overhead cost. Then, in job-order costing systems, this total overhead cost is used as the numerator to compute a PDOH rate. That is, a PDOH rate usually includes both variable and fixed overhead costs.
What is the difference between labor rate and efficiency variance?
Therefore actual cost is $1,000 and the debit to direct materials is $800. The $200 difference has to be a debit to the direct materials price variance account. An unfavorable price variance suggests a problem within the purchasing department of the firm or a change in the external market for this input. It could also be related to the firm’s differentiation strategy and purchasing high-quality direct materials. With a little investigative effort, the firm can develop an action plan to improve this variance. Generally, what real estate business expenses are tax deductible uses direct materials, which are raw materials that are made into finished products.
Generally, a yield variance is unfavorable, since it is more likely that a production process will contain errors that result in extra usage of raw materials. The labor yield variance, one of the factors that make up the labor efficiency variation, is caused by the discrepancy between the worker’s actual output and the standard output that was expected. Since fixed costs, by definition, do not vary with volume, the static budget and the flexible budget are the same for fixed overhead costs. To avoid confusion I do not use the term flexible budget for this variance. Among cost variances, I find overhead variances to be less useful than direct labor or direct materials variances.
Using excessive direct materials than allowed by standards often results in higher total direct materials cost. In a question, use either the usage variance or the mix and yield variances. Also, do not forget the material price variance in your analysis as this may provide additional information. This is calculated as the difference between the actual quantity of material valued at the actual cost and the actual quantity of material valued at the standard cost. Yield variance is the difference between a production or manufacturing process’s actual and expected outputs, calculated using standardized inputs for labor and materials. Yield variance, when the actual output is smaller than the standard or expected output, is typically unfavorable, while it is possible that the output exceeds expectations as well.
Yield variance is the discrepancy between the anticipated yield from a given quantity of raw materials and the actual yield of finished goods. An adverse material yield variance suggests that less output has been achieved for a given input, i.e. the total input in volume is more than expected for the output achieved. A favourable material yield variance indicates that more output was produced from the quantity of material used than expected by the standard. An adverse material mix variance indicates that more of the expensive material was used in the actual input than indicated by the standard mix. Regardless, many companies calculate overhead variances and seem to get some good use out of them.
The yield variance reflects the variation between standard finished goods output (given inputs) and the actual finished goods output (given inputs). Standard costing can technically be combined with any of the costing systems described in Chapters 4, 5, and 6. That’s because the “standard costs versus normal costs versus actual costs” decision answers a different question than the “job-order costing versus activity-based costing versus process costing” decision. This difference is often called the fixed overhead spending variance. Second, it is more likely that responsibility for overhead costs, even after additional investigation, is spread across several managers and/or departments.