Direct Labor Yield Variance
Direct Labor Yield Variance:
Learning Objective of the article:
- Define and explain labor yield variances.
- Calculate labor yield variance.
Rate and efficiency variances of labor are explained on direct labor rate variance page and direct labor efficiency variance page respectively. Here, our focus is to explain the calculation of labor yield variance.
Formula of Labor Yield Variance:
(Standard hours allowed for expected output × Standard labor rate) – (Standard hours allowed for actual output × Standard labor rate)
An example can help us explain the calculation of labor yield variance.
Example:
To illustrate the calculation of labor yield variances assume that the springmint Company, a manufacturer of chewing gum, uses a standard cost system. Standard product and cost specifications for 1,000 lbs. of chewing gum are as follows:
Quantity | × | Price | = | Cost | ||
Gum base | 800 | $0.25 | $200 | |||
Corn syrup | 200 | $0.40 | 80 | |||
Sugar | 200 | $0.10 | 20 | |||
——– | ——– | |||||
Input | 1,200 lbs | $300 |
$300 / 1,200 lbs = $0.25 per lb.* |
|||
===== | ==== | |||||
Output | 1,000 | $300 |
$300 / 1,000 lbs = $0.30 per lb.* |
|||
===== | ==== |
*Weighted average.
The production of 1,000 lbs. of chewing gum required 1,200 lbs of raw materials. Hence the yield is 1,000 lbs / 1,200lbs. or 5/6 of input. Materials records indicate.
Materials | Beginning Inventory | Purchases in January | Ending Inventory |
Materials | Beginning Inventory | Purchases in January | Ending Inventory |
Gum base | 10,000 lbs | 162,000 lbs@ 0.24 | 15,000 lbs |
Corn Syrup | 12,000 lbs | 30,000 lbs @ 0.42 | 4,000 lbs |
Sugar | 15,000 lbs |
32,000 lbs @ 0.11 |
11,000 lbs |
To convert 1,200 lbs. of raw materials into 1,000 lbs of finished product required 20 hours at $6.00 per hour or $0.12 per lbs. of finished product. Actual direct labor hours and cost for January are 3,800 hours at $23,104. Factory overhead is applied on a direct labor hour basis at a rate of $5 per hour ($3 fixed , $2 variable), or $ 0.1 per lb. of finished product. Normal overhead is $20,000 with 4,000 direct labor hours. Actual overhead for the month is $22,000, Actual finished production for January is 200,000 lbs.
The standard cost per pound of finished chewing gum is:
Materials |
$0.30 per lb. |
Labor | $0.12 per lb. |
Factory overhead |
$0.10 per lb |
Required: Calculate:
- Labor rate variance
- Labor efficiency variance
- Labor yield Variance
The expected output of 192,500 lbs. of chewing gum should require 3,850 standard labor hours (20 hours per thousand pounds of chewing gum produced). Similarly, the actual out put of 200,000 lbs. of chewing gum should require 4,000 standard labor hours.
The labor variances are labor rate variance, labor efficiency variance and labor yield variance.
Calculation of Labor Rate Variance:
labor rate variance is calculated as explained on direct labor rate variance page.
Actual payroll | $23,104 |
Actual hours (3,800) × Standard labor hours ($6) | $22,800 |
———— | |
Labor rate variance | $304 unfavorable |
======== |
Calculation of Labor Efficiency Variance:
Actual hours (3,800) × Standard labor hours ($6) | $22,800 |
Standard hours allowed for expected output (3,850) × Standard labor rate ($6) | $23,100 |
————— | |
Labor efficiency variance | $(300) favorable |
========== |
The traditional labor efficiency variance, as explained on direct labor efficiency variance page, is calculated as follows:
Time | × | Rate | = | Amount | |
Actual hours worked | 3,800 | $6 | $22,800 | ||
Standard hours allowed | 4,000 | $6 | $24,000 | ||
——— | ——– | ———– | |||
Labor efficiency variance | (200) | $6 | $(1,200) favorable | ||
====== | ===== | ========= |
Calculation of Labor Yield Variance:
Standard hours allowed for expected output (3,850) × Standard labor rate ($6) |
$23,100 |
Standard hours allowed for actual output (4,000) × Standard labor rate ($6) |
24,000 |
————— |
|
Labor yield variance | $(900) favorable |
======== |
The labor yield variance identifies the portion of the labor efficiency variance attributable to obtaining an unfavorable or, as in this example, a favorable yield [(3,850 standard hours allowed for expected output – 4,000 standard hours allowed for actual output) × $6 standard labor rate = $900].
The favorable labor efficiency variance of $300 is the portion of the traditional labor efficiency variance that is attributable to factors other than yield. The sum of the two variances, $900 plus $300, equals the $1,200 traditional labor efficiency variance.
You may also be interested in other articles from “standard costing and variance analysis” chapter
- Standard Costs and Management By Exception
- Setting Standard Costs – Ideal Versus Practical Standards
- Direct Materials Price and Quantity Standards
- Direct Materials Price Variance
- Direct Materials Quantity Variance
- Direct Labor Rate and Efficiency Standards
- Direct Labor Rate/Price Variance
- Direct Labor Efficiency | Usage | Quantity Variance
- Manufacturing Overhead Standards
- Overall or net factory overhead variance.
- Controllable variance
- Volume variance
- Spending variance
- Idle capacity variance
- Efficiency variance
- Spending variance
- Variable efficiency variance
- Fixed efficiency variance
- Idle capacity variance
- Mix and Yield Variance – Definition and Explanation
- Materials Mix and Yield Variance
- Labor Yield Variance
- Factory Overhead Yield variance
- Variance Analysis and Management By Exception
- Managerial importance and usefulness of variance analysis
- Advantages and Disadvantages of Standard Costing System
- Standard Costing Discussion Questions and Answers
- Standard Costing and Variance Analysis Formulas
- Standard Costing and Variance Analysis Problems and Solution
- Standard Costing and Variance Analysis Case Study
Other Related Accounting Articles:
- Factory Overhead Yield Variance
- Materials Mix and Yield Variance
- Standard Costing and Variance Analysis Formulas
- Factory Overhead Efficiency Variance
- Fixed Overhead Efficiency Variance
- Overall or Net Factory Overhead Variance
- Variable Overhead Efficiency Variance
- Factory Overhead Controllable Variance
- Factory Overhead Volume Variance
- Managerial Usefulness/Importance of Variance Analysis
Or
Download E accounting book in MS-word format for just 20 $ - Click here to Download