Factory Overhead Yield Variance
Factory Overhead Yield Variance:
Learning Objective of the article:
- Define and explain overhead yield variance.
- Calculate overhead yield variance when three variance and two variance approaches are used.
Formula of Overhead Yield Variance:
(Standard hours allowed for expected output × Standard overhead rate) – (Standard hours allowed for actual output × Standard overhead rate)
An example can help us explain the calculation of overhead yield variance.
Example:
To illustrate the calculation of overhead yield variance 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 factory overhead yield variance.
Three Variance Method Adapted to Calculate Overhead Yield Variance:
A yield variance can be calculated for factory overhead. When three variance method is used to calculate overhead yield variance, the overhead variances consist of the:
- Factory overhead spending variance
- Factory overhead idle capacity variance
- Factory overhead efficiency variance
- Factory overhead yield variance
These variances are computed as follows:
Actual factory overhead | $22,000 | ||
Budgeted allowance based on actual hours worked: | |||
Fixed expenses budgeted | $12,000 | ||
Variable expenses: 3,800 actual hours × $2 variable standard overhead rate | $7,600 | ||
——– | $19,600 | ||
——— | |||
1 | Overhead spending variance | $2,400 U | |
====== | |||
Budgeted allowance based on actual hours worked | $19,600 | ||
Actual hours (3,800) × Standard overhead rate ($5) | $19,000 | ||
———- | |||
2 | Overhead idle capacity variance | $600 U | |
====== | |||
Actual hours (3,800) × Standard overhead rate ($5) | $19,000 | ||
Standard hours allowed for expected out put (3,850) × Standard overhead rate ($5) | $19,250 | ||
——— | |||
3 | Overhead efficiency variance | $(250) F | |
======= | |||
Standard hours allowed for expected output (3,850) × Standard overhead rate ($5) | $19,250 | ||
Standard hours allowed for actual output (4,000) × Standard overhead rate ($5) | $20,000 | ||
——— | |||
4 | Overhead yield variance |
$(750) F |
|
====== |
|||
F = Favorable U = Unfavorable |
The spending and idle capacity variances are calculated in the same manner as explained on factory overhead spending variance page and factory overhead idle capacity variance page respectively. The overhead efficiency variance calculated here and the overhead yield variance when combined , equal the traditional overhead efficiency variance discussed on overhead efficiency variance page. The overhead yield variance measures that portion of the total overhead variance resulting from a favorable yield. [(3,850 hours – 4000hours) × $5.00 = $750]
Two Variance Method Adopted to Calculate Overhead Yield Variance:
When two variance approach is used, the overhead variances are:
- Controllable variance
- Volume variance
- Yield variance
These variances are calculated as follows:
Actual factory overhead | $22,000 | ||
Budgeted allowance based on standard hours allowed: | |||
Fixed overhead budgeted | $12,000 | ||
Variable expenses (3,850 standard hours × $2 standard rate) | $7,700 | ||
——— | $19,700 | ||
——— | |||
1 | Controllable variance | $2,300 U | |
======= | |||
Budgeted allowance based on standard hours allowed | $19,700 | ||
Standard hours allowed for expected output (3,850) × standard overhead rate ($5) | $19,250 | ||
———- | |||
2 | Volume variance | $450 U | |
======= | |||
Standard hours allowed for expected output (3,850) × standard overhead rate ($5) | $19,250 | ||
Standard hours allowed for actual output (4,000) × standard overhead rate ($5) | $20,000 | ||
———- | |||
3 | Overhead yield variance | $ (750) F | |
F = Favorable U = Unfavorable |
The favorable overhead yield variance is the same as for the three variance approach and can be viewed as consisting of $300 variable cost [(3,850 standard hours allowed for expected output – 4,000 standard hours allowed for actual output) × $2], and $450 fixed cost [(3,850 – 4,000) × $3].
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:
- Standard Costing and Variance Analysis Formulas
- Overall or Net Factory Overhead Variance
- Variable Overhead Efficiency Variance
- Factory Overhead Efficiency Variance
- Direct Labor Yield Variance
- Factory Overhead Volume Variance
- Fixed Overhead Efficiency Variance
- Factory Overhead Controllable Variance
- Materials Mix and Yield Variance
- Manufacturing Overhead Cost Standards
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