Learning Objective of the article:

1. Define and explain overhead yield variance.
2. 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.

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:

2. Factory overhead idle capacity variance

These variances are computed as follows:

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]

When two variance approach is used, the overhead variances are:

1. Controllable variance
2. Volume variance
3. 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].