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 [email protected] 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