Factory Overhead Yield Variance

Factory Overhead Yield Variance:

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 [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:

  1. Factory overhead spending variance
  2. Factory overhead idle capacity variance
  3. Factory overhead efficiency variance
  4. 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:

  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].

 

You may also be interested in other articles from “standard costing and variance analysis” chapter

  1. Standard Costs and Management By Exception
  2. Setting Standard Costs – Ideal Versus Practical Standards
  3. Direct Materials Price and Quantity Standards
  4. Direct Materials Price Variance
  5. Direct Materials Quantity Variance
  6. Direct Labor Rate and Efficiency Standards
  7. Direct Labor Rate/Price Variance
  8. Direct Labor Efficiency | Usage | Quantity Variance
  9. Manufacturing Overhead Standards
  10. Overall or net factory overhead variance.
  11. Controllable variance
  12. Volume variance
  13. Spending variance
  14. Idle capacity variance
  15. Efficiency variance
  16. Spending variance
  17. Variable efficiency variance
  18. Fixed efficiency variance
  19. Idle capacity variance
  20. Mix and Yield Variance – Definition and Explanation
  21. Materials Mix and Yield Variance
  22. Labor Yield Variance
  23. Factory Overhead Yield variance
  24. Variance Analysis and Management By Exception
  25. Managerial importance and usefulness of variance analysis
  26. Advantages and Disadvantages of Standard Costing System
  27. Standard Costing Discussion Questions and Answers
  28. Standard Costing and Variance Analysis Formulas
  29. Standard Costing and Variance Analysis Problems and Solution
  30. Standard Costing and Variance Analysis Case Study


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