Factory Overhead Yield Variance:

Learning Objective of the article:

1. 2.

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 Gum base Corn syrup Sugar Input Output 800 200 200 -------1,200 lbs ===== 1,000 =====

Price $0.25 $0.40 $0.10

Cost $200 80 20 -------$300 ==== $300 ==== $300 / 1,000 lbs = $0.30 per lb.* $300 / 1,200 lbs = $0.25 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 Materials Gum base Corn Syrup Sugar

Beginning Inventory Beginning Inventory 10,000 lbs 12,000 lbs 15,000 lbs

Purchases in January Purchases in January 162,000 lbs@ 0.24 30,000 lbs @ 0.42 32,000 lbs @ 0.11

Ending Inventory Ending Inventory 15,000 lbs 4,000 lbs 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 Labor Factory overhead

$0.30 per lb. $0.12 per lb. $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. 2. 3. 4.

Factory Factory Factory Factory

overhead overhead overhead overhead

spending variance idle capacity variance efficiency variance yield variance

These variances are computed as follows:

Actual factory overhead Budgeted allowance based on actual hours worked: Fixed expenses budgeted Variable expenses: 3,800 actual hours $2 variable standard overhead rate $12,000 $7,600 -------1 Overhead spending variance Budgeted allowance based on actual hours worked Actual hours (3,800) Standard overhead rate ($5) 2 Overhead idle capacity variance Actual hours (3,800) Standard overhead rate ($5) Standard hours allowed for expected out put (3,850) Standard overhead rate ($5) 3 Overhead efficiency variance Standard hours allowed for expected output (3,850) Standard overhead rate ($5) Standard hours allowed for actual output (4,000) Standard overhead rate ($5) $19,600 --------$2,400 U ====== $19,600 $19,000 ---------$600 U ====== $19,000 $19,250 --------$(250) F ======= $19,250 $20,000 --------$22,000

4 Overhead yield variance

$(750) F ======

F = Favorable U = Unfavorable

The spending and idle capacity variances are calculated in the same manner as explained onfactory overhead spending variance page and factory overhead idle capacity variance pagerespectively. The overhead efficiency variance calculated here and the overhead yield variance when combined , equal the traditional overhead efficiency variance discussed onoverhead 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. 2. 3.

Controllable variance Volume variance Yield variance

These variances are calculated as follows:

Actual factory overhead Budgeted allowance based on standard hours allowed: Fixed overhead budgeted Variable expenses (3,850 standard hours $2 standard rate) $12,000 $7,700 --------$19,700 --------1 Controllable variance $2,300 U ======= Budgeted allowance based on standard hours allowed Standard hours allowed for expected output (3,850) standard overhead rate ($5) $19,700 $19,250 ---------2 Volume variance $450 U ======= Standard hours allowed for expected output (3,850) standard overhead rate ($5) Standard hours allowed for actual output (4,000) standard overhead rate ($5) $19,250 $20,000 ---------3 Overhead yield variance F = Favorable U = Unfavorable $ (750) F $22,000

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].