Direct materials are goods that physically become the finished product at the end of the manufacturing process. In other words, these are the tangible pieces or components of a finished product. If the different materials are not interchangeable, then separate price and usage variances can be calculated. However, if substitution of one material for another can occur, then it is more useful to calculate mix and yield variances. See, if you’re splitting the quantity variance into mix and yield variances, then there are multiple inputs that can be substituted for each other. Yield variance then is just the traditional quantity variance (i.e. how many finished goods units come from the given input units) adapted to this idea of substitutable inputs.
Direct Labor Variances
- However, if the quality of the product is adversely affected, this is damaging to the reputation of the business and hence its long‑term survival prospects.
- Direct labor purchased is the same as direct labor used as far as this textbook is concerned.
- An unfavorable overhead variance (e.g. driven by a need for extra human resources costs or training costs) could help confirm this diagnosis.
- That’s because multi-product firms’ sales volume variances could reflect overall sales changes or just a change in the sales mix.
It may be possible for the production manager to deviate from this standard mix and use slightly different proportions of each input material. The production manager may be tempted to replace some Beta for the cheaper Gamma as this would reduce the overall production cost. The factory has set a standard that 1000 liters of raw fruit juice should yield 950 bottles of the finished product. Each bottle contains 1 liter of juice, and the standard cost per bottle is $2. Direct Labor Yield Variance (DLYV) is a measure of the difference between actual and expected labor costs, based on the number of units produced or services provided.
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Standard quantity is the quantity of an input (direct labor, direct materials, or overhead) per unit produced. Just because that’s the standard quantity doesn’t mean you can plug that number in for actual or budgeted quantity. The yield variance, which is based on standard inputs of materials and labor, is the difference between the actual output and the standard output of the production or manufacturing process.
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Beta has a large favourable variance and Alpha has a large adverse variance. Kappa Co has used relatively less of the more expensive material Beta, and relatively more of the cheaper material Alpha. Overall, the savings from using less Beta have outweighed the additional cost of the extra Alpha, thus resulting in a favourable total mix variance. The yield variance can be calculated using a similar table approach to the mix variance.
Otherwise that variance would get in the way of evaluating performance. A favorable material yield variance indicates better productivity than the standard yield resulting in lower material cost. Note that sum of individual material yield variances equals the total yield variance calculated in step 3.
1.6 Standards: Price and Quantity
The material yield variance for March was favorable because company actually produced 32,340 tons of output which was higher than the standard output of 31,000 tons based on input quantity of 34,100 tons. As the actual output achieved during the period is higher than the standard yield, the variance is favorable. Favorable material yield variance indicates the amount of savings in material costs as a result of better output yield than the standard. In this example, the yield variance is $60, which is unfavorable since the actual yield is less than the standard yield. This signals that there may be inefficiencies in the production process or issues with the quality of the raw juice. The yield variance is favorable if the production process manufactures more finished product from a specific amount of raw materials than expected.
Also notice that, for the above revenue calculations, quantity was expressed as a total figure and price was expressed per unit. But total budget variance, the only variance I’ve introduced thus far, could be caused by hundreds, thousands, even millions of things. Managers are hardly any closer to knowing how to improve profits simply by knowing total budget variance. The most important similarity, for my purposes anyway, is that this pattern involves developing an expectation and comparing actual results against that expectation in a controlled and careful way. If you understand that, you will have a much more complete understanding of variance analysis. Beta Company processes three materials, namely, material A, material B, and material C, to produce its only product known as product K.
You have to dig into the budget to find the variable overhead cost rate per unit of the cost driver. The difference between the two goes to the direct materials quantity variance. That line of the journal entry is a debit, meaning the variance is unfavorable.
Labor rate variance arises when labor is paid at a rate that differs from the standard wage rate. Labor efficiency variance arises when the actual hours worked vary from standard, resulting in a higher or lower standard time recorded for a given output. In an analysis question involving variances, it is important to consider who is responsible for the variances. For Kappa Co it is worth noting periodic inventory system: methods and calculations that the standards set are not the responsibility of the production manager. Also, as they are out of date (they were calculated five years ago), this could be contributing to the variances calculated. The main differences to note is in cell E14 which is now the sum of cells B14 to D14 and the heading for Actual quantity in standard mix is now on the top row of the table in cell A13.