Direct Labor Yield Variance:

Learning Objective of the article:

1. Define and explain labor yield variances. 2. Calculate labor yield variance.
Rate and efficiency variances of labor are explained on direct labor rate variance page anddirect labor efficiency variance page respectively. Here, our focus is to explain the calculation of labor yield variance.

Formula of Labor Yield Variance:

(Standard hours allowed for expected output Standard labor rate) (Standard hours allowed for actual output Standard labor rate) An example can help us explain the calculation of labor yield variance.

Example:
To illustrate the calculation of labor yield variances 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: Labor rate variance Labor efficiency variance Labor yield Variance

The expected output of 192,500 lbs. of chewing gum should require 3,850 standard labor hours (20 hours per thousand pounds of chewing gum produced). Similarly, the actual out put of 200,000 lbs. of chewing gum should require 4,000 standard labor hours. The labor variances are labor rate variance, labor efficiency variance and labor yield variance.

Calculation of Labor Rate Variance:

labor rate variance is calculated as explained on direct labor rate variance page.
Actual payroll Actual hours (3,800) Standard labor hours ($6) Labor rate variance $23,104 $22,800 -----------$304 unfavorable ========

Calculation of Labor Efficiency Variance:

Actual hours (3,800) Standard labor hours ($6) Standard hours allowed for expected output (3,850) Standard labor rate ($6) Labor efficiency variance $22,800 $23,100 --------------$(300) favorable ==========

The traditional labor efficiency variance, as explained on direct labor efficiency variance page, is calculated as follows:
Time Actual hours worked 3,800 Rate $6 = Amount $22,800

Standard hours allowed

4,000 ---------

$6 -------$6 =====

$24,000 ----------$(1,200) favorable =========

Labor efficiency variance

(200) ======

Calculation of Labor Yield Variance:

Standard hours allowed for expected output (3,850) Standard labor rate ($6) Standard hours allowed for actual output (4,000) Standard labor rate ($6) $23,100 24,000 --------------Labor yield variance $(900) favorable ========

The labor yield variance identifies the portion of the labor efficiency variance attributable to obtaining an unfavorable or, as in this example, a favorable yield [(3,850 standard hours allowed for expected output 4,000 standard hours allowed for actual output) $6 standard labor rate = $900]. The favorable labor efficiency variance of $300 is the portion of the traditional labor efficiency variance that is attributable to factors other than yield. The sum of the two variances, $900 plus $300, equals the $1,200 traditional labor efficiency variance.