Direct Labor Yield Variance


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 and direct 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 × 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 lbs@ 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:

  • 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 $23,104
Actual hours (3,800) × Standard labor hours ($6) $22,800
————
Labor rate variance $304 unfavorable
========

Calculation of Labor Efficiency Variance:

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

The traditional labor efficiency variance, as explained on direct labor efficiency variance page, is calculated as follows:

Time × Rate = Amount
Actual hours worked 3,800 $6 $22,800
Standard hours allowed 4,000 $6 $24,000
——— ——– ———–
Labor efficiency variance (200) $6 $(1,200) favorable
====== ===== =========

Calculation of Labor Yield Variance:

Standard hours allowed for expected output (3,850) × Standard labor rate ($6)

$23,100

Standard hours allowed for actual output (4,000) × Standard labor rate ($6)

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.

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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