Understanding Yield Variance: Improve Manufacturing Efficiency and Profitability
Yield variance is the difference between actual output and standard output of a production or manufacturing process, based on standard inputs of materials and labor. It reflects the efficiency of these processes and is valued at standard cost. Yield variance is generally unfavorable when the actual output is less than the standard or expected output, but it can exceed expectations as well.
How to Calculate Yield Variance
Yield variance is calculated as the actual yield minus the standard yield multiplied by standard unit cost:
1Yield Variance = SC * (Actual Yield − Standard Yield)
2
3where:
4 SC = Standard unit cost
The Significance of Yield Variance
Yield variance is a key financial and operational metric in manufacturing industries. Analysts frequently adjust inputs for special scenarios to maintain the relevance and accuracy of this measure. For example, in the event of a temporary spike in raw material prices, temporary price inputs might be excluded to avoid distorting results.
Usually, yield variance pertains to direct materials—raw materials made into finished products, not those used in the production process. Direct materials are the physical components of the finished product at the end of the manufacturing process.
If a firm misjudges the amount of material required for production, this discrepancy will be reflected in the yield variance. A variance greater or less than zero indicates discrepancies between standard and actual usage of materials. When standard and actual quantities match, the yield variance will be zero.
Highlighting inefficiencies through direct materials yield variance, companies can identify opportunities for operational improvements. Increasing output from the same level of inventory while maintaining quality can enhance profitability.
However, yield variance alone does not reveal the reasons behind the discrepancies. It identifies that a variance exists but does not specify the cause.
Yield Variance vs. Mix Variance
Yield variance measures the difference in output, while mix variance assesses overall material usage or inputs. Mix variance arises from the usage of a different mix of products or inputs than expected.
Example of Using Yield Variance
Consider a scenario where 1,000 units are the standard output based on 1,000 kilograms of materials in an 8-hour production shift. If the actual output is 990 units, there is an unfavorable yield variance of 10 units (1,000 - 990). With a standard cost of $25 per unit, the unfavorable yield variance totals $250 (10 x $25).
For Company ABC, suppose it plans to produce 1,000,000 units of a toy for every 1,500,000 units of specialized plastic parts. In a recent production run, it used 1,500,000 plastic units but produced only 1,250,000 toys. The cost per plastic unit is $0.50. The yield variance would be calculated as follows:
- (1.25M actual toy output - 1.5M expected toy output) * $0.50 per unit = $125,000 unfavorable yield variance
Key Takeaways
- Yield variance measures the difference between actual output and standard output of a production process.
- It differs from mix variance, which examines the difference in overall material usage.
- Yield variance reflects the accuracy of a firm’s estimate of the amount of material required for a certain level of production.
Related Terms: mix variance, operational metrics, standard unit cost, production efficiency, material usage.
