Definition: Material yield variance is a financial measurement used by management to calculate the difference between the cost of the output expected to be produced and the cost of the output actually produced. In other words, it is how much output a business is planning on producing for a given level of input versus how much is actually produced for the same level of input.
What Does Direct Material Yield Variance Mean?
What is the definition of material yield variance? Direct materials yield variance can tell an organization how effectively they are using their inputs. It can be calculated by using the following yield variance formula:
DM yield variance = standard unit cost x ( actual yield – standard yield )
If a company overestimates or underestimates how much material it will take to produce a certain amount, the materials yield variance will be less than or greater than zero. If the standard quantity is equal to the quantity actually used, then the variance will be zero.
If the direct materials yield variance shows that the company is producing less than planned for a given level of input, the organization can look into their operations to look for ways to become more efficient. Making more products with the same amount of inventory while keeping quality constant can help the organization improve profitability.
Let’s look at an example.
ABC, Inc. manufactures a product for which it plans to make 500 units using 800 pounds of material X. Material X costs $5 per pound.
Based on their projection, ABC, Inc. bought 800 pounds of material X. The company ended up producing 350 units using all of the material X that it purchased.
Using the above formula, we can plug in the given values:
Direct materials mix variance = $5 x (350 – 500)
The variance is -$750. This means that ABC, Inc. produced less than it planned, keeping the level of input constant.
Define Material Yield Variance: Direct Materials Yield Variance means a the difference in actual and expected production costs.