Yield variance

The term refers to the expected deviation of interest yields. 

Yield variance is the gap between the real output and the expected output of a production or manufacturing process, calculated using standard materials and labor. It’s measured in standard cost. Usually, yield variance is considered unfavorable when the actual output falls short of the expected output. However, there are cases where the output can exceed expectations too.

Calculating the yield variance

It is possible to calculate the yield variance using the formula:

Yield Variance=Standard Unit Cost * (Actual Yield − Standard Yield)

Yield variance is a widely used metric in manufacturing industries to assess financial and operational performance. Analysts often tweak the inputs to make the measurement more accurate. For example, during a sudden rise in raw material prices, using temporary price inputs might distort the results from the usual levels. This analysis involves both art and science, as it requires balancing different factors for more reliable insights.

Yield variance typically focuses on direct materials, which are the raw materials directly transformed into the final products. These materials aren’t used in the production process; instead, they physically become part of the finished product. In simple terms, direct materials are the tangible pieces or components that make up the final product.

If a company predicts the amount of material needed to produce a specific quantity and ends up using more or less than that prediction, the material’s yield variance will be either negative or positive. If the predicted quantity matches the actual quantity used, then the variance will be zero. In other words, if they get it right, there won’t be any variance.