What Does Yield Variance Mean?
Yield variance is the striking difference in yield between the profitability and the interest rate that income is the profit earned on the investment, and the interest rate is the reason for that gain.
Interest rate and yield are two terms commonly used by banks, financial companies, brokers, investment funds, etc. To involve investors in many schemes. When investing in a commodity, it is very important for the investor to refresh his knowledge of what Yield variance actually means.
Profit can be understood as the collective return earned by investing in financial commodities like stocks, debentures, bonds, etc. Returns are more accurate and provide an accurate understanding of the total return earned on investment. The reason is that profitability also takes into account factors such as tax breaks. To understand how profitability works, we first need to delve deeper into the concept of interest rates.
The interest rate is not more than a percentage of the amount received or paid on the principal amount. In the case of income generating investments such as time deposits, regular deposits, etc. The interest rate means the percentage of the amount that will be received compared to the initial investment. Whereas in the case of loans, interest rate refers to the percentage of the amount owed by the borrower to the lender in relation to the loan amount.
The yield can only be calculated after taking into account the interest rate. For example, if an investor has invested $1000 in dividends with an interest rate of 5%, which is compiled quarterly, the return on this investment can only be obtained after calculating the interest received. Interest on this investment will be $50 for the first quarter, but starting in the second quarter, interest will be charged on the total amount earned by adding the previous interest to the principal, i.e., $1,050 and so on.
Since there are four quarters in a year, interest will be calculated four times, and the total earned in the year, plus all other monetary gains such as taxes, will represent the total return on the investment. An important feature of profit is that it is always calculated annually, that is, on an annual basis, and is often expressed as a percentage. Interest can be calculated annually, semi-annually, quarterly, monthly, etc.
Therefore, investors need to draw a line between yields and interest rates, and then continue investing.
Yield Variance is the difference between the standard cost of the management to produce in a certain amount with the actual cost of the production. Yield variance is a financial measurement tool for management in controlling production costs and company productivity. From the variance of these results, management can find out how effective and efficient they are in using inputs in production. Furthermore, management can try to control input costs to produce products according to company targets
In measuring the variance of this result, the value of the result can be negative or positive. A positive yield variance means that more output is produced using standard inputs. The larger or more positive the value means the more efficient the company’s productivity. Whereas a negative Yield Variance means that less output is produced using standard costs or inputs. The smaller or more negative the value of this result variance means the more inefficient the production.
In practice this result variance is usually used together with the mix variance. This mix variance shows the difference in the proportion of the mixture of raw materials in production with the standard. Because there is a relationship between yield variance and mix variance. Differences in the mixture of ingredients in production will result in changes in the yield variance.
Actually, a positive Yield Variance is not necessarily good, especially if the value is too far from the standard value. Because these results could actually cause a decrease in the quality of the goods produced. This low quality is not good for the company because it makes it difficult for the product to compete in the market. Ideally the yield variance is zero, but in practice it is difficult to achieve this zero yield variance. So a slight difference below or above zero is normal.
Yield variance can be negative or positive. The yield variance is called negative if the number of goods produced is less than the standard input used. If the number of goods produced is more than the standard input, then the yield variance is positive.
Input standards include the cost of raw materials used and wages for labor involved in production activities.
What causes yield variance?
There are two factors that play a very important role in a production activity, namely raw materials and labor. These two factors are the cause of the yield variance.
From the manpower perspective, the variance in results can be triggered by differences in wage rates and differences in working hours. Meanwhile, in terms of raw materials, the yield variance is caused by the difference in the price of raw materials and the difference in the quality of the raw materials.
Accountants generally think that the main factor causing yield variance is the quality and quantity of raw materials handled by workers. Materials Quantity and quality of raw materials have a direct impact on the number of goods produced. That assumption is very reasonable.
For example, you plan to make ten shirts. For that you buy 20 meters of cloth. However, it turned out that from the 20 meters of cloth, 5 meters of them were not suitable for use because there were defects. Then the number of shirts you can produce will be less than 10 pieces.
It is a form of negative yield variance, where the number of goods produced is less than the standard cost of production. The opposite is a positive yield variance. Referring to the example above, from the 20 meters of fabric you are able to produce 12 pieces of shirts. This is because the raw material for the fabric you use is of high quality and has a size wider than the size of the fabric you normally use.
What are the benefits of yield variance?
Yield variance serves as an indicator to measure the level of effectiveness and efficiency in controlling production costs. The company’s management uses the result variance as an evaluation material so that the production costs used produce products according to the target.
To calculate the yield variance the following formula is used;
Yield Variance = (Actual Output Units – Expected Output Units) x Standard Cost per unit of raw material
As described above, the results of the yield variance calculation can be positive or negative. A positive result variance means that production activities are carried out as expected and can generate profits for the company. Conversely, if the value is negative, it means that production activities are not profitable for the company.
However, there are also those who argue that the ideal value of yield variance is zero. The reason is that the yield variance is positive, where the goods produced are greater than the standard production costs, which may have an impact on product quality. It could be that the resulting product does not meet the company’s quality standards.
