If you are making widgets, you will always get the number of finished goods you expect based on the quantities called for on the bill of materials (unless there are scrapped or lost items, which is a different subject altogether). But if you are making food products or chemicals, the quantity of the finished goods you produce is often different than what you expected. That is a “variable yield.”
Why?
Spillage is one reason. If you spilled some of a mixed batch, then you wouldn’t be able to make the quantity you were expecting, even though you consumed all of the ingredients. On a personal level, if you’re making chocolate chip cookies and can’t help but eat some of the batter, you are going to get fewer cookies than the recipe called for. Right? Same (ish) deal.
Temperature, pressure, humidity, and other environmental conditions are another. Ingredients react differently under different conditions and affect the yield. For example, the boiling point of water decreases as altitude increases and atmospheric pressure decreases.
Substituting ingredients. The same specified ingredient ordered from different suppliers can perform differently. Substituting an ingredient with another that is identical in one aspect (color, viscosity, taste) may be different in another, including volume. Substitutions are often made out of necessity (“just can’t get it”) or for profitability (lower-cost substitutes are available).
Whatever the reason for the variable yield, it is important to account for it in both production planning and the cost of goods sold (COGS). For a make-to-stock manufacturer in which inventory levels are managed to hit order fulfillment rates, slight variations in the yield are not as troublesome. But for a make-to-order manufacturer, especially for perishable items like food, variations in the yield may encourage the manufacturer to include “buffer stock” with each production run to be able to fulfill that order and not be short. Either way, it is critical that a manufacturer track the normal variances in yield and plan accordingly.
actual output – standard output = variable yield
The financial impact of a variable yield can be significant (positive or negative, but mostly negative). It is critical to understand how it affects the COGS and what, if any, price adjustments need to be made to remain profitable. As an example, if the standard output for a batch of muffins is 1,000 units based on 500 pounds of ingredients, but the actual output is 900 units, there is an unfavorable yield variance of 100 units (1,000 – 900). If the standard cost is $2 per unit, the unfavorable yield variance is $200.
That yield variance is typically a detailed line item that supports a manufacturer’s profit and loss (income statement) as part of the COGS calculation to reflect the true costs. An astute manufacturer will monitor that variance account to review the production process:
- Is the standard output estimate correct?
- Has something changed in the environmental conditions or ingredients that would change the volume produced?
- Is there a problem handling batches and causing spillage?
- Are certain workers making mistakes that spoil part or all of a batch?
MISys Manufacturing is used by hundreds of batch process manufacturers for whom variable yields are a normal part of the business. Ingredients are considered to be “consumed” components of the bill of material (BOM/Recipe), for which an amount of units/pounds, etc. is expected to be produced (standard output). When a Manufacturing Order (MO) is started, the ingredients are taken out of Raw Material inventory and allocated into Work in Process (WIP). Once the production run is finished, the number of items/quantity produced (actual output) is recorded in the MO. The MO won’t close automatically, because an MO is intentionally flexible, allowing for partial completion of production runs that could be picked up later. Closing the MO indicates that production is finished and all of the items allocated are consumed. The quantity that is recorded is the actual output, and the variable yield is the difference between the standard output and the actual output. The value of the variable yield is recorded as an Assembly Variance in the MISys subledger. When this is transferred to the General Ledger, it is _____________. MISys generates a separate report for Assembly Variances so that the production manager and accountant can review the entries and make business decisions based on the information there. What’s more, is that a user can set up a custom alert that would provide information on any Assembly Variances created over a defined period (yesterday, last week, last month, etc.) directly to the individual who needs to review the information. That way real-time decisions can be made based on the actual vs standard output.
