Production Volume Variance
Production volume variance, also known as fixed overhead volume variance, is a measure used in cost accounting to quantify the deviation in actual production volume from the planned or budgeted production volume. It helps in understanding the extent to which a company’s actual output differs from its expected output.
Production volume variance is especially relevant when a company incurs fixed overhead costs that are spread over its units of production. If a company produces more units than expected, it spreads these fixed costs over a larger number of units, reducing the fixed overhead cost per unit. Conversely, if a company produces fewer units than expected, the fixed overhead cost per unit increases.
The formula to calculate the production volume variance is as follows:
Production Volume Variance = (Budgeted Quantity – Actual Quantity) x Budgeted Overhead Rate
- If the result is positive, it means the actual production volume was less than expected, which is unfavorable because fixed overhead costs are spread over fewer units, increasing the cost per unit.
- If the result is negative, it means the actual production volume was greater than expected, which is favorable because fixed overhead costs are spread over more units, reducing the cost per unit.
By analyzing production volume variance, management can gain insights into production efficiency and make adjustments as necessary to reduce costs and maximize profits. However, it’s important to note that a favorable variance is not always good, and an unfavorable variance is not always bad. They should be interpreted in the context of the company’s overall operational and financial performance.
Example of Production Volume Variance
Suppose a company called “ABC Manufacturing” planned to produce 10,000 units of a product during a particular period, with fixed overhead costs of $200,000 for that period. Therefore, the budgeted overhead rate per unit is $200,000 / 10,000 units = $20 per unit.
However, due to various factors (like machinery downtime, labor issues, etc.), ABC Manufacturing only produced 9,000 units during that period.
The production volume variance can be calculated as follows:
Production Volume Variance = (Budgeted Quantity – Actual Quantity) x Budgeted Overhead Rate
Substitute the given values into the formula:
Production Volume Variance = (10,000 units – 9,000 units) x $20 per unit = 1,000 units x $20 per unit = $20,000.
In this case, the production volume variance is positive, indicating an unfavorable variance. This means that the actual production volume was less than the planned volume, resulting in a higher cost per unit than planned because the fixed overhead costs were spread over fewer units.
ABC Manufacturing would need to investigate the reasons for the lower-than-expected production volume and take corrective actions to improve production efficiency and reduce the cost per unit. Such actions might include addressing machinery issues more promptly, improving labor management, enhancing production planning, etc.
