Cost Accounting

# What is Production Volume Variance?

Production volume variance is a measure of the difference between the actual cost of producing a certain number of units of output and the budgeted cost of producing that output.

It is a type of overhead variance, which is a variance that arises from the difference between the actual cost of overhead and the budgeted cost of overhead.

## How to Calculate Production Volume Variance

The production volume variance is calculated as follows:

Production volume variance = (Actual units produced – Budgeted production units) × Budgeted overhead rate per unit

Where:

If the production volume variance is positive, then it means that the company produced more units of output than it had budgeted for. This will result in a favourable production volume variance, which means that the company’s overhead costs were lower than it had expected.

Conversely, if the production volume variance is negative, then it means that the company produced fewer units of output than it had budgeted for. This will result in an unfavourable production volume variance, which means that the company’s overhead costs were higher than it had expected.

The production volume variance is an important tool for managers to use to track and control overhead costs. By understanding the factors that affect the production volume variance, managers can take steps to reduce their overhead costs and improve their profitability.

## Factors Impacting Production Volume Variance

Here are some of the factors that can affect the production volume variance:

Changes in demand: If demand for the company’s products increases, then the company will need to produce more units of output. This will result in a favourable production volume variance. Conversely, if demand for the company’s products decreases, then the company will need to produce fewer units of output. This will result in an unfavourable production volume variance.

Changes in production efficiency: If the company’s production efficiency increases, then it will be able to produce more units of output with the same amount of overhead. This will result in a favourable production volume variance. Conversely, if the company’s production efficiency decreases, then it will need to use more overhead to produce the same amount of output. This will result in an unfavourable production volume variance.

Changes in production overhead rates: If the company’s production overhead rates increase, then the budgeted overhead cost per unit will also increase. This will make it more difficult for the company to achieve a favourable production volume variance. Conversely, if the company’s production overhead rates decrease, then the budgeted overhead cost per unit will also decrease. This will make it easier for the company to achieve a favourable production volume variance.

## Conclusion

By understanding these factors, managers can take steps to minimize the impact of the production volume variance on their company’s profitability.