Production Volume Variance

AAA

DEFINITION of 'Production Volume Variance'

The amount of fixed overhead costs that are not allocated to a product because actual production varies from budgeted production. Also known as fixed overhead volume variance.


Mathematically, production volume variance is expressed as:


(Actual Production - Budgeted Production) x Budgeted Overhead Rate


With the budgeted overhead rate defined as (budgeted fixed overhead / budgeted production). It may also be expressed as:


(Actual Production - Factory Capacity) x Budgeted Overhead Rate


With the budgeted overhead rate defined as (budgeted fixed overhead / factory capacity); in this case, production volume variance represents the cost of idle factory capacity.

INVESTOPEDIA EXPLAINS 'Production Volume Variance'

When actual production is greater than budgeted production, production volume variance is favorable, since total fixed overhead is allocated to a greater number of units resulting in a lower production cost per unit and consequently greater profitability. Conversely, when actual production is lower than budgeted production, production volume variance is unfavorable.

RELATED TERMS
  1. Applied Overhead

    A type of overhead that is recorded under the cost-accounting ...
  2. Overhead Rate

    In managerial accounting, a cost added on to the direct costs ...
  3. Initial Production

    The measurement of an oil well's production at the outset. Initial ...
  4. Fixed Cost

    A cost that does not change with an increase or decrease in the ...
  5. Overhead

    An accounting term that refers to all ongoing business expenses ...
  6. Absorption Costing

    A managerial accounting cost method of expensing all costs associated ...
Related Articles
  1. Fundamental Analysis

    Analyzing Operating Margins

    Find out how to put this important component of equity analysis to work for you.
  2. Active Trading Fundamentals

    Bet Smarter With The Monte Carlo Simulation

    This technique can reduce uncertainty in estimating future outcomes.
  3. Investing

    Operating Leverage Captures Relationships

    Find out how fixed and variable costs interact to shed new light on old companies.
  4. Investing

    What are the risks of having both high operating leverage and high financial leverage?

    In finance, the term leverage arises often. Both investors and companies employ leverage to generate greater returns on their assets. However, using leverage does not guarantee success, and the ...
  5. Delivery duty paid (DDP) is a shipping term.
    Investing

    What does DDP Mean?

    Delivery duty paid (DDP) is a shipping term specifying that the seller is responsible for all costs associated with delivery of the goods to the buyer. It is usually used when goods are exported ...
  6. Fundamental Analysis

    What is a good interest coverage ratio?

    Learn the importance of the interest coverage ratio, one of the primary debt ratios analysts use to evaluate a company's financial health.
  7. Fundamental Analysis

    What is a bad interest coverage ratio?

    Understand how interest coverage ratio is calculated and what it signifies, and learn what market analysts consider to be an unacceptably low coverage ratio.
  8. Active Trading Fundamentals

    What is liquidity risk?

    Learn how to distinguish between the two broad types of financial liquidity risk: funding liquidity risk and market liquidity risk.
  9. Technical Indicators

    What is a good gearing ratio?

    Understand the meaning of the gearing ratio, how it is calculated, the definition of high and low gearing, and how they reflect relative financial stability.
  10. Investing Basics

    What is considered to be a bad gearing ratio?

    Understand the basics of gearing, including the net gearing ratio, what constitutes a bad gearing ratio and how this figure reflects financial stability.

You May Also Like

Hot Definitions
  1. Santa Claus Rally

    A surge in the price of stocks that often occurs in the week between Christmas and New Year's Day. There are numerous explanations ...
  2. Commodity

    1. A basic good used in commerce that is interchangeable with other commodities of the same type. Commodities are most often ...
  3. Deferred Revenue

    Advance payments or unearned revenue, recorded on the recipient's balance sheet as a liability, until the services have been ...
  4. Multinational Corporation - MNC

    A corporation that has its facilities and other assets in at least one country other than its home country. Such companies ...
  5. SWOT Analysis

    A tool that identifies the strengths, weaknesses, opportunities and threats of an organization. Specifically, SWOT is a basic, ...
  6. Simple Interest

    A quick method of calculating the interest charge on a loan. Simple interest is determined by multiplying the interest rate ...
Trading Center