Production Volume Variance
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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. |
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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. |
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