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. Analyzing Operating Margins
    Fundamental Analysis

    Analyzing Operating Margins

  2. Bet Smarter With The Monte Carlo Simulation
    Active Trading Fundamentals

    Bet Smarter With The Monte Carlo Simulation

  3. Operating Leverage Captures Relationships
    Investing

    Operating Leverage Captures Relationships

  4. What are the risks of having both high ...
    Investing

    What are the risks of having both high ...

Hot Definitions
  1. Wage-Price Spiral

    A macroeconomic theory to explain the cause-and-effect relationship between rising wages and rising prices, or inflation. ...
  2. Accelerated Depreciation

    Any method of depreciation used for accounting or income tax purposes that allows greater deductions in the earlier years ...
  3. Call Risk

    The risk, faced by a holder of a callable bond, that a bond issuer will take advantage of the callable bond feature and redeem ...
  4. Parity Price

    When the price of an asset is directly linked to another price. Examples of parity price are: 1. Convertibles - the price ...
  5. Earnings Multiplier

    An adjustment made to a company's P/E ratio that takes into account current interest rates. The earnings multiplier is used ...
  6. Macroeconomics

    The field of economics that studies the behavior of the aggregate economy. Macroeconomics examines economy-wide phenomena ...
Trading Center