Production Volume Variance


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.

BREAKING DOWN '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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