Using these calculations can help make sure you’re producing enough units to run at a profit. You can have a more efficient production process while keeping a steady production level. This result of $950 of unfavorable fixed overhead volume variance can be used together with the fixed overhead budget variance to determine the total fixed overhead variance. The standard fixed overhead applied to units exceeding the budgeted quantity represent cost saved because units were essentially produced at no additional fixed overhead. The result is a lower actual unit cost and higher profitability than the budgeted figures. Actual production volume is the production that the company actually achieves (in hours) or produces (in units) during the period.

- This variance compares the standard quantity or budget quantity with the actual quantity of direct material at the standard price.
- By contrast, efficiency variance measures efficiency in the use of the factory (e.g., machine hours employed in costing overheads to the products).
- Management salaries do not usually vary with incremental changes in production.
- One of these statistics is a measurement of the number of units that a business can produce per day given a set cost.
- At Finance Strategists, we partner with financial experts to ensure the accuracy of our financial content.

If actual production is greater than budgeted production, the production volume variance is favorable. That is, the total fixed overhead has been allocated to a greater number of units, resulting in a lower production cost per unit. However, as the name suggested, it is the fixed overhead volume variance that is more about the production volume. Likewise, we can also determine whether the fixed overhead volume variance is favorable or unfavorable by simply comparing the actual production volume to the budgeted production volume. Production volume variance is especially relevant when a company incurs fixed overhead costs that are spread over its units of production. If a company produces more units than expected, it spreads these fixed costs over a larger number of units, reducing the fixed overhead cost per unit.

## Resources for Your Growing Business

To calculate the production volume variance, we deduct the budgeted unit of production from the actual number of units produced. In a standard cost system, overhead is applied to the goods based on a standard overhead rate. The standard overhead rate is calculated by dividing budgeted overhead at a given level of production (known as normal capacity) by the level of activity required for that particular level of production. To calculate the Production Volume Variance, subtract the budgeted production from the actual production, and then multiply the result by the budgeted cost per unit. The resulting variance will tell you how the difference in production volume between what was budgeted and what was actually achieved affects your production costs.

- Quantity standards indicate how much labor (i.e., in hours) or materials (i.e., in kilograms) should be used in manufacturing a unit of a product.
- You need to pay these costs no matter the number of units that you produce.
- The proportion of this sale from every four products is MacBook 40%, iPhone 40%, IPod 10%, and IPad 10%.
- This is said to be a favorable variance because the total fixed overhead is being allocated to a greater number of units.
- Basically, Sales Volume Variance measures the sales performance due to differences between actual products sold during the period compared to budget at the standard price, standard profit or standard contribution.

Suppose Connie’s Candy budgets capacity of production at 100% and determines expected overhead at this capacity. Connie’s Candy also wants to understand what overhead cost outcomes will be at 90% capacity and 110% capacity. The following information is the flexible budget Connie’s Candy prepared to show expected overhead at each capacity level. Adding these two variables together, we get an overall variance of $3,000 (unfavorable). Although price variance is favorable, management may want to consider why the company needs more materials than the standard of 18,000 pieces. It may be due to the company acquiring defective materials or having problems/malfunctions with machinery.

## Variance Analysis

If the fixed overhead cost applied to the actual production using the standard fixed overhead rate is bigger than the budgeted fixed overhead cost, the fixed overhead volume variance is the favorable one. This means that the company’s actual production volume measured in units or hours during the period is more than the budgeted production volume that the company has previously planned. Fixed overhead volume variance is the difference between the budgeted fixed overhead cost and the fixed overhead costs that are applied to the actual production volume using the standard fixed overhead rate. While fixed overheads are supposed to be fixed, to facilitate timely reporting, the budgeted fixed overhead cost needs to be applied to units produced at a standard rate.

## Production Volume Variance: Definition, Formula, Example

By analyzing production volume variance, management can gain insights into production efficiency and make adjustments as necessary to reduce costs and maximize profits. However, it’s important to note that a favorable variance is not always good, and an unfavorable variance is not always bad. They should be interpreted in the context of the company’s overall operational and financial performance. Production volume variance is the difference between your budgeted overhead and actual overhead.

## What is the Production Volume Variance?

This is because the responsibility for overhead costs is difficult to pin down. Direct Material Usage Variance measure how efficiently the entity’s direct materials are using. This variance compares the standard quantity or budget quantity with the actual quantity of direct material at the standard price. In this case, two elements are contributing to the favorable outcome. Connie’s Candy used fewer direct labor hours and less variable overhead to produce 1,000 candy boxes (units). For example, if the actual cost is lower than the standard cost for raw materials, assuming the same volume of materials, it would lead to a favorable price variance (i.e., cost savings).

## Sales Mix Variance:

For this reason, some businesses prefer to rely on other statistics, such as the number of units that can be produced per day at a set cost. When calculated using the formula above, a positive fixed overhead volume variance is favorable. The fixed factory overhead variance represents the difference between the actual fixed overhead and the applied fixed overhead. One variance determines if too much or too little was spent on fixed overhead.

During that year, it expects to have 30,000 production machine hours of good output. Based on this, the manufacturer established a predetermined fixed manufacturing overhead rate of $10 per standard machine hour. If the company actually produces 29,000 standard machine hours of good output, the output (products) will be assigned (or will have absorbed) $290,000 of the fixed manufacturing overhead. This will cause an unfavorable production volume variance of $10,000 ($300,000 budgeted vs. $290,000 assigned; or 1,000 too few standard machine hours of good output X $10 per standard machine hour).

## What is your current financial priority?

Often, explanation of this variance will need clarification from the production supervisor. Another variable overhead variance to consider is the variable overhead efficiency variance. Fixed overhead volume variance is favorable when operating income formula the applied fixed overhead cost exceeds the budgeted amount. This is because the units produced in such a case are more than the quantity expected from current production capacity and this reflects efficient use of fixed resources.