To illustrate the production volume variance, let's assume that a manufacturer had budgeted $300,000 of fixed manufacturing overhead (supervisors' compensation, depreciation, etc.) for the upcoming year. During that period it expected to have 30,000 machines hours of good output. Based on this plan the manufacturer established a fixed manufacturing overhead rate of $10 per standard machine hour. If the company actually produces 29,000 standard machine hours of good output, the 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).
If our example had stated that the manufacturer actually produced 32,000 standard machine hours of good output, the products would have been assigned $320,000 of fixed manufacturing overhead costs compared to the budgeted amount of $300,000. This scenario would result in a favorable production volume variance of $20,000 ($300,000 budgeted vs. $320,000 assigned; or 2,000 additional standard machine hours of good output X $10 per standard machine hour).
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