Definition of Production Volume Variance
The production volume variance is associated with a standard costing system used by some manufacturers. This variance arises when there is a difference in the following amounts:
- The manufacturer's budgeted amount of fixed manufacturing overhead costs
- The amount of the fixed manufacturing overhead costs that were assigned to (or absorbed by) the company's good output
Example of Production Volume Variance
Assume that a manufacturer had budgeted $300,000 of fixed manufacturing overhead (supervisors' compensation, depreciation, etc.) for the upcoming year. 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).
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 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).