Production Volume Variance

What Is Production Volume Variance?

Production volume variance is a statistic utilized by businesses to measure the cost of production of goods against the expectations reflected in the budget. It compares the genuine overhead costs per unit that were accomplished to the expected or budgeted cost per thing.

The formula for production volume variance is as follows:

• Production volume variance = (real units created - budgeted production units) x budgeted overhead rate per unit

Production volume variance is at times alluded to just as volume variance.

Grasping Production Volume Variance

Computing its overhead costs per unit is important for a business in light of the fact that so many of its overhead costs are fixed. That is, they will be similar whether 1,000,000 units are created or zero.

Factory rent, equipment purchases, and insurance costs the entire fall into this category. They must be paid no matter what the number of units delivered. Management salaries don't as a rule fluctuate with incremental changes in production.

Different costs are not fixed as volume changes. Total spending on raw materials, transportation of goods, and even storage might fluctuate essentially with greater volumes of production.

Production volume variance can be viewed as a flat statistic. It very well might be calculated against a budget that was drafted months or even a long time before genuine production. Thus, a few businesses like to depend on different statistics, for example, the number of units that can be delivered each day at a set cost.

In any case, volume variance is a valuable number that can assist a business with deciding if and how it can create a product at a sufficiently low price and a sufficiently high volume to run at a profit.

Production volume variance is ideal assuming real production is greater than budgeted production.

Great and Bad Production Volume Variance

Assuming real production is greater than budgeted production, the production volume variance is ideal. That is, the total fixed overhead has been allocated to a greater number of units, bringing about a lower production cost per unit.

At the point when real production is lower than budgeted production, production volume variance is unfavorable.

For instance, expect a company budgeted to have 5,000 units delivered the following year at an overhead rate for every unit of $12. In the wake of computing the production results for that year, it was confirmed that 5,400 units were really created. The production volume variance in this model is $4,800 ((5,400 - 5,000) x $12 = $4,800).

The company has delivered a greater number of units at the cost than it had anticipated. The difference of $4,800 is savings made by creating a bigger number of units than the budget assumed.

Highlights

• It centers around overhead costs per unit, not the total costs of production.
• Computing production volume variance can assist a business with deciding if it can create a product in enough amounts to run at a profit.
• Numerous production costs are fixed, so higher production means higher profits.