What is the production volume variance?

The production volume variance is the difference between the actual number of units produced in a period and the budgeted number of units that should have been produced. The calculation is:

(Actual units produced - Budgeted units produced) x Budgeted overhead rate

An excessive quantity of production is considered to be a favorable variance, while an unfavorable variance is when fewer units are produced than expected.

The reason why a larger production volume is considered favorable is that this means factory overhead can be allocated across more units, which reduces the total allocated cost per unit. Conversely, if fewer units were to be produced, this means the amount of overhead allocated on a per-unit basis would be higher. Thus, the designation of the production volume variance as being favorable or unfavorable is only from the accounting perspective, where a lower per-unit cost is considered better.

From the perspective of the production process, a production volume variance is likely to be useless, since it is measured against a budget that may have been created months ago.  A better measure would be the ability of a production operation to meet its production schedule for that day.

The production volume variance is based on the assumption that factory overhead is directly associated with units of production, which is not necessarily the case. Some overhead, such as facility rent or building insurance, will be incurred even if there is no production, while other types of overhead, such as management salaries, only vary across very large ranges of production volume. Instead, there may be a number of other ways in which factory overhead can be broken into smaller units, known as cost pools, and allocated using several methods that represent a more intelligent association of activities with costs incurred (see activity-based costing for more information).

Related Topics

Standard costing overview
What does a favorable variance indicate?
What is a cost variance? 
What is a rate variance?
What is a volume variance?