Overhead Volume
Variance:
Definition and Explanation:
The
Volume variance represents the difference
between the budget allowance and the standard
expenses charged to work in process.
If
budget allowance is more than the standard expenses
charged to production, the variance is called
unfavorable volume variance.
If
budget allowance is less than the standard expenses
charged to production, the variance is called
favorable volume variance.
Overhead volume variance is calculated when
overall or net overhead variance is further
analyzed using two variance method. Other variance
that is calculated in two variance method is
Controllable variance.
Formula:
Following formula is used for the calculation of
this variance:
Controllable variance = Budgeted Allowance
Based on Standard Hours Allowed - Overhead
charged to production |
Example:
From the following
data calculate factory overhead volume
variance:
Actual
overhead |
|
$7,384 |
Actual
hours used |
|
3,475 |
Units
produced during the period |
|
850 |
Standard hours for one unit |
|
4 |
Standard factory overhead rate: |
|
|
Variable |
$1.20 |
|
Fixed |
$0.80 |
$2.00 |
|
|
|
Normal
Capacity in labor hours |
|
4000 hours |
Solution:
Budgeted
allowance based on standard hours
allowed: |
|
|
Fixed expenses budgeted |
$3,200 |
|
Variable expenses (3,400*
standard hours allowed × $1.20 variable
overhead rate) |
4,080 |
$7,280 |
|
|
|
Overhead
charged to production (3400 standard
hours allowed × $2.00 standard rate) |
|
$6,800 |
|
|
|
Volume
variance |
|
$480 unfav |
|
|
|
*Standard
hours allowed = Units produced during
the period × Standard time allowed for
one unit |
3,400 =
850 units × 4 hours |
|
|
This variance
consists of Fixed expense only and can also be
computed as follows:
Normal
capacity hours |
4,000 |
Standard
hours allowed for actual production |
3,400 |
|
|
|
600 |
|
|
Volume
variance (600 hours × $08.0*) |
$480
unfav. |
|
|
*Fixed
expenses rate at normal capacity |
Who is Responsible For Volume Variance?
The overhead volume
variance indicates the cost of capacity available
but not utilized efficiently and is considered the
responsibility of executive and departmental
management.
|