Download material                Accounting topics                Accounting dictionary                Financial calculators
Home » Standard Costing and Variance Analysis » Overhead Volume Variance

# 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.

A D V E R T I S E M E N T

 Financial Accounting Topics Introduction to Accounting ---------------------------------------------------------------------------- Transactions and Accounting Equation ---------------------------------------------------------------------------- Analysis of Business Transactions ---------------------------------------------------------------------------- Journal, Ledger and Trial Balance ---------------------------------------------------------------------------- Accounting for Bills of Exchange ---------------------------------------------------------------------------- Special Journals ---------------------------------------------------------------------------- Cash Book ---------------------------------------------------------------------------- Bank Reconciliation Statement ---------------------------------------------------------------------------- Final Accounts ---------------------------------------------------------------------------- Work Sheet ---------------------------------------------------------------------------- Capital and Revenue Items ---------------------------------------------------------------------------- Valuation of Inventories ---------------------------------------------------------------------------- Accounts of Non-profit Making Organizations ---------------------------------------------------------------------------- Statement of Cash Flows ---------------------------------------------------------------------------- Accounting Ratios Analysis ---------------------------------------------------------------------------- Depreciation, Provisions and Reserves ---------------------------------------------------------------------------- Accounting Dictionary ---------------------------------------------------------------------------- Financial Calculators

 Managerial Accounting Topics Financial Statements ---------------------------------------------------------------------------- Cost Volume Profit Relationship ---------------------------------------------------------------------------- Variable Costing System ---------------------------------------------------------------------------- Materials and Inventory Cost Control ---------------------------------------------------------------------------- Activity Based Costing System ---------------------------------------------------------------------------- Standard Costing and Variance Analysis ---------------------------------------------------------------------------- Balanced Scorecard ---------------------------------------------------------------------------- Capital Investment Analysis/Capital Budgeting

A D V E R T I S E M E N T