Volume variance is primarily driven by differences between actual and planned production, affecting fixed overhead allocation. True or False?

Volume variance is primarily driven by differences between actual and planned production, affecting fixed overhead allocation. True or False?

• A. True
• B. False
• C. Only for variable overhead
• D. Cannot be determined

Answer: (A)

Volume variance measures how much fixed overhead is under- or over-absorbed due to a difference between actual production and what was planned. In absorption costing, fixed overhead is allocated to production at a standard rate derived from budgeted fixed overhead divided by budgeted activity. When actual production differs from the planned level, the amount of fixed overhead that is absorbed changes accordingly, and the gap between budgeted fixed overhead and absorbed fixed overhead becomes the volume variance. So the variance arises specifically from producing more or fewer units than expected, which changes how much fixed overhead is allocated. For example, if you budget fixed overhead at 100,000 for 20,000 units (a rate of 5 per unit) and actual production is 25,000 units, fixed overhead absorbed would be 125,000. The volume variance is 100,000 minus 125,000, reflecting the change in absorption due to higher output. If output were lower than budget, the opposite would occur. This concept is distinct from spending variance (which relates to actual fixed overhead vs. budgeted fixed overhead) and from variable overhead, which behaves differently since it varies with activity in a separate way.

Volume variance measures how much fixed overhead is under- or over-absorbed due to a difference between actual production and what was planned. In absorption costing, fixed overhead is allocated to production at a standard rate derived from budgeted fixed overhead divided by budgeted activity. When actual production differs from the planned level, the amount of fixed overhead that is absorbed changes accordingly, and the gap between budgeted fixed overhead and absorbed fixed overhead becomes the volume variance. So the variance arises specifically from producing more or fewer units than expected, which changes how much fixed overhead is allocated.

For example, if you budget fixed overhead at 100,000 for 20,000 units (a rate of 5 per unit) and actual production is 25,000 units, fixed overhead absorbed would be 125,000. The volume variance is 100,000 minus 125,000, reflecting the change in absorption due to higher output. If output were lower than budget, the opposite would occur. This concept is distinct from spending variance (which relates to actual fixed overhead vs. budgeted fixed overhead) and from variable overhead, which behaves differently since it varies with activity in a separate way.