Definition
Volume variances are measures used in managerial accounting to analyze the performance of a business. Specifically, volume variances compare the actual volume of production or sales to the volume that was planned or budgeted. Such variances are pivotal for understanding whether production efficiencies, changes in demand, or other factors affected the company’s output.
Types of Volume Variances
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Fixed Overhead Volume Variance: This refers to the difference between the budgeted fixed overhead cost and the actual fixed overhead cost based on actual production levels. It provides insights into how well the company utilized its fixed production resources.
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Sales Margin Volume Variance: This is the difference in the contribution margin that results from the difference between actual sales volume and budgeted sales volume. It highlights the impact of sales volume fluctuations on profitability.
Examples
Example 1: Fixed Overhead Volume Variance
ABC Manufacturing budgeted $50,000 for fixed overhead costs, assuming they would produce 10,000 units. The actual production was 12,000 units, with the total fixed overhead remaining at $50,000. The variance is calculated as:
\[ \text{Fixed Overhead Volume Variance} = (\text{Actual Units} - \text{Budgeted Units}) \times \text{Fixed Overhead Rate} \]
\[ \text{Fixed Overhead Volume Variance} = (12,000 - 10,000) \times \left(\frac{$50,000}{10,000}\right) \]
\[ \text{Fixed Overhead Volume Variance} = 2,000 \times $5 = $10,000 \]
Example 2: Sales Margin Volume Variance
XYZ Retail budgeted for 8,000 units at a contribution margin of $15 per unit, but actually sold 10,000 units. The variance is calculated as:
\[ \text{Sales Margin Volume Variance} = (\text{Actual Sales Volume} - \text{Budgeted Sales Volume}) \times \text{Contribution Margin per Unit} \]
\[ \text{Sales Margin Volume Variance} = (10,000 - 8,000) \times $15 \]
\[ \text{Sales Margin Volume Variance} = 2,000 \times $15 = $30,000 \]
Frequently Asked Questions (FAQs)
What is the primary purpose of calculating volume variances?
Volume variances help in identifying whether discrepancies in performance were due to changes in volume, enabling better decision-making regarding production and sales strategies.
How do volume variances differ from price variances?
Volume variances focus on differences in the number of units produced or sold, whereas price variances deal with differences in the prices received for sales or the costs incurred for inputs.
Can volume variances indicate inefficiencies in production?
Yes, unfavorable fixed overhead volume variances may indicate underutilization of production capacity and inefficiencies in managing fixed resources.
How are volume variances used in flexible budgeting?
In flexible budgeting, volume variances are used to adjust the budgeted figures to reflect actual activity levels, providing a more accurate comparison between budgeted and actual performance.
Are volume variances relevant for service industries?
Yes, volume variances can apply to service industries where services are standardized and quantifiable, such as in consulting hours or healthcare services provided.
Related Terms
Fixed Overhead Volume Variance: The difference between the budgeted fixed overhead costs and the fixed overhead costs applied to actual production.
Sales Margin Volume Variance: The difference between the budgeted contribution margin and the actual contribution margin stemming from variations in the sales volume.
Flexible Budgeting: An approach to budgeting that scales the budget based on actual activity levels, facilitating better performance evaluation.
Contribution Margin: The selling price per unit minus the variable cost per unit. It represents the portion of sales that contributes to covering fixed costs and generating profit.
Online References
- Investopedia’s Article on Fixed Overhead Volume Variance
- AccountingCoach’s Guide to Variable and Fixed Overhead
- Financial Accounting Standards Board (FASB) for in-depth accounting standards and practices
Suggested Books for Further Studies
- “Managerial Accounting: Tools for Business Decision Making” by Jerry J. Weygandt, Paul D. Kimmel, Donald E. Kieso
- “Cost Accounting: A Managerial Emphasis” by Charles T. Horngren, Srikant M. Datar, Madhav V. Rajan
- “Management Accounting” by Anthony A. Atkinson, Robert S. Kaplan, Ella Mae Matsumura, S. Mark Young
Accounting Basics: Volume Variances Fundamentals Quiz
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