What is a volume variance?

What is a volume variance?

• A. Difference in costs/profits due to changes in the volume of output.
• B. Difference between actual results and the master budget.
• C. Difference between flexed budget and actual results.
• D. Difference between budgeted cash flows and actual cash flows.

Answer: (A)

Volume variance is the change in costs or profits that comes from producing more or fewer units than planned. When actual output is higher than budgeted, fixed costs are spread over more units, so more fixed overhead is absorbed and the volume variance tends to be favorable. If actual output is lower, the opposite happens and the volume variance is unfavorable. The standard way to express it is: Volume variance = (actual output − budgeted output) × standard fixed overhead rate per unit. The other descriptions refer to different variances: the difference between actual results and the master budget is the overall (master) variance; the difference between the flexed budget and actual results is a flexible-budget variance; and the difference between budgeted cash flows and actual cash flows is a cash-flow variance.

Volume variance is the change in costs or profits that comes from producing more or fewer units than planned. When actual output is higher than budgeted, fixed costs are spread over more units, so more fixed overhead is absorbed and the volume variance tends to be favorable. If actual output is lower, the opposite happens and the volume variance is unfavorable. The standard way to express it is: Volume variance = (actual output − budgeted output) × standard fixed overhead rate per unit.

The other descriptions refer to different variances: the difference between actual results and the master budget is the overall (master) variance; the difference between the flexed budget and actual results is a flexible-budget variance; and the difference between budgeted cash flows and actual cash flows is a cash-flow variance.