Definition: A quantity variance is the difference between the actual and budget caused by the actual number of units produced and the budgeted number of units produced.
What Does Quantity Variance Mean?
Companies create budgets to help track goals and improve performance. Budgets are key to managers in establishing benchmarks and being able to measure improvements. One way companies use budgets to measure improvements is by measuring the quantity variances. It sounds confusing, doesn’t it? Well, it’s actually pretty simple.
Think about it like this. When a company budgets its production line, it considers the costs of producing a specific number on products. The company also bases its budgets on the revenues from selling the number of units produced. If the company doesn’t produce the same quantity of units that were estimated in the budget, there is a quantity variance. The actual costs of producing the products changes from the estimated budget and the revenues are also different from the estimated budgets.
Managers use these variances between the actual cost and budgeted costs to plan future production and sales strategies. The same is true with revenues. Sometimes not meeting budgeted number is a good thing however. Many times production processes run smoother than anticipated and the actual costs are lower than the budgeted costs. This means the company or the department is more profitable than expected. Quantity variances are important, but they are only one variance that managers study in a standard company variance analysis.