Definition: Volume variance is the difference between the total budgeted overhead costs and the actual amount of overhead costs allocated to production processes using the fixed overhead rate as a result of a difference in budgeted and actual production volume. This variance occurs when the actual volume of products produced differs from the budgeted or estimated production schedule.
What Does Volume Variance Mean?
Since most budgets rely on a fixed production amount to determine cost structures, changes in the actual production output will also change the cost structure. For instance, during the budget making process management estimates fixed overhead costs like insurance and taxes. These overhead rates are allocated to the products being produced during the period.
In most cases the budgeted overhead amount is the same regardless of the production volume as long as the production volume is within the relevant range of production.
At the end of the period, management reconciles the actual business performance with the budgeted or estimated performance.
Management also reconciles the amount of fixed overhead that was allocated to each process with the actual overhead that was incurred for the period. Since the estimates rarely are completely accurate, there is usually a difference between the actual overhead costs incurred during the period and the estimated overhead that was allocated during the period. These differences are considered volume variances because the overhead cost difference occurred as a result of a production volume difference.
Fixed overhead variances also include spending variances. Variable overhead variances include efficiency variances.