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Define production volume variance?

Avatar 37a3bd7bc7328f0ead2c0f6f635dddf60615e676e6b4ddf964144012e529de45 aliya bhat asked over 2 years ago

Hi, Explain about the production volume variance?

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5 Answers
Avatar 37a3bd7bc7328f0ead2c0f6f635dddf60615e676e6b4ddf964144012e529de45 acharya answered over 2 years ago

An account (in bookkeeping) refers to assets, liabilities, income, expenses, and equity, as represented by individual ledger pages, to which changes in value are chronologically recorded with debit and credit entries. These entries, referred to as postings, become part of a book of final entry or ledger. --One definition of an account is a record in the general ledger that is used to collect and store debit and credit amounts. For example, a company will have a Cash account in which every transaction involving cash is recorded.

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Avatar 37a3bd7bc7328f0ead2c0f6f635dddf60615e676e6b4ddf964144012e529de45 narahari answered over 2 years ago

From the perspective of the production process, a production volume variance is likely to be useless, since it is measured against a budget that may have been created months ago. A better measure would be the ability of a production operation to meet its production schedule for that day.

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Open uri20170510 32134 1c996lj?1494421732 Anil answered over 2 years ago

Definition Fixed Manufacturing Overhead Volume Variance quantifies the difference between budgeted and absorbed fixed production overheads. Formula Fixed Overhead Volume Variance=Absorbed Fixed overheads-Budgeted Fixed Overheads =Actual Output x FOAR*- Budgeted Output x FOAR* * Fixed Overhead Absorption Rate per unit of output Example Motors PLC is a manufacturing company specializing in the production of automobiles. Information from its last budget period is as follows: Actual Production275,000 units Budgeted Production250,000 units Standard Fixed Overhead Absorption Rate$2,000 per unit Calculate the fixed overhead volume variance. Fixed Overhead Volume Variance Absorbed Fixed Overheads(275,000 x $2,000)$550 m Budgeted Fixed Overheads(250,000 x $2,000)($500 m) Fixed Overhead Volume Variance$50 mFavorable Note: It may appear strange to you that even though the absorbed fixed overheads are higher than the budgeted overheads, the variance is described as being 'favorable' which is usually not how cost variances are interpreted. In short, this variance is used as a balancing exercise when fixed overhead expenditure variance is calculated. For more detail on this, see the explanation below. Explanation Fixed Overhead Volume Variance is the difference between the fixed production cost budgeted and the fixed production cost absorbed during the period. The variance arises due to a change in the level of output attained in a period compared to the budget. The variance can be analyzed further into two sub-variances: Fixed Overhead Capacity Variance Fixed Overhead Efficiency Variance The sum of the above two variances should equal to the volume variance. Fixed overhead volume variance helps to 'balance the books' when preparing an operating statement under absorption costing. Sales Quantity Variance already takes into account the change in budgeted fixed production overheads as a result of increase or decrease in sales quantity along with other expenses. At the same time, fixed overhead expenditure variance accounts for the difference between actual and budgeted expense rather than the flexed expense unlike other expenditure variances. This implies that the difference between budgeted and flexed fixed cost is included twice in the operating statement. Sales volume variance removes the effect of such duplication. As fixed costs are not absorbed under marginal costing system, fixed overhead volume variance (and its sub-variances) are to be calculated only when absorption costing is applied. Fixed Overhead Capacity Variance Fixed Overhead Capacity Variance calculates the variation in absorbed fixed production overheads attributable to the change in the number of manufacturing hours (i.e. labor hours or machine hours) as compared to the budget. The variance can be calculated as follows: Fixed Overhead Capacity Variance: = (budgeted production hours - actual production hours) x FOAR* * Fixed Overhead Absorption Rate / unit of hour Fixed Overhead Efficiency Variance Fixed Overhead Efficiency Variance calculates the variation in absorbed fixed production overheads attributable to the change in the manufacturing efficiency during a period (i.e. manufacturing hours being higher or lower than standard ). The variance can be calculated as follows: Fixed Overhead Efficiency Variance: = (standard production hours - actual production hours) x FOAR* * Fixed Overhead Absorption Rate / unit of hour.

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Avatar 37a3bd7bc7328f0ead2c0f6f635dddf60615e676e6b4ddf964144012e529de45 veeru answered over 2 years ago

The production volume variance measures the amount of overhead applied to the number of units produced. It is the difference between the actual number of units produced in a period and the budgeted number of units that should have been produced, multiplied by the budgeted overhead rate. The measurement is used to ascertain whether the materials and production management staff is able to produce goods in accordance with long-range planned expectations, so that an expected amount of overhead can be allocated.

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Open uri20170510 32134 s5bvk0?1494421637 ARJUN PRATAP SINGH answered over 2 years ago

Dear Friend, as far as your query is concerned that Define production volume variance? Let me informed that The production volume variance measures the amount of overhead applied to the number of units produced. It is the difference between the actual number of units produced in a period and the budgeted number of units that should have been produced, multiplied by the budgeted overhead rate. The measurement is used to ascertain whether the materials and production management staff is able to produce goods in accordance with long-range planned expectations, so that an expected amount of overhead can be allocated. From the perspective of the production process, a production volume variance is likely to be useless, since it is measured against a budget that may have been created months ago. A better measure would be the ability of a production operation to meet its production schedule for that day. The calculation of the production volume variance is: (Actual units produced - Budgeted units produced) x Budgeted overhead rate An excessive quantity of production is considered to be a favorable variance, while an unfavorable variance is when fewer units are produced than expected. The reason why a larger production volume is considered favorable is that this means factory overhead can be allocated across more units, which reduces the total allocated cost per unit. Conversely, if fewer units were to be produced, this means the amount of overhead allocated on a per-unit basis would be higher. Thus, the designation of the production volume variance as being favorable or unfavorable is only from the accounting perspective, where a lower per-unit cost is considered better. From a cash flow perspective, it might be better to only produce just that number of units immediately needed by customers, thereby reducing the company's working capital investment. The production volume variance is based on the assumption that factory overhead is directly associated with units of production, which is not necessarily the case. Some overhead, such as facility rent or building insurance, will be incurred even if there is no production, while other types of overhead, such as management salaries, only vary across very large ranges of production volume. Instead, there may be a number of other ways in which factory overhead can be broken into smaller units, known as cost pools, and allocated using several methods that represent a more intelligent association of activities with costs incurred (see activity-based costing for more information). Hope answer was helpful to you Regards, Arjun Pratap Singh

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