Which variance is primarily driven by changes in production volume?

Which variance is primarily driven by changes in production volume?

• A. Overhead expenditure variance.
• B. Labor rate variance.
• C. Material price variance.
• D. Overhead volume variance.

Answer: (D)

This question tests how production volume affects overhead variances. The overhead volume variance measures how much fixed overhead absorbed into production differs from what was budgeted, and it changes with actual production levels. If you produce more than planned, more of the fixed overhead is allocated to units, which tends to be favorable because the fixed cost per unit drops. If you produce less, less overhead is absorbed, producing an unfavorable variance. The other variances focus on different drivers: expenditure variance is about actual overhead spending versus budget, not how much you produced; labor rate variance depends on the wage rate per hour worked; material price variance depends on the price of materials. So the variance driven by changes in production volume is the overhead volume variance.

This question tests how production volume affects overhead variances. The overhead volume variance measures how much fixed overhead absorbed into production differs from what was budgeted, and it changes with actual production levels. If you produce more than planned, more of the fixed overhead is allocated to units, which tends to be favorable because the fixed cost per unit drops. If you produce less, less overhead is absorbed, producing an unfavorable variance.

The other variances focus on different drivers: expenditure variance is about actual overhead spending versus budget, not how much you produced; labor rate variance depends on the wage rate per hour worked; material price variance depends on the price of materials. So the variance driven by changes in production volume is the overhead volume variance.