What does a favorable overhead volume variance indicate about production relative to plan?

What does a favorable overhead volume variance indicate about production relative to plan?

• A. Production below plan
• B. Production above plan
• C. Production exactly matched
• D. Not related to plan

Answer: (B)

A favorable overhead volume variance shows up when production exceeds what was planned. This happens because fixed overhead is allocated (absorbed) into units based on actual output. When more units are produced, more of the fixed overhead is spread across a larger quantity, so the amount absorbed into production is greater than the budgeted amount. That higher absorption compared with the budget reduces the per-unit cost and makes the variance favorable. For example, with a fixed overhead rate of $10 per unit and a budgeted output of 10,000 units (budgeted fixed overhead of $100,000), if actual production is 12,000 units, the absorbed fixed overhead would be $120,000. Since $120,000 absorbed > $100,000 budgeted, the overhead volume variance is favorable. Producing less than planned would reverse this, leading to an unfavorable variance.

A favorable overhead volume variance shows up when production exceeds what was planned. This happens because fixed overhead is allocated (absorbed) into units based on actual output. When more units are produced, more of the fixed overhead is spread across a larger quantity, so the amount absorbed into production is greater than the budgeted amount. That higher absorption compared with the budget reduces the per-unit cost and makes the variance favorable.

For example, with a fixed overhead rate of $10 per unit and a budgeted output of 10,000 units (budgeted fixed overhead of $100,000), if actual production is 12,000 units, the absorbed fixed overhead would be $120,000. Since $120,000 absorbed > $100,000 budgeted, the overhead volume variance is favorable. Producing less than planned would reverse this, leading to an unfavorable variance.