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Former Member
May 15, 2012 at 09:00 AM

Volume Overhead Variances

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Hi, I am not sure if this is the right platform to discuss my question or not but I will ask anwyay.

I have a serious confusion about the treatment of volume overhead variances.

Lets say we have two exactly identical plants (I mean ,same capacity, same machines, everything same). In a month, we produce exactly the same number of quanitities with exactly the same variable cost and same fixed costs (as plants are same). However, when we make the financial statements, we see that we had budgeted more quantities in Plant 1 than Plant 2. which means by mistake (or anyway), we said in budget that we will produce more quantities in Plant 1 in that month than Plant 2(despite of them being same).

Now, the actual variable cost for both plants (such as elecricity, fuel etc) and actual fixed costs (salaries etc.) are exactly same. But still in financial statements, we willl have a different operating income because we will have more unfavourable/favourable overhead volume variance in Plant 1.

How is this possible in reality? I mean when we make exactly same quantities, sell same quantities, with same raw material cost, same variable and fixed cost, we should end up with same money in our hand. Then how the operating income in different in two plants?

I'll be very thankful to anyone for clearing my confusion.

Thanks!!

Raj.