Production Volume Variance

  

You run a business that makes shoes for Civil War reenactors. You expect to make 5,000 units in a month. Last month, you made 4,500 units. The difference from the typical output represents production volume variance. The figure tracks the fluctuation in the number of items created.

The concept becomes important when related to overhead expenses. You have some costs that stay the same no matter how many items you produce. Rent, insurance, animal topiaries for the employee “rest gardens,” etc. These costs become comparably cheaper (on a per-unit basis) the more items you can make.

The ad you posted in Rebel Monthly cost $500. When you make 5,000 units in a month, that means the ad cost $0.10 per unit. When you only make 4,500 units in a month, the same ad, taken on a per-unit basis, cost $0.11 for each pair of shoes you make.

This type of overhead accounting makes tracking production volume variance important.

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And finance Allah shmoop What is variants Analysis Well basically

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it's the fancy business Way to ask Why didn't things

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go as expected Or how on Earth are we so

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far off Plan plan is the key word You made

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a plan a k a Budget Others in the company

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rely in your planning and budgeting You know from the

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hiring needs of the union factory workers this year to

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the marketing spend for TV ads from that department to

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the legal team who's fully plumbed up for the eleven

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point three lawsuits you expected you'd have to defend this

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year But then real life happened and things didn't quite

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go as you expected What happened Well they'll figure it

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out You're going to use variance analysis And yes it's

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a whole science unto itself You own zesty kitty a

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leading provider of condiments for pet food You launch a

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new Suraj based sauce meant to pair perfectly with the

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frozen mice that people feed to there Pet snakes It's

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called spicy serpent surprise and cats love it As much

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as I know a cat can love anything based on

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market research and projections derived from other products you already

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sell while you expect sales of three hundred thousand dollars

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in the first month and you expect contributed profits from

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this product to be one hundred twenty five grand giving

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you a contribution margin of about forty two percent Well

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a month after launch you look at the numbers you

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brought in revenues of four hundred thousand dollars way better

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than expected However profits and margins fell meaningful E short

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of projections You only brought in one hundred thousand dollars

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in contributed profits A contribution margin of just twenty five

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percent Well shy of the budgeted forty two percent So

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w t f baby Well you run some variance analysis

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And as it turns out you had unexpected demand from

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Ireland You were pretty sure you'd heard they didn't have

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anything left there but oh well additional demand is usually

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a good surprise Right That drove your four hundred thousand

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over the much less revenue that you originally thought But

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the extra demand meant you had to scramble to make

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enough spicy serpents Surprised to feel all the orders Well

02:01

to do this you had to pay overtime to your

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union workers in order to crank out the extra sauce

02:07

And that was expensive Now that you know what happened

02:10

you can well kind of adjust You know the extra

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demand is there so you can hire some additional workers

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carefully These new employees will get regular pay and the

02:18

additional capacity means you won't have to pay anybody usurious

02:21

overtime Since you're not paying the extra labor costs associated

02:25

with the overtime well margins will return to the expected

02:28

levels Meanwhile you adjust your revenue projections to the new

02:31

levels The added demand is still going to be there

02:34

next month so you revise your expectations You're going to

02:37

make them higher revenues go up So for the second

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month you expect to repeat four hundred thousand dollars in

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revenue However your labor adjustment should allow margins to get

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closer to the originally expected forty two percent which would

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give you contribution profits of about one hundred sixty eight

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grand Right Well once the month is over you'll look

02:53

at the numbers and see if anything else doesn't match

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the new budgeted expectations Then you'll run the variance analysis

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process again and it becomes part of an ongoing cycle

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Basically checking budgets against projections against riel Life results well

03:06

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were just wrong and need to be adjusted You know

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sauce or you'll find points in the production process and

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distribution process and marketing process where your costs went awry

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are marketed or placed or put on shelves or whatever

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when you figured out how the overtime hurt your profit

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margins and you brought in new workers overseas likely to

03:37

fix the unnecessarily high labor costs Well now thatyou're Suraj

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