Overhead Volume Variance

[reeree]

"Overhead volume variances do not signal that overhead costs are in or out of control." Do you agree or disagree?

[SandyHood]

The overhead volume variance measures volume of production only.
If you produce more than budget there will be a favourable variance.
If you produce less than budget there will be an adverse variance.

Overhead costs out of, or in, control is adifferent matter. For overhead costs to be in control, you need to be spending only the amounts needed to achieve the production actually being made. So you are controlling overhead costs by making sure that machine cleaning is in line with production and rent payments are appropriate for the level of production.

Overhead costs that are out of control are those that have been allowed to increase far and above a level needed for a production level. At the moment, some firms are reducing capacity because it has been difficult to ahieve sales. But, if they continue to spend the same amounts on all their cost areas as they did when production was at a higher level, or even spend more, then their overheads will not be being controlled.

If you have 15 machines and these are cleaned overnight while the production has stopped then the whole machine cleaning issue needs to be reassessed if there are never more than 10 machines in operation at one time. Also, can cleaning times be changed to daytime to save the unsocial time element of night cleaning costs?

Overhead volume variances tend to assume that fixed overhead costs are not affected by volumes of production (after all that is the definition of a fixed cost), so if production volumes are lower than budget, the calculation means there must be an adverse variance and if production volumes are higher than budget, there must be a favourable variance. But these variances in themselves do not mean that the overhead costs are under control or out of control. Making a judgement about how well overheads are being controlled would require an assessment of what is being spent on these costs and how well the management are budgeting for changing volumes in production in terms of the breakdown of overheads into those that vary and those that do not vary with output.

I agree with the statement:


"Overhead volume variances do not signal that overhead costs are in or out of control."