Not understanding volume variance on this green light question

topcat

Evening all ,

I really don't fully understand the below AAT green light question



Question:

A business has budgeted to produce and sell 100,000 units of its single product. The standard fixed production cost per unit is £1.10. During the last period its actual production and sales output was 110,000 units and actual fixed production overheads were £125,000. Which of the following is the volume variance?



My method for working this out is

Actual production X Standard OAR

110000 £1.10 = £121,000



Standard Production production X Standard OAR Efficiency variance = £11,000 Adverse?

100,000 £1.10 = £110,000


This is where i am lost... how does this formula has come into play does anyone know please? i can see where the £11,000 is worked out from but it doesn't fit or make sense to me

Volume varaince = capacity + efficiency






AAT answer + explanation







£11,000 favourable




















Volume variance = £11,000 favourable: £121,000 actual production volume at standard OAR (110,000 units x £1.10) compared to £110,000 standard production volume at standard OAR (100,000 units x £1.10).

tillyjbc

Hi Topcat, overheads variances do your head in don't they.......The volume variance is the difference between budgeted no. of units and actual no. of units x OAR.
Therefore (100,000 - 110,000) x 1.10 = £11,000F. The capacity and efficiency variances are within vol variance but using labour hours and a calculated OAR/labour hour. This information has not been given here. I have my FNFP exam tomorrow and have just been doing some revision - sometimes I think I have it sussed and then I'll get a Greenlight like this one has for you that throws me completely....!

Anyway, hope this helps!

topcat

Hi tilly. Thank you very much for your help! They drive me nuts well the whole of this year is driving me nuts I did think I nailed them a few weeks ago but obviously not Best of luck for your exam let us know how it goes :-)

tillyjbc

Ni Topcat - exam not great......there was nothing I couldn't actually do (obviously I don't know if I've made stupid mistakes in calculations) but there were no horrible surprises, but I RAN OUT OF TIME!!! I had to really rush the last big written task, I know I haven't done enough for that one so I can only hope that everything else was OK......I need to forget about it for 6 weeks now, nothing I can do except get on to Budgeting (few days off first I think....)

Have you got any exams booked in?

topcat

I always nearly run out of time there is so much to do and double check calculations, I'm sure you have done fine, will be a good Christmas present if it comes in time :-) Unfortunately college has decided to group 3 units very close to each other start of next year I prefer to do one unit at a time then exam and move on, but studying 3 at the moment which I'm finding difficult to manage Without a doubt on the days of well deserved

Kelly7

Hmm, this seems to be the thing I was questioning on Tue with my teacher. He said it shouldn't be in budgeting & will be taught in our next unit. He was going to check with aat this week & will have to teach us on Tue if it could be in the exam, its our only lesson left too, argh. X

CeeJaySix

Yes these variances can be in your Budgeting exam (they are in the mocks and they were in mine), you do far more of them in Financial Performance but they could well come up in Budgeting. Once they click they're easy, but getting to the clicking point can take a while! I found it easiest to try and understand what exactly each variance is showing; once you've got this susses, it's much simpler to work out which figures to use. So for volume variance, you're only interested in the difference made by the volume of production, meaning all other variables (ie. price) should be discounted. That only leave the standard OAR to work with, leading you to budgeted production x OAR less actual production x OAR. As above, capacity and efficiency variances make up the volume variance, and as long as my tutor and textbooks are correct, won't be tested in Budgeting.