A business measures its manufacturing and selling efficiency by examining any volume variances it incurs during production and sales. A volume variance is the difference between what a company expected to use and what it actually used. Volume variance can be applied to units of sales, direct materials, direct labor hours and manufacturing overhead. The basic formula for volume variance is the budgeted amount less the actual amount used multiplied by the budgeted price.
Sales volume variance is the difference between the quantity of inventory units the company expected to sell vs. the amount it actually sold. To calculate sales volume variance, subtract the budgeted quantity sold from the actual quantity sold and multiply by the standard selling price. For example, if a company expected to sell 20 widgets at $100 a piece but only sold 15, the variance is 5 multiplied by $100, or $500.
Direct materials volume variance -- also called direct materials quantity variance -- is the difference between the amount of direct materials budgeted to create a certain amount of inventory and what was actually used. To calculate direct materials quantity variance, subtract the budgeted direct materials needed from the actual quantity used and multiply by the budgeted cost of direct materials. For example, if a company thought it would need 7 yards of fabric at $6 a yard for a product but only needed 5 yards, the variance is 2 multiplied by $6, or $12.
Direct labor volume variance - also called direct labor efficiency variance -- is the difference between the amount of direct labor hours budgeted and the actual hours expended. Direct labor hours are the hours spent by the individuals that actually create or modify the product. To calculate direct labor efficiency variance, subtract the budgeted labor hours from the actual hours expended and multiply by the budgeted cost of labor per hour. For example, if a company thought it would need 20 labor hours at $30 per hour for a product but only needed 16 hours, the variance is 4 multiplied by $30, or $120.
Overhead volume variance, also called overhead efficiency variance, is the difference between the amount of overhead applied and the actual overhead applied. Overhead is all the product costs that a company incurs that aren't part of direct labor or overhead. Wages paid to supervisors, janitorial staff, machine parts and machine maintenance are all common overhead costs. A business usually applies these overhead costs based on the number of labor hours incurred to create products. This rate is determined in advance then applied when actual labor hours are calculated.
To calculate overhead efficiency variance, subtract the budgeted labor hours from the actual hours expended and multiply by the standard overhead rate per hour. For example, say a company budgeted for 20 labor hours but only used 16 and the standard overhead rate is $5 per hour. The overhead efficiency variance is 4 multiplied by $5, or $20. A favorable overhead variance, like this one, means that less overhead costs were spent to create the product than expected. If the variance is negative, that means that more hours were spent on the product than expected, and more overhead costs were incurred.