Definition:
Activity volume variance is a variance that measures the impact of changes in activity levels on a company’s profitability. It arises when the actual level of activity differs from the budgeted level of activity.
Types of activity volume variance:
- Favorable variance: When the actual level of activity is higher than the budgeted level, resulting in higher profits.
- Unfavorable variance: When the actual level of activity is lower than the budgeted level, resulting in lower profits.
Formula:
Activity Volume Variance = (Actual Quantity – Budgeted Quantity) * Standard Rate
Why is activity volume variance important?
- Profitability analysis: It helps to identify the impact of changes in activity levels on a company’s profitability.
- Budgeting: It can be used to adjust budgets based on changes in activity levels.
- Performance evaluation: It can be used to evaluate the performance of managers and departments.
In essence, activity volume variance is a useful tool for analyzing the impact of changes in activity levels on a company’s profitability.
