Managers create budgets projecting production volume and financial expectations, but actual production may vary due to unforeseen factors. Positive variation occurs when actual production exceeds estimates, negative variation when it falls short.
Managers and other supervisors in factories often create budgets that project the company’s overall expectations regarding different aspects of its operations, including production volume and the resulting financial expectations. The variation in production volume is derived from these plants’ projections of production, which is usually calculated within a certain defined business cycle. As such, the variation in production volume can be calculated by analyzing the expectations of that specific manufacturing company in relation to production for the period considered, in line with the real reality in terms of production. The difference between the two disparate factors will result in the variation in production volume. Due to the fact that there may be factors that affect the total production volume on a daily, monthly or quarterly basis, the projected production estimate and the actual production volume are almost never the same.
For example, the estimated production volume for producing orange juice for a business quarter might be fixed at 500,000 cartons of juice. This calculation does not take into account factors such as delays in delivering oranges to the mill, unexpected overheads such as machine breakdowns, and other factors that could negatively affect this projection. As a result, the total number of orange juice cartons for the quarter may be lower or higher than the projected volume, creating variation in production volume.
From the example above, it is clear that the variation in production volume can be positive when the estimated total volume is exceeded by the actual production volume. For example, where orange juice manufacturers estimated production of 500,000 cartons of orange juice and ended up producing 550,000, there is a variation in production volume in favor of the company due to the increase in actual production volume compared to previously projected. In this case, the positive change in production volume is around 50,000 more packs of orange juice for the business quarter under consideration. The same principle can also be applied to determine whether the change in projected volume is to the detriment of the company; in this case, it can be considered negative. For example, where the total volume for the projected period reaches 450,000 packs of orange juice, the variation can be considered negative in the order of 50,000 packs of juice.
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