Manufacturing companies create budgets projecting production volume and financial expectations, but actual production may vary due to factors such as delays and machinery breakdowns. The difference between projected and actual production creates a variance, which can be positive or negative.
Managers and other supervisors in manufacturing plants often create budgets that project the company’s overall expectations regarding different aspects of its operations, including production volume and resulting financial expectations. The variance in production volume is derived from those manufacturing facilities’ projections of output, something that is usually calculated within a given business cycle. Therefore, the variance of the production volume can be calculated by analyzing the expectations of that particular manufacturing company regarding the production for the period considered in accordance with the actual reality in terms of production. The difference between the two different factors will lead to the variation of the production volume. Due to the fact that there might be factors affecting the total production volume on a daily, monthly or quarterly basis, the expected production estimate and the actual production volume are almost never the same.
For example, the estimated throughput for orange juice production for a business district might be set at 500,000 packs of juice. This calculation does not take into account factors such as delays in the delivery of oranges to the factory, unexpected overheads such as machinery breakdown and other factors that may adversely affect this projection. Therefore, the total number or packages of orange juice for the quarter may be less or more than the expected volume, creating a change in production volume.
From the example above, it is clear that the production volume variance can be positive when the estimated total volume is exceeded by the actual production volume. For example, where orange juice producers estimated they would produce 500,000 packs of orange juice and ended up producing 550,000, there is a shift in production volume in the company’s favor due to increased volume of actual production compared to that previously projected. In this case, the positive change in production volume is approximately 50,000 additional packs of orange juice for the quarter under review. The same principle can also be applied in determining whether the projection volume variance is to the detriment of the company, in which case it can be said to be negative. For example, where the total volume for the forecast period actually adds up to 450,000 packages of orange juice, the variance can be said to be negative for approximately 50,000 packages of juice.
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