The production-volume variance is affected by the choice of capacity concept used to determine the denominator level.

Question

Quizplus · Accepted Answer

The production-volume variance is the difference between the actual level of output and the flexible budget amount based on the standard hours allowed for the actual output. The denominator level used in computing the flexible budget can be based on different capacity concepts, such as practical capacity, normal capacity, or theoretical capacity. Each capacity concept has a different denominator level, which affects the computation of the flexible budget and the resulting production-volume variance. Therefore, the choice of capacity concept used to determine the denominator level can affect the production-volume variance.

The Production-Volume Variance Is Affected by the Choice of Capacity