A(n) ______ variance occurs when the company operates at a different capacity level than predicted.

• A. Volume
• B. Spending
• C. Efficiency
• D. Price

Answer: (A)

Volume variance captures the effect of operating at a different capacity level than was planned. In standard costing, overhead (often fixed) is allocated based on a planned capacity. When actual production differs from that plan, the overhead absorbed differs from the budgeted amount, creating a volume variance. If actual volume is higher than planned, more overhead is absorbed and the variance tends to be favorable; if actual volume is lower, it tends to be unfavorable. This differs from price or spending variances (which relate to actual prices or costs of inputs) and efficiency variances (which relate to how efficiently resources are used for the actual output).