Which statement about volume variances is true?

• A. They capture differences between actual and budgeted overhead costs.
• B. They arise from changes in the price of inputs.
• C. They arise when actual activity deviates from the budgeted activity.
• D. They are always due to errors in cost allocation.

Answer: (C)

Volume variances capture the impact of the actual level of activity coming in different from what was planned. In standard costing, overhead is allocated to products based on a standard rate times the actual level of activity. If actual activity turns out higher than the budget, more overhead is absorbed into the products than planned, producing a favorable volume variance. If actual activity is lower, less overhead is absorbed, yielding an unfavorable volume variance. This concept is distinct from price variances (which come from changes in input prices) and from allocation errors, since it hinges on the difference between what was budgeted and what actually occurred in terms of activity.