Correct option is C
An unfavourable overhead volume variance arises when the actual production is less than the normal or expected production level, leading to under-absorption of fixed overheads.
Fixed overheads are allocated or absorbed based on normal or standard production volume. If actual production is lower, then the fixed overhead cost per unit increases, because the same fixed cost is spread over fewer units. As a result, less overhead is absorbed into the cost of goods manufactured, and the difference becomes an unfavourable variance.
The volume variance essentially measures the efficiency of capacity utilization. When a business fails to produce at expected capacity, it leads to idle resources and hence unabsorbed fixed costs, which is considered unfavourable.
Information Booster:
Unfavourable overhead volume variance = under-utilization of production capacity.
Indicates idle time or operational inefficiency.
Common in industries with high fixed costs and seasonal demand.
Leads to lower absorption of fixed overheads per unit.
A warning sign for cost control and capacity management.
Triggers management action to boost production or reallocate resources.
A part of fixed overhead variance under standard costing systems.
Additional Knowledge:
(a) Total fixed overhead has exceeded the standard budgeted amount:
This relates to the spending variance, not volume variance. Even if total fixed overhead spending remains constant, volume variance can be unfavourable due to lower production.
(b) Variable overhead per unit has exceeded the standard budgeted amount:
This is related to the variable overhead spending or efficiency variance, not fixed overhead volume variance. Volume variance is specifically about fixed costs and production levels.
(d) Actual production was more than the normal level of output:
If production exceeds the normal level, the fixed overhead is spread over more units, causing a favourable volume variance, not an unfavourable one.
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