Which variances are caused by volume differences?

• A. Only revenue variances
• B. Only cost variances
• C. Both revenue and cost
• D. Neither revenue nor cost

Answer: (C)

Volume differences show up when actual output or sales differ from what was planned. More units sold than planned boosts revenue, creating a favorable revenue variance, while producing or selling more also raises variable costs, creating a favorable or unfavorable cost variance depending on whether the extra revenue covers the extra costs. Because the level of activity directly affects both revenue and the costs tied to that activity, volume differences generate variances on both sides. So the correct understanding is that both revenue and cost variances can arise from differences in volume. For example, higher volume increases both revenue and variable costs, and the overall impact on profit depends on the relationship between the additional revenue and the added costs.