Understanding Production Order Variance - Part 2 The SAP
PerspectiveAuthor: Ranjit Simon JohnEvery PP, FI and CO user in any
Manufacturing Industry will be having a tough time while processing
month-end activities. Production Order Variance posted against each
process orders will have to be examined, explained &
investigated thoroughly. Major questions arising will be; Origin of
Variance has come How to Categorize the variance How to cut down
the variance. Impact of variance on COGM, COGS & Closing
Stock.Answering these will be really tough.We have faced all these
scenarios andafter months of deep research in this field I came
across few conclusions.For better understanding I will divide this
blog into two categories; Category A: Basic understanding of
Production Order Category B: Co-relating Category A scenarios with
real life scenarios.Now let us examine the main points
underCategory A:The ultimate end point of any industry is sales.
For selling the product several process has to be carried out. The
success of any management depends on how well they forecast the
sales, plan and schedules the activities.
Figure 1.0Let us divide the process as given below; 1)Initial
Planning 2)Cost Estimates 3)Actual Posting 4)Period End
Processing1)Initial Planning: Forecasting the sales for future.
Sales and Operation Planning, Long term planning, Cost center
planning should be well executed by the management.2)Cost
Estimates: The major points to be considered here are;a) a)Master
Data: a.1) Material Master: All the required information to manage
a material. Transaction Codes: MM01, MM02, MM03 a.2) Bill of
Material (BOM): Structured hierarchy of raw materials necessary to
create a Finished / Semi Finished Good. Transaction Codes: CS01,
CS02, CS03 a.3) Routing: List of tasks containing standard activity
times required to perform operations to create a Finished / Semi
Finished Good. Transaction Codes: CA01, CA02, CA03 a.4) Product
Cost Collector: Collects actual costs during the production of a
material. Transaction Codes: KKF6N a.5) Recipe:Recipes comprise
information about the products and components of a process, the
process steps to be executed, and the resources required for the
production. Transaction Codes: C201, C202, C203 b) Overhead Costs:
All indirect cost like power, canteen etc. Transaction Codes: KZS2
b.1) Calculation Base: A base is a group of cost elements to which
overhead is applied b.2) Overhead Rate: Overhead rate is a
percentage factor applied to the value of the calculation base
(group of cost elements). b.3) Credit Key During Overhead
calculation, a manufacturing order in product cost collector is
debited, and a cost center is credited. The credit key defines
which cost center receives the credit. C ) Cost Component: The cost
component split allows a cost estimate to group costs of similar
types of components, such as material, labor, and overhead. d)
Costing Variant: The costing variant contains information on how a
cost estimate calculates the standard price. e) Standard Cost
Estimate: The Standard Cost Estimate is involved in variance
analysis because it is used for stock valuation. When a production
or process order delivers production to inventory, it receives
acreditbased onstandard price.Total variance is the difference
between actual costs debited to the order and costs credited to the
order due to deliveries to stock. f) Preliminary Cost Estimate: The
Preliminary Cost Estimate is involved with production, variance
calculation and valuating scrap variance and WIP. g) Mixed Cost
Estimate: If there are different procurement alternatives for the
same material, such as two production lines or two vendors, mixed
costing can be used when inventory valuation has to reflect the
mixed procurement costs. 3)Actual Postings Plan costs are
postedpriorto a fiscal period. Actual costs are posted in real
timeduringa fiscal period. Actual Cost can be divided into two
groups based on the posting origin; Postings to CO
fromexternalbusiness transactions results in Primary Costs.
Business transactionswithinCO results in Secondary Costs.
3.1Primary Cost: Primary cost will be posted to CO mainly in the
following scenarios:3.1.1 Goods Issue to Production Order: When
goods are issued from inventory, a general ledger balance sheet
account is credited, and profit and loss consumption (expense)
account is debited. A primary cost element with the same number and
identifier as the inventory consumption is usually created in CO
during initial system implementation. When the system detects a
corresponding primary cost element in CO during a posting to
General ledger expense account, a posting to CO cost object is also
required. Primary Cost are posted to CO from FI. GL entry during
Goods IssueDebitCredit
Raw Material ConsumptionXXX
Stock of Raw MaterialXXX
Table 1.03.2Secondary Cost: The costs in CO are allocated from
overhead cost centers to production cost centers
duringassessmentand then onto production order duringactivity
confirmation. 3.2.1 Assessment Period-end assessments move costs
from overhead cost centers to production cost centers. 3.2.2
Activity Confirmation: When production order activities are
confirmed, the production or product cost collector is debited, and
the production cost center is credited. There are no FI postings
during activity confirmation.3.3Primary Credits Primary Credits
occur when production orders deliver Finished / Semi finished good
into inventory. As finished goods are delivered from manufacturing
order into inventory, an inventory balance sheet account is
debited, and profit and loss production output account is credited.
Because there is a primary cost element corresponding to the
production output account, a CO object is also credited. The
finished goods are delivered from a production order, so the system
automatically chooses the production order or product cost
collector to receive the primary credit. The credit value is
calculated by multiplying the finished goods standard price by the
quantity delivered to inventory.DebitCredit
Stock of Finished GoodXXX
COGM of Finished GoodXXX
Raw Material ConsumptionXXX
Stock of Raw MaterialXXX
Table 2.03.4Secondary CreditAt period end the production order
receives a secondary credit that is equal to the variance during
settlement, resulting in zero balance.During the settlement
process, product cost collectors and process order variance are
posted to Profitability Analysis (CO-PA) and FI.Debit100 Raw
Material100 Labor100 Over Heads
Credit(250) Finished Good
Balance50 Variance
Table 3.0Total Variance is the difference between total
production order debits and credits.Variance calculation at period
end divides the variance into categories, based on the source of
the variance.Production Variance settled to CO-PA are included at
thegross profitmargin level.Cost Center under/over absorption
costsassessedto CO-PA are included at theoperating
profitlevel.3.5)Post Actual Costs1)Period End Processing 5.1 The
three common types of variance calculation are as follows; 5.1.1)
Total Variance Total variance is the difference between the actual
cost debited to the order and credits from deliveries to inventory.
Total Variance is variance relevant to settlement. The variance is
settled in Financial Accounting (FI), Profit Center Accounting and
Profitability Analysis 5.1.2) Production Variance Production
variance is the difference between net actual costs debited to the
order and target costs based on the preliminary cost estimate and
quantity delivered to inventory.Production variance is not relevant
for settlement, only for information. 5.1.3) Planning Variance
Planning variance is the difference between costs on the
preliminary cost estimate for the order and target costs based on
the standard cost estimate and planned order quantity.5.2) Variance
Categories During variance calculation, the order balance is
divided into categories on the input and output sides. Variance
category provide reasons for the cause of the variance. There are
no FI posting during variance calculation.Variance can be
categorized intoInput VarianceandOutput Variance5.2.1) Input
Variance Variance based on Goods Issue, Internal activity
allocation, overhead allocation, general ledger account postings.
Input variance is divided into the following categories during
variance calculation, according to their source:Category IV.1)
Input Price Variance Input price variance occurs as a result of
material price change after the higher level material cost estimate
is released. It occurs in any of the below mentioned scenarios; If
the material valuation is based onstandard pricecontrol, a standard
cost estimate for the component could be released after the cost
estimate for the assembly is released. If the material valuation is
based onMoving averageprice control, a goods receipt of the
component could change the component price after the cost estimate
for the material is released. Input price variance = (actual price
plan price) * actual input quantityCategory IV.2) Resource Usage
VarianceResource Usage variance occurs as a result of substituting
components. This could occur if a component is not available, and
another component with a different material number is used instead.
Resource Usage variance = Actual costs target costs Input price
varianceCategory IV.3) Input quantity varianceInput quantity
variance occurs as a result of a difference between plan and actual
quantities of materials and activities consumed. Input quantity
variance = (actual input quantity target input quantity) * plan
priceCategory IV.4) Remaining Input VarianceWhen input variance
cannot be assigned to any other variance category.5.2.2) Output
VarianceVariance can be from too little or too much of planned
order quantity being delivered, or because the delivered quantity
was valuated differently.5.2.2) Output Variance is divided
into;Category OV.1) Mixed Price Variance Mixed-Price variance
occurs when inventory is valuated using a mixed cost estimate for
the material.Category OV.2) Output Price Variance Output price
variance can occur in the following scenarios; 1)If the standard
price is changed after delivery to inventory, and before variance
calculation. 2)If the material is valuated at moving average price
and it is not delivered to inventory at standard price during
target value calculation. Output price variance = actual activity *
(plan price actual price)Category OV.3) Lot Size Variance Lot Size
variance occurs if a manufacturing order lot size is different from
the standard cost estimate costing lot size.Category OV.4)
Remaining Variance Occurs if variance cannot be assigned to any
other variance category.Category OV.5) Output Quantity Variance
Represents the difference between manually entered actual costs and
allocated actual quantities. Output Quantity variance = ( actual
quantity manual actual quantity) * plan price5.3) Period End The
most importantperiod-end process relevant to production order
variance analysis is; Overhead WIP Variance CalculationVariance can
be calculated using the formula; Variance = Actual Cost Actual Cost
Allocated (credits) WIP ScrapDuring variance calculation, target
and control costs are compared, and variance categories are
assigned. Variance categories are assigned in the following
sequence: Input price variance Resource usage variance Input
quantity variance Remaining input variance Mixed price variance
Output price variance Lot Size Variance Remaining
VarianceSettlement :Settlement of Production Orders will be
executed. KO88 - Individual Settlement CO88 - Collective
SettlementNow let us examine the main points underCategory B: Now
you will be having a basic idea about production order variance ,
variance calculation types & various categories. Now let us try
to co-relate this with real life scenarios.I will divide the topic
into below mentioned sections;1.How to analyze production order
variance posted against production orders2.Major Reasons for the
variance3.How to minimize the variance4.Impact of production order
variance on COGM, COGS & Closing StockCategory B.1) How to
analyze variance posted against production orderFor explaining the
scenarios I am taking one Semi Finished Good (SFG1 Semi Finished
Good 1) which is used as a raw material for production of Finished
Good.Master Recipe of SFG1 is;ItemResourceTotal ValueFixed
ValueQuantityUnit
1POWER12.9012.900.030MWH
2ADMINI1.000.001.00TO
3DEPRIN1.000.001.00TO
4LABOUR2.000.001.00TO
5MACOOH0.740.001.00TO
6RAWMATERIAL18.100.000.81TO
7RAWMATERIAL21.490.000.061TO
8RAWMATERIAL31.830.000.103TO
9RAWMATERIAL40.120.000.002TO
10RAWMATERIAL54.310.000.024TO
TOTAL33.4912.90
Figure 2.0Process order No for SFG1 is 15000035Variance Posted
against the Process Order for the month is128,190.87 AEDAfter
technically completing ("TECO") the process order & before
executing costing run check for the variance in transaction code
KO88 (CO88 - Collective) in Test Run mode.For analyzing the
variance in detail we will use transaction codes KKBC_ORD &
KOB1.Let me explain difference between KKBC_ORD and KOB1.KKBC_ORD
is used for analyzing single order. Planned and Actual cost details
relating to the production order will be recorded in KKBC_ORD.KOB1
you can execute for single as well as bulk order. KOB1 provides the
"Actual" values (cost & quantity) of raw materials and
overheads used for the production of the material. KKBC_ORD Figure
3.0 KOB1
Figure 4.0Here you can see settlement (Variance) of128,190.87
AED.I will explain how we are calculating the variance.Below table
shows the formula used for Variance Calculation.All the Std. Rate,
Std. Qty, Std. Cost value fields in Table 4.0 are calculated based
on the master details (Material Recipe Figure 2.0).All the Actual
Rate, Actual Qty. Actual Cost vale fields in table 4.0 are
extracted from KOB1.Cost ElementsStd. Rate(Figure 2.0)Std.
Qty.(Figure 2.0)Std. CostActual RateActual Qty.(Figure 4.0)Actual
Cost(Figure 4.0)Variance
RAWMATERIAL1Total value / QtyPer Ton Qty * FG Prd. QtyStd Qty *
Std RateAct Cost / Act Qty49,663.00496,630.00Std Cost - Act
Cost
RAWMATERIAL2Total value / QtyPer Ton Qty * FG Prd. QtyStd Qty *
Std RateAct Cost / Act Qty3,411.0089,824.45Std Cost - Act Cost
RAWMATERIAL3Total value / QtyPer Ton Qty * FG Prd. QtyStd Qty *
Std RateAct Cost / Act Qty5,798.00104,162.8Std Cost - Act Cost
RAWMATERIAL4Total value / QtyPer Ton Qty * FG Prd. QtyStd Qty *
Std RateAct Cost / Act Qty1,003.00209,858.91Std Cost - Act Cost
RAWMATERIAL5Total value / QtyPer Ton Qty * FG Prd. QtyStd Qty *
Std RateAct Cost / Act Qty9.00517.57Std Cost - Act Cost
RAWMATERIAL6Total value / QtyPer Ton Qty * FG Prd. QtyStd Qty *
Std RateAct Cost / Act Qty21.00735.00Std Cost - Act Cost
LaborTotal value / QtyPer Ton Qty * FG Prd. QtyStd Qty * Std
RateAct Cost / Act Qty59,900.00119,800.00Std Cost - Act Cost
DepriciationTotal value / QtyPer Ton Qty * FG Prd. QtyStd Qty *
Std RateAct Cost / Act Qty59,900.0059,900.00Std Cost - Act Cost
AdministrationTotal value / QtyPer Ton Qty * FG Prd. QtyStd Qty
* Std RateAct Cost / Act Qty59,900.0059,900.00Std Cost - Act
Cost
MACOOHTotal value / QtyPer Ton Qty * FG Prd. QtyStd Qty * Std
RateAct Cost / Act Qty59,900.0044,326.00Std Cost - Act Cost
POWERTotal value / QtyPer Ton Qty * FG Prd. QtyStd Qty * Std
RateAct Cost / Act Qty1,609,780.00692,205.4Std Cost - Act Cost
FINISHED GOOD59,900.002,006,051.00
Table 4.0Now let us fill in values in Table 5.0 with the
production order values.Cost ElementsStd. Rate(Figure 2.0)Std.
Qty.(Figure 2.0)Std. CostActual RateActual Qty.(Figure 4.0)Actual
Cost(Figure 4.0)Variance
RAWMATERIAL110.0048,519.00485,190.0010.0049,663.00496,630.00(11,440.00)
RAWMATERIAL224.42623,653.989,250.8926.33383,411.0089,824.45(573.45)
RAWMATERIAL317.76706,169.7109,617.0017.96535,798.00104,162.805,454.20
RAWMATERIAL4179.58331,437.6258,169.00209.23121,003.00209,858.9148,310.09
RAWMATERIAL560.00119.87,188.0057.50789.00517.576,670.43
RAWMATERIAL600.000.000.0035.0021.00735.00(735.00)
Labor2.0059,900.00119,800.001.0059,900.00119,800.000.00
Depriciation1.0059,900.0059,900.001.0059,900.0059,900.000.00
Administration1.0059,900.0059,900.001.0059,900.0059,900.000.00
MACOOH0.7459,900.0044,326.000.7459,900.0044,326.000.00
POWER0.431,797,000.00772,719.000.431,609,780.00692,205.480,504.6
FINISHED GOOD33.4959,900.002,006,051.00
TOTAL128,190.87
Table 5.0Now let us categorize the variance.Variance has been
posted in the following orderSerial NoCost ElementVarianceVariance
CategoryVariance Class
RMV1RAWMATERIAL1(11,440.00)Category IV.3C1
RMV2RAWMATERIAL2(573.45)Category IV.3 + Category IV.1C2
RMV3RAWMATERIAL35,454.20Category IV.3 + Category IV.1C2
RMV4RAWMATERIAL448,310.09Category IV.3 + Category IV.1C2
RMV5RAWMATERIAL56,670.43Category IV.3 + Category IV.1C2
RMV6RAWMATERIAL6(735.00)Category IV.2C3
OHV1Power80,504.6Category IV.3
Table 6.0Let us try to calculate Variance by applying Formula
for each category.Category IV.1:Input Price Variance = (Actual
Price Plan Price) * Actual Input QuantityCategory IV.2:Resource
Usage Variance Actual Cost Target Cost Input Price VarianceCategory
IV.3:Input Quantity Variance = (Actual Input Quantity Target Input
Quantity) * Plan PriceCost ElementsPlan PriceTarget Input QtyTarget
CostActual PriceActual Input QtyActual CostVariance
ClassVariance
RAWMATERIAL110.0048,519.00485,190.0010.0049,663.00496,630.00C111,440.00
RAWMATERIAL224.42623,653.9089,251.0026.33383,411.0080,824.45C2573.45
RAWMATERIAL317.76706,169.70109,617.0017.96535,798.00104,162.80C2(5,454.25)
RAWMATERIAL4179.58331,437.6258,169.00209.23121,003.00209,858.91C2(48,310.09)
RAWMATERIAL560.00119.807,188.0057.50789.00517.57C2(6,670.43)
RAWMATERIAL60.000.000.0035.0021.00735.00C3735.00
Power0.431,797,000.00772,710.000.431,609,780.00692,205.4C1(80,504.6)
TOTAL(128,190.27)
Table 7.0Category B.2) Major Reasons for the varianceFrom My
experience I can point out that Production order variance occur
mainly from;a) Material BOM not updated properly (Category IV.3)b)
Material Price Change after release of Standard Cost Estimate
(Category IV.1)c) Activity Price (Material Recipe) not updated
properly (Category IV.2)d) Standard Cost estimate released for one
production version and confirmation done against another production
order. (Category OV.3)e) Total Planned Quantity and Actual Produced
Quantity Difference (Category IV.4)f) Material used not included in
BOM ((Category IV.2)Let us try to analyze all the scenarios.a)
Material BOM not updated properlyExplained inCategory B.1b)
Activity Price (Material Recipe) not updated properlyExplained
inCategory B.1Total POWER consumption as per KOB1 (Actual as per
Material Recipe) and FBL3N should be approximately equal.KOB1 ->
POWER consumption for the Materials ProducedFBL3N -> Actual
POWER receipt report(Receipt = Consumption)c) Standard Cost
estimate released for one production version and confirmation done
against another production order.Costing run executed for one
Production Version and Process Order created against another
production version.Let us take one example where two production
versions are present Production Version 1 and Production Version 2
for Finished GoodFG1. Production Version 1 will be usingRM1as raw
material and production version 2 will be usingRM2as raw
material.Standard cost estimate is released against Production
version 1.Let me explain with an example;As per Released Standard
Cost Estimate Material recipe / Ton ofFG1Production
VersionResourceTotal ValueQuantity
PO31GCPRODCGM1 P031 POWER15.050.035
PO31GCPRODCGM1 P031 ADMINI0.501.00
PO31GCPRODCGM1 P031 DEPRN1.001.00
PO31GCPRODCGM1 P031 LABOUR0.701.00
PO31GCPRODCGM1 P031 MACOOH1.191.00
GC01 RM1149.540.945
GC01 RM34.470.055
TOTAL172.45
Table 8.0Process Order has been Created Under production version
PO32The Activity Price recorded in system against PO32 is as
followsProduction VersionResourceTotal ValueQuantity
PO32GCPRODCGM2 P032 POWER17.000.040
PO32GCPRODCGM2 P032 ADMINI1.001.00
PO32GCPRODCGM2 P032 DEPRN1.461.00
PO32GCPRODCGM2 P032 LABOUR1.001.00
PO32GCPRODCGM2 P032 MACOOH1.501.00
GC01 RM2152.000.930
GC01 RM45.500.075
TOTAL177.51
Table 9.0After Settlement (For 1000 TO of FG1) entries will be
in the following sequence;Production VersionResourceTarget
ValueActual ValueVariance
PO31GCPRODCGM1 P031 POWER15,050.000.0015,050.00
PO31GCPRODCGM1 P031 ADMINI500.000.00500.00
PO31GCPRODCGM1 P031 DEPRN1,000.000.001,000.00
PO31GCPRODCGM1 P031 LABOUR700.000.00700.00
PO31GCPRODCGM1 P031 MACOOH1,190.000.001,190.00
GC01 RM1149,540.000.00149,540.00
GC01 RM34,470.000.004,470.00
PO32GCPRODCGM2 P032 POWER0.0017,000.00(17,000.00)
PO32GCPRODCGM2 P032 ADMINI0.001,000.00(1,000.00)
PO32GCPRODCGM2 P032 DEPRN0.001,460.00(1,460.00)
PO32GCPRODCGM2 P032 LABOUR0.001,000.00(1,000.00)
PO32GCPRODCGM2 P032 MACOOH0.001,500.00(1,500.00)
GC01 RM20.00152,000.00(152,000.00)
GC01 RM40.005,500.00(5,500.00)
TOTAL(7,910)
Table 10.0Here if we see the total variance of POWER = 15,050 +
(17,000) =(1,950.00)Similarly for all the Material and resources.In
order to avoid the Over head Variance input same activity price for
all the production versions,i. i.e. the net difference will be then
POWER = 17,000 + (17,000) = 0 Let us see a LIVE Process
OrderExample:Example
Product : FG1Standard Cost Estimate Released for Production
Version "PO31"
Table 11.0Material Recipee for FG1 (CK13N)Production
VersionResourceTotal ValueFixed ValueQuantity
PO31POWER15.0515.050.035
PO31ADMINI0.500.001.00
PO31DEPRIN1.000.001.00
PO31LABOUR0.700.001.00
PO31MACOOH1.190.001.00
RM1149.5432.690.945
RM34.470.000.055
TOTAL172.4547.74
Figur 5.0Process Order is Created under production Version
"PO32"When a Process order is created for Material FG1 system
calculatesPlannedcost as follows;Quantity Produced -> 25,302.00
TOUse the same calculation logic used in Table
1.0;ResourceQuantityAmount
RM123,910.393,783,661.17
RM313,916.101,130,999.021
ADMIN25,302.0012,651.00
LABOR25,302.0017,711.40
DEPRIN25,302.0025,302.00
MACOOH25,302.0030,109.38
POWER885,570.00380,795.10
Table 12.0Planned Cost for Producing 25,302.00 TO of FG1
Figure 6.0Process Order has been created in Production version
"PO32". During Confirmation System calculates actual cost as
follows;
Figure 7.0d) Total Planned Quantity and Actual Produced Quantity
DifferenceWe came across this production order variance in few
process orders only. While doing final confirmation of process
orders user made mistake by not allowing system to re calculate the
activity prices.Material: FG1Total Process Order Quantity: 93,000
TOQuantity Produced: 8,865.00 TOThe total quantity produced is
8,865.00 TO against which the activities booked
are;ActivityQuantityAmount
LABOR8,865 * 2 DH / TON17,730.00
DEPRIN8,865 * 1 DH / TON8,865.00
MACOOH8,865 * 0.74 DH / TON6,560.10
ADMIN8,865 * 1 DH / TON8,865.00
POWER8,865 * 0.03 * 1000265,950.00
TOTAL42,020.10
Table 13.0Since during final confirmation of the Order, re
calculation of activities were bypassed (by user) system calculated
the activities against the production order as
below;ActivityQuantityAmount
LABOR93,000 * 2 DH / TON186,000.00
DEPRIN93,000 * 1 DH / TON93,000.00
MACOOH93,000 * 0.74 DH / TON68,820.00
ADMIN93,000 * 1 DH / TON93,000.00
POWER2,857,172.00 (User Entered)1,228,583.96
TOTAL440,820.00
Table 14.0A Variance of 440,820.00 - 42,020.00 = 39,880.00 TO
was posted against all the activities
Figure 9.0Note: While doing final confirmation ensure that all
the activity prices are recalculated as per the new output.e)
Variance Due to Price changePrice change of material due to
execution of standard cost estimate will be posted with document
type "PR"3) How to reduce varianceFor reducing production order
variancea) Material BOM should be up to date;User should not be
modifying the material quantity manually while confirmation
(COR6N)b) Activity Price should be Updated periodicallyc) Confirm
activity getting booked while doing final confirmationd) Try to
ensure that process order for Finished Good is created on the same
production version released in standard cost estimate.4) Impact of
the variance on COGM, COGS, Closing StockVariances posted with
document type "SA", "AB", should have been part of COGM, COGS and
Closing Stock. Because of variance material movement cannot be
analysed correctly, material value can either Overestimated or
under estimated. In order to figure out how much portion of
variance should be allocated to COGM,COGS & closing stock We
are following manual calculation.Step1:List down all the Semi
Finished and Finished Goods.Step 2:Record total variance posted
against each material (FBL3N) (Document type "SA" & "AB")Step
3:Record total quantity produced (MB5B with movement types 101
& 102)Step4:Variance Per Ton = Step3 / Step 2Step5:Record
closing stock of Material (MB5B)Step6:Closing Stock Variance
Allocation = Step5 * Step4Step7:Record COGM Quantity (MB5B with
movement type 201 + 202 & 261 + 262)Step8:COGM Variance
Allocation = Step7 * Step4Step9:Record COGS Quantity (MB5B with
movement type 601 + 602)Step10:COGS Variance Allocation = Step9 *
Step4MaterialVarianceStep 2Production QtyStep 3Variance / TonStep
4Closing Stock QtyStep 5Closing Stock VarianceStep 6COGM
VarianceStep 8COGS QtyStep 9COGS VarianceStep 10
MATERIAL1V1P1VT1 = P1 / V1C1C1 * VT1COGM Qty * VT1S1S1 * VT1
MATERIAL2V2P2VT2 = P2 / V2C2C2 * VT2COGM Qty * VT2S2S2 * VT2
MATERIAL3V3P3VT3 = P3 / V3C3C3 * VT3COGM Qty * VT3S3S3 * VT3
Table 15.0Few Important Document Types Posted in Production
Order Variance GL are;AB -> Reversal of Production Order
SettlementSA -> Production Order SettlementPR -> Price
ChangeWA -> Confirmation Reversal (If Price Changed after
Confirmation)WL -> Sales Reversal (If Price Changed after
Sales)
Figure 10.0Few Important Transaction
CodesKKBC_ORDKOB1KOC4FBL3NCK13NCK11NCK24MB5BMB51
Input Price Variance:Input price variance occurs as a result of
material price change after the higher level material cost estimate
is released.It occurs in any of the below mentioned scenarios; If
the material valuation is based onstandard pricecontrol, a standard
cost estimate for the component could be released after the cost
estimate for the assembly is released. If the material valuation is
based onMoving averageprice control, a goods receipt of the
component could change the component price after the cost estimate
for the material is released. Input price variance = (actual price
plan price) * actual input quantity Let us try to understand How
Price difference variance occours; LetThe Price difference Variance
will be posted mainly during the following process; a) Process
Order Confirmation Price difference variance occours mainly due to
the following reasons; 1) Different Raw Material Price in released
Standard Cost Estimate and Process Order Confirmation 2) Change of
Standard Price of Finished or Semi Finished Good. b) Cancellation
of Process Order Confirmation Price difference variance occours
mainly due to the following reasons; 1) Raw Material Price
Difference 2) Finished / Semi Finished Good Price DifferenceLet us
try to analyse the scenarios one by one;Let us take Raw Material
"RM1" as an example;The Standard Cost Estimate released for
Finished Good "FG1" is as Follows;Raw Material Std. Rate -> As
per Released Standard Cost Estimate of Finished Good 1 (FG1),
Released on 01.01.2012Raw Material Std. Quantity -> As per
Released Standard Cost Estimate of Finished Good 1 (FG1), Released
on 01.01.2012Material / OverHeadStd. RateStd. QuantityStd. Cost
Raw Material 1 (RM1)25.001.0025.00
Raw Material 2 (RM2)10.001.0010.00
Raw Material 3 (RM3)60.001.0060.00
Raw Material 4 (RM4)15.001.0015.00
ADMIN1.501.001.50
DEPRIN1.751.001.75
MACOOH1.251.001.25
LABOUR1.301.001.30
POWER0.431.000.43
Finished Good 1 (FG1)116.231.00116.23
Table 1.0Scenario 1: a) Process Order Confirmation:a.1)
Different Raw Material Price in released Standard Cost Estimate and
Process Order Confirmation 1000 TO of Finished Good "FG1" confirmed
(Produced). Planned and Actual Material Consumption for "FG1" (1000
TO);Raw Material Std. Rate -> As per Released Standard Cost
Estimate of Finished Good 1 (FG1), Released on 01.01.2012Raw
Material Actual Rate -> As per Moving Average Price as on
01.02.2012Material / OverHeadStd. RateStd. QuantityStd. CostActual
RateActual QuantityActual CostVariance
Raw Material 1
(RM1)25.001000.0025,000.0035.001000.0035,000.00(10,000.00)
Raw Material 2
(RM2)10.001000.0010,000.0015.001000.0015,000.00(5,000.00)
Raw Material 3
(RM3)60.001000.0060,000.0057.001000.0057,000.003,000.00
Raw Material 4
(RM4)15.001000.0015,000.0015.001000.0015,000.000.00
ADMIN1.501000.001,500.001.501000.001,500.000.00
DEPRIN1.751000.001,750.001.751000.001,750.000.00
MACOOH1.251000.001,250.001.251000.001,250.000.00
LABOUR1.301000.001,300.001.301000.001,300.000.00
POWER0.431000.00430.000.431000.00430.000.00
Finished Good
(FG1)116.231000.00116,230.00128.231000.00128,230.00(12,000.00)
Table 2.0The variance has been posted because of the change in
Raw Material Price.a.2) Change of Standard Price of Finished or
Semi Finished Good Let us consider Finished Good 2 for explaining
the scenario. Released Standard Cost Estimate for Finished Good 2
"FG2" is;Semi FInished Good Std. Rate -> As per Released
Standard Cost Estimate of Finished Good 2 (FG2), Released on
01.01.2012Semi Finished GoodStd. Quantity -> As per Released
Standard Cost Estimate of Finished Good 2 (FG2), Released on
01.01.2012Material / OverHeadStd. RateStd. QuantityStd. Cost
Raw Material 1 (RM1)10.001.0010.00
Semi FInished Good 1 (SFG1)25.001.0025.00
Semi FInished Good 2 (SFG2)20.001.0020.00
ADMIN1.501.001.50
DEPRIN1.751.001.75
MACOOH1.251.001.25
LABOUR1.301.001.30
POWER0.431.000.43
Finished Good 2 (FG2)61.231.0061.23
Table 3.0Let us consider that Standard Cost Etimate for Semi
Finished Good 1 ("SFG1") was released on 01.02.2012.New Standard
Cost of SFG1 = 35.00Standard Cost Estimate for "FG2" was not run or
released after "SFG1" cost estimate release.Planned and Actual
Material Consumption for "FG2" (1000 TO);Semi Finished Good Std.
Rate -> As per Released Standard Cost Estimate of Finished Good
2 (FG2) , Released on 01.01.2012Semi Finished GoodActual Rate ->
As per Released Standard Cost Estimate of Semi Finished Good (SFG)
, Released on 01.02.2012Material / OverHeadStd. RateStd.
QuantityStd. CostActual RateActual QuantityActual CostVariance
Raw Material 1
(RM1)10.001000.0010,000.0010.001000.0010,000.000.00
Semi Finished Good 1
(SFG1)25.001000.0025,000.0035.001000.0035,000.00(10,000.00)
Semi Finished Good 2
(SFG2)20.001000.0020,000.0018.001000.0018,000.002,000.00
ADMIN1.501000.001,500.001.501000.001,500.000.00
DEPRIN1.751000.001,750.001.751000.001,750.000.00
MACOOH1.251000.001,250.001.251000.001,250.000.00
LABOUR1.301000.001,300.001.301000.001,300.000.00
POWER0.431000.00430.000.431000.00430.000.00
Finished Good 2
(FG2)61.231000.0061,230.0069.231000.0069,230.00(8,000.00)
Table 4.0Scenario 2: b) Cancellation of Process Order
Confirmation b.1)Raw Material Price Difference If the Moving
Average Price of Raw Material during confirmation (Production) of
Finished Good 3 "FG3" is different from the Moving Average Price
when the confirmation is reversed, price difference will be posted.
For Example: 1000 TO Finished Good 3 FG3 Confirmed.Note:Std. Rate
-> During Confimration of Finished Good 3 (FG3)Std. Quantity
-> During Confimration of Finished Good 3 (FG3)Std. Cost ->
During Confimration of Finished Good 3 (FG3)Actual Rate ->
During Finished Good 3 (FG3) Confimration CancellationActual
Quantity -> During Finished Good 3 (FG3) Confimration
CancellationActual Cost -> During Finished Good 3 (FG3)
Confimration CancellationMaterial / OverHeadStd. RateStd. Qty.Std.
CostAct. RateAct. Qty.Act. CostVariance
Raw Material 1
(RM1)10.001000.0010,000.008.001000.008,000.002,000.00
Raw Material 2
(RM2)20.001000.0020,000.0022.001000.0022,000.00(2,000.00)
Raw Material 3
(RM3)25.001000.0025,000.0030.001000.0030,000.00(5,000.00)
ADMIN1.501000.001,500.001.501000.001,500.000.00
DEPRIN1.751000.001,750.001.751000.001,750.000.00
MACOOH1.301000.001,300.001.301000.001,300.000.00
LABOUR1.251000.001,250.001.251000.001,250.000.00
POWER0.431000.00430.000.431000.00430.000.00
Finished Good 3
(FG3)61.231000.0061,230.0066.231000.0066,230.00(5,000.00)
Table 5.0The GL Entries Posted during Confirmation of Finished
Good 3 (Production);DebitCredit
Stock of Finished Good 3 (FG3)XXX
COGM of Finished Good 3 (FG3)XXX
Raw Material ConsumptionXXX
Stock of Raw MaterialXXX
Table 6.0
Figure 1.0The GL Entries Posted during Confirmation
Cancellation:DebitCredit
COGM of Finished Good 3 (FG3)XXX
Stock of Finished Good 3 (FG3)XXX
Stock of Raw MaterialXXX
Raw Material ConsumptionXXX
Price Diff-Production Order VarianceXXX
Table 7.0
b.2)Finished / Semi Finished Good Price Difference When a cost
estimate for a finished / semi finished good is released and the
higher level product cost estimate is not updated.