Understanding Production Order Variance - Part 1Managerial
Accounting - Performance Evaluation Through Standard CostsAuthor:
Ranjit Simon JohnThe ultimate aim of any company will be generating
profit and increasing the profit margin. There are many
interpretations of the word profit. Time, resource, money, effort,
effectiveness etc are in one instance or the other equated to
profit. We can say all these words can be consolidated and merged
into "Efficiency". By measuring the efficiency of a firm we can
calculate the profit and by improving the efficiency the profit
margin grows. Lets drill down to find the ingredients of
"Efficiency". Efficiency focuses on the cost of accomplishing the
task. Lets explain "Efficiency" with an example. To evaluate the
effectiveness of a product produced the following questions has to
be answered effectively;1. Was the best cost obtained in purchasing
raw materials.2. Whether the specified quantity of raw material was
used.3. Was extra raw materials used4. Was the specified amount and
level of overheads used5. Was the task completed within specified
timeMeasuring all these and confirming to the specified range will
increase the effectiveness there by increasing efficiency.The
importance of "STANDARDS"Many finance managers argues on the point,
actual price should only be followed while valuating finished and
semi finished goods, not the standard price. The starting point of
better controlling begins with better "STANDARD", let it be for
price determination or for employee performance evaluation.In our
daily life we are bound to meet certain standards; the food we eat,
the mobile phone we use, the car we drive, Government standards,
organizational standards are few to be noted. All and everything in
our daily life has to meet certain "STANDARD". Difference between
Standard Cost and Budget:Standards and Budgets are essentially the
same in concept. Both are predetermined costs and both contribute
significantly to management planning and control. A Standard is a
Unit amount, whereas a budget is a Total amount.There are important
accounting differences between budgets and standards. Budget data
are not journalized in cost accounting. Standard cost will be
incorporated into accounting systems. Why Standard Costs?Standard
Cost offer the following advantages; Facilitate Management Planning
by establishing expected future costs Makes employees more "Cost
Conscious" Useful for Setting "Selling Price" for finished goods
Contribute to Management Control by providing a basis for
evaluating the performance of managers responsible for controlling
costs. Performance may be evaluated through management by
exception, as deviations (or Variances) from standard are
highlighted When standard costs are incorporated into the
accounting system, they simplify the costing of inventories and
reduce clerical costs. Provides a clear overview of the entire
process in the company.Setting Standard CostsSetting up standard
cost is a highly difficult task. Standards may be set at one of two
levels: Ideal Standards or Normal Standards. Ideal Standards
represent the optimum level of performance under perfect operating
conditions.Normal Standards represent an efficient level of
performance that is attainable under expected operating
conditions.To be effective in controlling costs, standard costs
need to be current at all times. Thus, Standards should be under
continuo's review and should be changed whenever it is determined
that the existing standard is not good measure of performance.To
establish the standard cost of producing a product, it is necessary
to establish standards for each manufacturing cost element - direct
materials, direct labor and manufacturing overhead. The standard
for each element is derived from a consideration of the standard
price to be paid and the standard quantity to be used.The three
Standard Cost calculation sections;1) Direct Materials:Direct
Materials Price StandardThe direct materials price standard is the
cost per unit of direct materials that should be incurred. This
standard should be the Cost of raw materials, which is frequently
based on an analysis of current purchase prices.Item /
UnitPrice
Raw Material Purchase Price2.70
Transportation Charge0.20
Receiving and Handling0.10
Standard Direct Material Price Per Ton3.00
Direct Materials Quantity StandardThe direct materials quantity
standard is the quantity of direct materials thats should be used
per unit of finished goods. The standard is expressed as a physical
measure. Consideration should be given to both the quality and
quantity of material required to manufacture the product. The
standard should include allowances for unavoidable waste and normal
spoilage.ItemQuantity
Required Raw Material3.50
Allowance for Waste0.40
Allowance for Spoilage0.10
Standard Direct Materials Quantity per Unit4.00
The Standard Direct Material Cost Per Unit = Standard Direct
Material Price x Standard Direct Materials Quantity
2) Direct LaborDirect Labor Price StandardThe direct labor price
standard is the rate per hour that should be incurred for direct
labor.ItemPrice
Hourly Wage Rate7.50
Cost of Living 0.25
Other benifits2.25
Standard Direct Labor Rate / Hour10.00
Direct Labor Quantity StandardThe direct labor quantity standard
is the time that should be required to make one unit of the
product.ItemQuantity
Actual Production Time 1.50
Rest Periods and Cleanup0.20
Setup and Downtime0.30
Standard Direct Labor Hours Per Unit2.00
The Standard Direct Labor Cost Per Unit = Standard Direct Labor
Rate x Standard Direct Labor Hours
3) Manufacturing OverheadFor manufacturing overhead, a Standard
Predetermined Overhead rate is used in setting the standard. This
overhead rate is determined by dividing budgetd overhead costs by
an expected standard activity index. For example the index can be
standard direct labor hours or standard machine
hours.BudgetedOverhead CostsAmountStandardDirectLabor HoursOverhead
RatePer DirectLabor Hour
Budgeted Overhead Costs Ampunt/ Standard Direct Labor
Hour=Overhead Rate Per Direct Labor Hour
Variable79,200.0026,400.003.00
Fixed52,800.0026,400.002.00
Total132,000.0026,400.005.00
The Standard Manufacturing Overhead Rate Per Unit =
Predetermined Overhead Rate x Direct Labor Quantity Standard
The total standard cost per unit is the sum of the standard
costs of Direct Materials, Direct Labor and Manufacturing
Overheads.Manufacturing Cost ElementsStandard Quantity xStandard
Price =Standard Cost
Direct Materials4 TON312.00
Direct Labor2 Hours1020.00
Manufacturing Overheads2 Hours 510.00
Total Manufacturing Cost42.00
The standard cost provides the basis for determining variances
from standards.Determining Variances from StandardsOne of the major
management use of standard cost is the determination of Variances.
Variances are the differences between total actual costs and total
standard cost. The process by which the total difference between
standard and actual results is analysed is known as variance
analysis. When actual results are better than the expected results,
we have a favourable variance (F). If, on the other hand, actual
results are worse than expected results, we have an adverse (A).The
following types of variance can be calculated; Planning variances -
Input price variance - Resource-usage variance - Input quantity
variance - Remaining input variance - Scrap variance Production
variances - Input price - variance - Resource-usage variance -
Input quantity variance - Remaining input variance Production
variance of the period - Input price - variance - Resource-usage
variance - Input quantity variance - Remaining input variance -
Scrap variance - Mixed-price variance - Output price variance - Lot
size variance Total variance - Input price - variance -
Resource-usage variance - Input quantity variance - Remaining input
variance - Scrap variance - Mixed-price variance - Output price
variance - Lot size variance - Remaining variance * In
make-to-stock production, standard cost is calculated in the
standard cost estimate for the material. In sales-order-related
production with a valuated sales order stock, standard cost is
determined using a predefined valuation strategy.* During
production, actual costs are collected on the order (product cost
collector or manufacturing order). The actual costs that are
compared with the target costs are reduced by the work in process
and scrap variances (the result is called the net actual cost).* We
can determine the production variances of the period by comparing
an alternative material cost estimate with the (net) actual costs.
This alternative material cost estimate can be the modified
standard cost estimate or the current cost estimate, for
example.Example: Let us assume that the standard manufacturing cost
per ton of "Material A" is 42.00. Production departement has
produced 100 Ton of the material. So Standard manufacturing cost =
100 * 42 = 42,000.00In actual the consumption was as
followsItemAmount
Direct Materials13,020.00
Direct Labor20,580.00
Variable Overhead6,500.00
Fixed Overhead4,400.00
Total Actual Cost44,500.00
Variance Posted
Actual Cost44,500.00
Standrad Cost42,000.00
Total Variance2,500.00 (A)
Unfavourable and Favourable VarianceWhen actual costs exceed
standard costs, the variance is unfavourable (A). Thus, the
2,500.00 variance is unfavourable. An unfavourable variance has a
negative connotation. It suggests that too much was paid for one or
more manufacturing cost elements or that the elements were used
inefficiently.If the actual costs are less than standard costs, the
variance is favourable (F). A favourable variance has a positive
inference. It suggests efficiencies in incurring manufacturing
costs and in using direct materials, direct labour, and
manufacturing overhead. Favourable variance can also be by using
inferior quality materials.Analyzing variances begins with a
determination of the cost elements that comprise the variance. For
each Cost element a total variance is calculated. Then this
variance is analyzed into a price variance and a quantity
variance.
Each of the Variance are explained in detail below.Direct
Material VarianceFor producing 1,000 Ton of Cement, company A used
4,200 Ton of raw material purchased at a cost of 3.10 per unit. The
total material variance is computed from the following formual;
The total material variance for Comapny A is 1,020 (A) (13,020 -
12,000). (unfavourable variance)(4,200 x 3.10) - (4,000 x 3.00) =
1,020.00 (A)The material price variance is computed from the
formula given below
The material price variance for Company A is 420.00 (A) (13,020
- 12,600). (unfavourable Variance)(4,200 x 3.10) - (4,200 x 3.00) =
420.00 (A)The material quantity (usage) variance is determined from
the following formula;
The material quantit unfavourable variance is 600 (A) (12,600 -
12,000). (Unfavourable Variance)(4,200 x 3.00) - (4,000 x 3.00) =
600 (A)ItemVariance
Material Price Variance420
Material Quantity VAriance600
Total Material Variance1,020 (A)
Variance MatrixVariance matrix can be used to determine and
analyze a variance. When the matrix is used, the formulas for each
cost element ar computed first and then the variances.Applying
variance martix:Direct Labor VarianceThe process of determining
direct labor variance is the same as for determining the direct
material variance.The total labor variance is obtained from the
formula;
The total labor unfavourable variance is 580 (A) (20,850 -
20,000). (Unfavourable Variance)(2,100 x 9.8) - (2,000 x 10.00) =
580 (A)The labor price (or rate) variance is calculated using the
formula;
The labor price variance is 420 (F) (20,580 - 21,000).
(Favourable Variance)(2,100 x 9.8) - (2,100 x 10.00) = 420 (F)The
labor quantity (or efficiency) variance is calculated using the
formula;
The labor quantity variance is 1,000 (A) (21,000 - 20,000).
(unfavourable variance)(2,100 x 10.00) - (2,000 x 10.00) = 1,000
(A)The total direct labor variance can be derieved
from;ItemVariance
Labor Price Variance(420)
Labor Quantity Variance1,000
Total Direct Labor Variance580 (A)
Using the Variance Matrix;
Note: When idle time occurs the efficiency variance is based on
hours actually worked (not hours paid for) and an idle time
variance (hours of idle time x standard rate per hour) is
calculated.Manufacturing Overhead VarianceThe computation of the
manufacturing overhead variance is conceptually the same as the
computation of the materials and labor variances. Total Overhead
VarianceThe total overhead variance is the difference between
actual overhead costs and overhead costs applied to work done. With
standard costs, manufacturing overhead costs are applied to work in
process on the basis of the standard hours allowed for the work
done. Standard hours allowed are the hours that should have been
worked for the units produced. In the example company A's standard
hours allowed for completing work B is 2,000 and the predetermined
overhead rate is 5 per direct labor hour. Thus overhead applied is
10,000 (2,000 x 5) Note: The actual hours of direct labor are not
used in applying manufacturing overhead.The formula for the total
overhead variance is:
Thus total overhead variance for Comapny A is 900.10,900 -
10,000 = 900The overhead variance is generally analyzed through a
price variance and a quantity variance. The name usually given to
the price variance is the overhead controllable variance, whereas
the quantity variance is referred to as the overhead volume
variance.Overhead Controllable VarianceThe overhead controllable
variance (also called the budget or spending variance) is the
difference between the actual overhead costs incurred and the
budgeted costs for the standard hours allowed. The budgeted costs
are determined from the flexible manufactruning overhead budget.The
budget for Company A is as follow;
As shown, the budgeted costs for 2,000 standard hours are 10,400
(6,000 variable and 4,400 fixed)The formula for the overhead
controllable variance is;
The overhead controllable variance for Comapny A is 500
(unfavourable).10,900 - 10,400 = 500Most controllable variance are
associated with variable costs which are controllable costs. Fixed
costs are usually at the time the budget is prepared.Overhead
Volume Variance:The overhead volume variance indicates whether
plant facilities were efficiently used during the period. The
formula for calculating overhead volume variance is as follows;
Both the factors on this formula has been explained above. The
overhead budgeted is the same as the amount used in computing the
controllable variance . Overhead applied is the amount used in
determining the totoal overhead variance.In example for Company A
the pverhead volume variance (unfavourable) is 40010,400 - 10,000 =
400The budgeted overhead consist of variable and fixed.
A careful examination of this analysis indicates that the
overhead volume variance relates solely to fixed costs. Thus, the
volume variance measures the amount that fixed overhead costs are
under -or over applied.If the standard hours allowed are less than
the standard hours at normal capacity, fixed overhead costs will be
underapplied. If production exceeds normal capacity, fixed overhead
costs will be overapplied.An alternative formula for computing the
overhead volume variance is shown below;
In example the normal capacity is 26,400 hours for the year or
2,200 hours for a month (26,400 / 12), and the fixed overhead rate
is 2 per hour. Thus, the volume variance is 400 unfavourable;2x
(2,200 - 2,000) = 400
Overhead controllable variance500
Overhead volume variance400
Total Overhead Variance900
Using Variance Matrix:
All variances should be reported to appropriate levels of
management as soon as possible. The sooner management is informed,
the sooner problems can be evaluvated and corrective actions taken
if necessary.Cause of VraicnesThe causes of variance may relate to
both external and intrenal factors.Materials VarianceLabor
VarianceManufacturing Overhead Variance
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 and after 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 under
Category 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 a
credit based on standard 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 posted
prior to a fiscal period. Actual costs are posted in real time
during a fiscal period. Actual Cost can be divided into two groups
based on the posting origin; Postings to CO from external business
transactions results in Primary Costs. Business transactions within
CO results in Secondary Costs. 3.1 Primary 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 1.03.2 Secondary Cost: The costs in CO are allocated from
overhead cost centers to production cost centers during assessment
and then onto production order during activity 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.
3.3 Primary 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 2.03.4 Secondary Credit At 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
the gross profit margin level.Cost Center under/over absorption
costs assessed to CO-PA are included at the operating profit
level.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 into Input Variance and Output Variance 5.2.1) 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 on standard price control, 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 on Moving average price 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 Variance
When 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 price 5.3) Period End The most important period-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 Variance Settlement : Settlement of Production
Orders will be executed. KO88 - Individual Settlement CO88 -
Collective Settlement Now let us examine the main points under
Category 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 is 128,190.87 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) of 128,190.87
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.3 C1
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 in Category
B.1b) Activity Price (Material Recipe) not updated
properlyExplained in Category 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 Good FG1.
Production Version 1 will be using RM1 as raw material and
production version 2 will be using RM2 as 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 of FG1Production 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 Version ResourceTotal 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
calculates Planned cost 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 *
Step4MaterialVariance Step 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 Codes
KKBC_ORDKOB1KOC4FBL3NCK13NCK11NCK24MB5BMB51Understanding Production
Order Variance - Part 3 Price Difference VarianceAuthor: Ranjit
Simon JohnIn my blog "Understanding Production Order Variance -
Part 2 The SAP Perspective" I have mentioned the main resaons for
varinace in production order. In this blog let us see in detail the
price difference variacne posted during order settlement.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 on standard price control, 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 on Moving average price 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; Let The 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 Good Std. 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 Good Actual 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 Cancellation Actual
Quantity -> During Finished Good 3 (FG3) Confimration
Cancellation Actual Cost -> During Finished Good 3 (FG3)
Confimration Cancellation Material / 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 Material XXX
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.