Understanding Production Order Variance

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



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





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




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



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



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



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


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.

Understanding Production Order Variance

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