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AM
Debit Credit
Stock of Finished Good XXX
COGM of Finished Good XXX
Raw Material Consumption XXX
Stock of Raw Material XXX
Table 2.0
3.4 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.
Debit 100 Raw Material
100 Labor
100 Over Heads
Credit (250) Finished Good
Balance 50 Variance
Table 3.0
Total 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 Costs
1) 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 quantity
Category IV.2) Resource – Usage Variance
Resource – 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 variance
Category IV.3) Input quantity variance
Input 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 price
Category IV.4) Remaining Input Variance
When input variance cannot be assigned to any other variance
category. 5.2.2) Output Variance
Variance 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 Calculation
Variance can be calculated using the formula;
Variance = Actual Cost – Actual Cost Allocated (credits) – WIP – Scrap
During 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 orders
2. Major Reasons for the variance
3. How to minimize the variance
4. Impact of production order variance on COGM, COGS & Closing Stock
Category B.1) How to analyze variance posted against production order
For 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;
Item Resource Total Value Fixed Value Quantity Unit
1 POWER 12.90 12.90 0.030 MWH
2 ADMINI 1.00 0.00 1.00 TO
3 DEPRIN 1.00 0.00 1.00 TO
4 LABOUR 2.00 0.00 1.00 TO
5 MACOOH 0.74 0.00 1.00 TO
6 RAWMATERIAL1 8.10 0.00 0.81 TO
7 RAWMATERIAL2 1.49 0.00 0.061 TO
8 RAWMATERIAL3 1.83 0.00 0.103 TO
9 RAWMATERIAL4 0.12 0.00 0.002 TO
10 RAWMATERIAL5 4.31 0.00 0.024 TO
TOTAL 33.49 12.90
Figure 2.0
Process order No for SFG1 is 15000035
Variance Posted against the Process Order for the month is 128,190.87 AED
After 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 4.0
Here 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 Elements Std. Rate Std. Qty. Std. Cost Actual Rate Actual Qty. Actual Cost Variance
(Figure 2.0) (Figure 2.0) (Figure 4.0) (Figure 4.0)
RAWMATERIAL1 Total Per Ton Qty * Std Qty * Act Cost / 49,663.00 496,630.00 Std Cost - Act
value / Qty FG Prd. Qty Std Rate Act Qty Cost
RAWMATERIAL2 Total Per Ton Qty * Std Qty * Act Cost / 3,411.00 89,824.45 Std Cost - Act
value / Qty FG Prd. Qty Std Rate Act Qty Cost
Cost Elements Std. Rate Std. Qty. Std. Cost Actual Rate Actual Qty. Actual Cost Variance
(Figure 2.0) (Figure 2.0) (Figure 4.0) (Figure 4.0)
RAWMATERIAL3 Total Per Ton Qty * Std Qty * Act Cost / 5,798.00 104,162.8 Std Cost - Act
value / Qty FG Prd. Qty Std Rate Act Qty Cost
RAWMATERIAL4 Total Per Ton Qty * Std Qty * Act Cost / 1,003.00 209,858.91 Std Cost - Act
value / Qty FG Prd. Qty Std Rate Act Qty Cost
RAWMATERIAL5 Total Per Ton Qty * Std Qty * Act Cost / 9.00 517.57 Std Cost - Act
value / Qty FG Prd. Qty Std Rate Act Qty Cost
RAWMATERIAL6 Total Per Ton Qty * Std Qty * Act Cost / 21.00 735.00 Std Cost - Act
value / Qty FG Prd. Qty Std Rate Act Qty Cost
Labor Total Per Ton Qty * Std Qty * Act Cost / 59,900.00 119,800.00 Std Cost - Act
value / Qty FG Prd. Qty Std Rate Act Qty Cost
Depriciation Total Per Ton Qty * Std Qty * Act Cost / 59,900.00 59,900.00 Std Cost - Act
value / Qty FG Prd. Qty Std Rate Act Qty Cost
Administration Total Per Ton Qty * Std Qty * Act Cost / 59,900.00 59,900.00 Std Cost - Act
value / Qty FG Prd. Qty Std Rate Act Qty Cost
MACOOH Total Per Ton Qty * Std Qty * Act Cost / 59,900.00 44,326.00 Std Cost - Act
value / Qty FG Prd. Qty Std Rate Act Qty Cost
POWER Total Per Ton Qty * Std Qty * Act Cost / 1,609,780.00 692,205.4 Std Cost - Act
value / Qty FG Prd. Qty Std Rate Act Qty Cost
FINISHED 59,900.00 2,006,051.00
GOOD
Table 4.0
Now let us fill in values in Table 5.0 with the production order values.
Cost Elements Std. Cost Actual Rate Variance
Std. Rate Std. Qty. Actual Qty. Actual Cost
(Figure 2.0) (Figure 2.0) (Figure 4.0) (Figure 4.0)
RAWMATERIAL1 10.00 48,519.00 485,190.00 10.00 49,663.00 496,630.00 (11,440.00)
RAWMATERIAL2 24.4262 3,653.9 89,250.89 26.3338 3,411.00 89,824.45 (573.45)
RAWMATERIAL3 17.7670 6,169.7 109,617.00 17.9653 5,798.00 104,162.80 5,454.20
RAWMATERIAL4 179.5833 1,437.6 258,169.00 209.2312 1,003.00 209,858.91 48,310.09
RAWMATERIAL5 60.00 119.8 7,188.00 57.5078 9.00 517.57 6,670.43
RAWMATERIAL6 00.00 0.00 0.00 35.00 21.00 735.00 (735.00)
Labor 2.00 59,900.00 119,800.00 1.00 59,900.00 119,800.00 0.00
Depriciation 1.00 59,900.00 59,900.00 1.00 59,900.00 59,900.00 0.00
Administration 1.00 59,900.00 59,900.00 1.00 59,900.00 59,900.00 0.00
MACOOH 0.74 59,900.00 44,326.00 0.74 59,900.00 44,326.00 0.00
POWER 0.43 1,797,000.00 772,719.00 0.43 1,609,780.00 692,205.4 80,504.6
FINISHED GOOD 33.49 59,900.00 2,006,051.00
TOTAL 128,190.87
Table 5.0
Now let us categorize the variance.
Variance has been posted in the following order
Serial No Cost Element Variance Variance Category Variance Class
RMV1 RAWMATERIAL1 (11,440.00) Category IV.3 C1
Serial No Cost Element Variance Variance Category Variance Class
RMV2 RAWMATERIAL2 (573.45) Category IV.3 + Category IV.1 C2
RMV3 RAWMATERIAL3 5,454.20 Category IV.3 + Category IV.1 C2
RMV4 RAWMATERIAL4 48,310.09 Category IV.3 + Category IV.1 C2
RMV5 RAWMATERIAL5 6,670.43 Category IV.3 + Category IV.1 C2
RMV6 RAWMATERIAL6 (735.00) Category IV.2 C3
OHV1 Power 80,504.6 Category IV.3
Table 6.0
Let us try to calculate Variance by applying Formula for each category.
Category IV.1: Input Price Variance = (Actual Price – Plan Price) * Actual Input Quantity
Category IV.2: Resource Usage Variance – Actual Cost – Target Cost – Input Price Variance
Category IV.3: Input Quantity Variance = (Actual Input Quantity – Target Input Quantity) * Plan
Price
Cost Elements Plan Target Input Target Actual Actual Input Actual Variance Variance
Price Qty Cost Price Qty Cost Class
RAWMATERIAL1 10.00 48,519.00 485,190.00 10.00 49,663.00 496,630.00 C1 11,440.00
RAWMATERIAL2 24.4262 3,653.90 89,251.00 26.3338 3,411.00 80,824.45 C2 573.45
RAWMATERIAL3 17.7670 6,169.70 109,617.00 17.9653 5,798.00 104,162.80 C2 (5,454.25)
RAWMATERIAL4 179.5833 1,437.6 258,169.00 209.2312 1,003.00 209,858.91 C2 (48,310.09)
RAWMATERIAL5 60.00 119.80 7,188.00 57.5078 9.00 517.57 C2 (6,670.43)
RAWMATERIAL6 0.00 0.00 0.00 35.00 21.00 735.00 C3 735.00
Power 0.43 1,797,000.00 772,710.00 0.43 1,609,780.00 692,205.4 C1 (80,504.6)
TOTAL (128,190.27)
Table 7.0
Category B.2) Major Reasons for the variance
From 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)
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 properly
Explained in Category B.1
b) Activity Price (Material Recipe) not updated properly
Explained in Category B.1
Total POWER consumption as per KOB1 (Actual as per Material Recipe) and FBL3N should be
approximately equal.
KOB1 -> POWER consumption for the Materials Produced
FBL3N -> 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 FG1
Production Version Resource Total Value Quantity
Table 12.0
Planned Cost for Producing 25,302.00 TO of FG1
Figure 6.0
Process Order has been created in Production version "PO32". During Confirmation System
calculates actual cost as follows;
Figure 7.0
d) Total Planned Quantity and Actual Produced Quantity Difference
We 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: FG1
Total Process Order Quantity: 93,000 TO
Quantity Produced: 8,865.00 TO
The total quantity produced is 8,865.00 TO against which the activities booked are;
Activity Quantity Amount
LABOR 8,865 * 2 DH / TON 17,730.00
DEPRIN 8,865 * 1 DH / TON 8,865.00
MACOOH 8,865 * 0.74 DH / TON 6,560.10
ADMIN 8,865 * 1 DH / TON 8,865.00
POWER 8,865 * 0.03 * 1000 265,950.00
TOTAL 42,020.10
Table 13.0
Since during final confirmation of the Order, re calculation of activities were bypassed (by user)
system calculated the activities against the production order as below;
Activity Quantity Amount
LABOR 93,000 * 2 DH / TON 186,000.00
DEPRIN 93,000 * 1 DH / TON 93,000.00
MACOOH 93,000 * 0.74 DH / TON 68,820.00
ADMIN 93,000 * 1 DH / TON 93,000.00
Activity Quantity Amount
POWER 2,857,172.00 (User Entered) 1,228,583.96
TOTAL 440,820.00
Table 14.0
A Variance of 440,820.00 - 42,020.00 = 39,880.00 TO was posted against all the activities
Figure 9.0
Note: While doing final confirmation ensure that all the activity prices are recalculated as per the
new output.
e) Variance Due to Price change
Price change of material due to execution of standard cost estimate will be posted with document
type "PR"
3) How to reduce variance
For reducing production order variance
a) 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 periodically
c) Confirm activity getting booked while doing final confirmation
d) 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 Stock
Variances 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 2
Step5: Record closing stock of Material (MB5B)
Step6: Closing Stock Variance Allocation = Step5 * Step4
Step7: Record COGM Quantity (MB5B with movement type 201 + 202 & 261 + 262)
Step8: COGM Variance Allocation = Step7 * Step4
Step9: Record COGS Quantity (MB5B with movement type 601 + 602)
Step10: COGS Variance Allocation = Step9 * Step4
Material Variance Production Variance / Closing Closing Stock COGM COGS COGS
Step 2 Qty Ton Stock Qty Variance Variance Qty Variance
Step 3 Step 4 Step 5 Step 6 Step 8 Step 9 Step 10
MATERIAL1 V1 P1 VT1 = P1 / C1 C1 * VT1 COGM Qty * S1 S1 * VT1
V1 VT1
MATERIAL2 V2 P2 VT2 = P2 / C2 C2 * VT2 COGM Qty * S2 S2 * VT2
V2 VT2
MATERIAL3 V3 P3 VT3 = P3 / C3 C3 * VT3 COGM Qty * S3 S3 * VT3
V3 VT3
Table 15.0
Few Important Document Types Posted in Production Order Variance GL are;
AB -> Reversal of Production Order Settlement
SA -> Production Order Settlement
PR -> Price Change
WA -> Confirmation Reversal (If Price Changed after Confirmation)
WL -> Sales Reversal (If Price Changed after Sales)
Figure 10.0
Few Important Transaction Codes
KKBC_ORD
KOB1
KOC4
FBL3N
CK13N
CK11N
CK24
MB5B
MB51
Reference: Production Variance Analysis in SAP Controlling By John Jordan, Published by SAP
Galileo PresAlso refer s
Also Refer: http://scn.sap.com/community/erp/manufacturing-
pp/blog/2012/03/27/understanding-production-order-variance--part-2-price-difference-variance
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