Production Variances in SAP Product costing

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Understanding Production Order Variance - Part 2 The SAP Perspective Posted by Ranjit John in SAP ERP Manufacturing - Production Planning (SAP PP) on Mar 13, 2012 8:54:24 AM inShare5

Understanding Production Order Variance Part 2 The SAP Perspective Author: Ranjit Simon John Every PP, FI and CO user in any Manufacturing Industry will be facing a tough time during period-end processing every month. Production Order Variance posted against each process orders will have to be examined, explained & investigated thoroughly. Major questions arising will be;    

From Where the Variance has come How to Categorize the variance How to cut down the variance. Impact of variance on COGM, COGS & Closing Stock, has to be answered to the management. 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 1.0

Let us divide the process as given below;

1)

Initial Planning

2)

Cost Estimates

3)

Actual Posting

4)

Period – End Processing

1) 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

acredit 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 Issue Debit Raw Material Consumption

Credit

XXX

Stock of Raw Material

XXX Table 1.0

3.2 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.

Debit Stock of Finished Good

Credit

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 (Figure 2.0)

Std. Qty. (Figure 2.0)

Std. Cost

Actual Qty. (Figure 4.0)

Actual Rate

Actual Cost (Figure 4.0)

Variance

Total value Per Ton Qty * FG Std Qty * RAWMATERIAL1 / Qty Prd. Qty Std Rate

Act Cost / Act Qty

496,630.0 Std Cost 49,663.00 0 Act Cost

Total value Per Ton Qty * FG Std Qty * RAWMATERIAL2 / Qty Prd. Qty Std Rate

Act Cost / Act Qty

3,411.00

Std Cost 89,824.45 Act Cost

Total value Per Ton Qty * FG Std Qty * RAWMATERIAL3 / Qty Prd. Qty Std Rate

Act Cost / Act Qty

5,798.00

Std Cost 104,162.8 Act Cost

Total value Per Ton Qty * FG Std Qty * RAWMATERIAL4 / Qty Prd. Qty Std Rate

Act Cost / Act Qty

1,003.00

209,858.9 Std Cost 1 Act Cost

Total value Per Ton Qty * FG Std Qty * RAWMATERIAL5 / Qty Prd. Qty Std Rate

Act Cost / Act Qty

9.00

517.57

Std Cost Act Cost

Total value Per Ton Qty * FG Std Qty * RAWMATERIAL6 / Qty Prd. Qty Std Rate

Act Cost / Act Qty

21.00

735.00

Std Cost Act Cost

Labor

Total value Per Ton Qty * FG Std Qty * / Qty Prd. Qty Std Rate

Act Cost / Act Qty

119,800.0 Std Cost 59,900.00 0 Act Cost

Depriciation

Total value Per Ton Qty * FG Std Qty * / Qty Prd. Qty Std Rate

Act Cost / Act Qty

Std Cost 59,900.00 59,900.00 Act Cost

Administration

Total value Per Ton Qty * FG Std Qty * / Qty Prd. Qty Std Rate

Act Cost / Act Qty

Std Cost 59,900.00 59,900.00 Act Cost

MACOOH

Total value Per Ton Qty * FG Std Qty * / Qty Prd. Qty Std Rate

Act Cost / Act Qty

Std Cost 59,900.00 44,326.00 Act Cost

POWER

Total value Per Ton Qty * FG Std Qty * / Qty Prd. Qty Std Rate

Act Cost / Act Qty

1,609,780 Std Cost .00 692,205.4 Act Cost

FINISHED GOOD

2,006,051 59,900.00 .00

Table 4.0 Now let us fill in values in Table 5.0 with the production order values.

Cost Elements

Std. Rate (Figure 2.0)

Std. Qty. (Figure 2.0)

Std. Cost

Actual Rate

Actual Qty. (Figure 4.0)

Actual Cost (Figure 4.0)

Variance

RAWMATERIAL1

10.00

48,519.00

485,190.0 0 10.00

49,663.00

(11,440.00 496,630.00 )

RAWMATERIAL2

24.4262

3,653.9

89,250.89 26.3338

3,411.00

89,824.45

RAWMATERIAL3

17.7670

6,169.7

109,617.0 0 17.9653

5,798.00

104,162.80 5,454.20

RAWMATERIAL4

179.5833

1,437.6

258,169.0 0 209.2312

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)

59,900.00

119,800.00 0.00

(573.45)

Labor

2.00

59,900.00

119,800.0 0 1.00

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

0.43

1,797,000.0 772,719.0 0 0 0.43

POWER

1,609,780.0 0 692,205.4

80,504.6

Std. Rate (Figure 2.0)

Cost Elements

Std. Qty. (Figure 2.0)

Actual Rate

Std. Cost

FINISHED GOOD

Actual Qty. (Figure 4.0)

33.49

59,900.00

Actual Cost (Figure 4.0) 2,006,051.0 0 TOTAL

Cost Element

128,190. 87

Table 5.0

Now let us categorize the variance. Variance has been posted in the following order Serial No

Variance

Variance

Variance Category

Variance Class

RMV1

RAWMATERIAL1

(11,440.00)

Category IV.3

C1

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 Price

RAWMATERIAL1 10.00

Target Input Qty 48,519.00

Target Cost

Actual Price

485,190. 00 10.00

Actual Input Qty 49,663.00

Actual Cost

Variance Class Variance

496,630. 00 C1

11,440.00

RAWMATERIAL2 24.4262 3,653.90

89,251.0 0 26.3338 3,411.00

80,824.4 5 C2

573.45

RAWMATERIAL3 17.7670 6,169.70

109,617. 00 17.9653 5,798.00

104,162. 80 C2

(5,454.25 )

179.583 RAWMATERIAL4 3 1,437.6

258,169. 209.231 00 2 1,003.00

209,858. 91 C2

(48,310.0 9)

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

735.00

C3

735.00

Power

1,797,000.0 772,710. 0 00 0.43

0.43

35.00

21.00

1,609,780.0 692,205. 0 4 C1 TOTAL Table 7.0

Category B.2) Major Reasons for the variance

(80,504.6 ) (128,190 .27)

From My experience I can point out that Production order variance occur mainly from;

d)

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

PO31

GCPRODCGM1 P031

POWER

15.05

0.035

PO31

GCPRODCGM1 P031

ADMINI

0.50

1.00

PO31

GCPRODCGM1 P031

DEPRN

1.00

1.00

PO31

GCPRODCGM1 P031

LABOUR

0.70

1.00

PO31

GCPRODCGM1 P031

MACOOH

1.19

1.00

GC01 RM1

149.54

0.945

GC01 RM3

4.47

0.055

TOTAL

172.45 Table 8.0

Process Order has been Created Under production version “PO32” The Activity Price recorded in system against “PO32” is as follows Production Version

Resource

Total Value

Quantity

PO32

GCPRODCGM2 P032

POWER

17.00

0.040

PO32

GCPRODCGM2 P032

ADMINI

1.00

1.00

PO32

GCPRODCGM2 P032

DEPRN

1.46

1.00

PO32

GCPRODCGM2 P032

LABOUR

1.00

1.00

PO32

GCPRODCGM2 P032

MACOOH

1.50

1.00

GC01 RM2

152.00

0.930

GC01 RM4

5.50

0.075

TOTAL

177.51 Table 9.0

After Settlement (For 1000 TO of FG1) entries will be in the following sequence; Production Version

Resource

Target Value

Actual Value

Variance

PO31

GCPRODCGM1 P031

POWER

15,050.00

0.00

15,050.00

PO31

GCPRODCGM1 P031

ADMINI

500.00

0.00

500.00

PO31

GCPRODCGM1 P031

DEPRN

1,000.00

0.00

1,000.00

PO31

GCPRODCGM1 P031

LABOUR

700.00

0.00

700.00

PO31

GCPRODCGM1 P031

MACOOH

1,190.00

0.00

1,190.00

GC01 RM1

149,540.00

0.00

149,540.00

GC01 RM3

4,470.00

0.00

4,470.00

PO32

GCPRODCGM2 P032

POWER

0.00

17,000.00

(17,000.00)

PO32

GCPRODCGM2 P032

ADMINI

0.00

1,000.00

(1,000.00)

PO32

GCPRODCGM2 P032

DEPRN

0.00

1,460.00

(1,460.00)

PO32

GCPRODCGM2 P032

LABOUR

0.00

1,000.00

(1,000.00)

PO32

GCPRODCGM2 P032

MACOOH

0.00

1,500.00

(1,500.00)

0.00

152,000.00

(152,000.00 )

GC01 RM2

Production Version

Target Value

Resource

GC01 RM4

0.00

Actual Value

Variance

5,500.00

(5,500.00)

TOTAL

(7,910)

Table 10.0

Here 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.e. the net difference will be then POWER = 17,000 + (17,000) = 0

i.

Let us see a LIVE Process Order Example: Example Product : FG1 Standard Cost Estimate Released for Production Version "PO31"

Production Version

Table 11.0 Material Recipee for FG1 (CK13N) Resource Total Value Fixed Value

Quantity

PO31

POWER

15.05

15.05

0.035

PO31

ADMINI

0.50

0.00

1.00

PO31

DEPRIN

1.00

0.00

1.00

PO31

LABOUR

0.70

0.00

1.00

PO31

MACOOH

1.19

0.00

1.00

RM1

149.54

32.69

0.945

RM3

4.47

0.00

0.055

TOTAL

172.45 Figur 5.0

47.74

Process 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 TO Use the same calculation logic used in Table 1.0; Resource

Quantity

Amount

RM1

23,910.39

3,783,661.17

RM3

13,916.10

1,130,999.021

ADMIN

25,302.00

12,651.00

Resource

Quantity

Amount

LABOR

25,302.00

17,711.40

DEPRIN

25,302.00

25,302.00

MACOOH

25,302.00

30,109.38

POWER

885,570.00

380,795.10

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

Activity

Quantity

Amount

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

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

Varian Productio Variance ce n Qty / Ton Material Step 2 Step 3 Step 4 MATERIAL1 V1 MATERIAL2 V2 MATERIAL3 V3

Closing Stock Qty Step 5

P1

VT1 = P1 / V1 C1

P2

VT2 = P2 / V2 C2

P3

VT3 = P3 / V3 C3

Closing Stock Variance Step 6

COGM Variance Step 8

C1 * VT1

COGM Qty * VT1 S1

S1 * VT1

C2 * VT2

COGM Qty * VT2 S2

S2 * VT2

COGM Qty * VT3 S3

S3 * VT3

C3 * 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

COGS COGS Qty Variance Step 9 Step 10

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/manufacturingpp/blog/2012/03/27/understanding-production-order-variance--part-2-price-differencevariance

Understanding Production Order Variance - Part 3 Price Difference Variance Posted by Ranjit John in SAP ERP Manufacturing - Production Planning (SAP PP) on Mar 27, 2012 6:24:14 AM inShare1

Understanding Production Order Variance - Part 3 Price Difference Variance Author: Ranjit Simon John In 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 Difference Let 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 01.01.2012 Raw Material Std. Quantity -> As per Released Standard Cost Estimate of Finished Good 1 (FG1), Released on 01.01.2012 Material / OverHead Std. Rate Std. Quantity Std. Cost Raw Material 1 (RM1)

25.00

1.00

25.00

Raw Material 2 (RM2)

10.00

1.00

10.00

Raw Material 3 (RM3)

60.00

1.00

60.00

Raw Material 4 (RM4)

15.00

1.00

15.00

ADMIN

1.50

1.00

1.50

DEPRIN

1.75

1.00

1.75

MACOOH

1.25

1.00

1.25

LABOUR

1.30

1.00

1.30

0.43

1.00

0.43

116.23 Table 1.0

1.00

116.23

POWER Finished Good 1 (FG1) Scenario 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 01.01.2012 Raw Material Actual Rate -> As per Moving Average Price as on 01.02.2012 Material / Std. Std. Actual Actual Actual OverHead Rate Quantity Std. Cost Rate Quantity Cost Variance Raw Material 1 (RM1)

25.00

1000.00

25,000.00

35.00

1000.00

35,000.00

(10,000.00 )

Raw Material 2 (RM2)

10.00

1000.00

10,000.00

15.00

1000.00

15,000.00 (5,000.00)

Raw Material 3 (RM3)

60.00

1000.00

60,000.00

57.00

1000.00

57,000.00

3,000.00

Raw Material 4 (RM4)

15.00

1000.00

15,000.00

15.00

1000.00

15,000.00

0.00

ADMIN

1.50

1000.00

1,500.00

1.50

1000.00

1,500.00

0.00

DEPRIN

1.75

1000.00

1,750.00

1.75

1000.00

1,750.00

0.00

MACOOH

1.25

1000.00

1,250.00

1.25

1000.00

1,250.00

0.00

LABOUR

1.30

1000.00

1,300.00

1.30

1000.00

1,300.00

0.00

POWER

0.43

1000.00

430.00

0.43

1000.00

430.00

0.00

Finished Good (FG1)

116,230. 128,230.0 (12,000.0 00 128.23 1000.00 0 0) Table 2.0 The 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 01.01.2012 Semi Finished Good Std. Quantity -> As per Released Standard Cost Estimate of Finished Good 2 (FG2), Released on 01.01.2012 Material / OverHead Std. Rate Std. Quantity Std. Cost 116.23

1000.00

Raw Material 1 (RM1)

10.00

1.00

10.00

Semi FInished Good 1 (SFG1)

25.00

1.00

25.00

Semi FInished Good 2 (SFG2)

20.00

1.00

20.00

ADMIN

1.50

1.00

1.50

DEPRIN

1.75

1.00

1.75

MACOOH

1.25

1.00

1.25

LABOUR

1.30

1.00

1.30

POWER

0.43

1.00

0.43

Finished Good 2 (FG2)

61.23 1.00 61.23 Table 3.0 Let us consider that Standard Cost Etimate for Semi Finished Good 1 ("SFG1") was released on 01.02.2012. New Standard Cost of SFG1 = 35.00 Standard 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 01.01.2012 Semi Finished Good Actual Rate -> As per Released Standard Cost Estimate of Semi Finished Good (SFG) , Released on 01.02.2012

Material / OverHead

Std. Rate

Std. Quantity

Std. Cost

Actual Rate

Actual Quantity

Actual Cost

Variance

10.00

1000.00

10,000.00

0.00 (10,000.0 0)

Raw Material 1 (RM1)

10.00

1000.00

10,000.0 0

Semi Finished Good 1 (SFG1)

25.00

1000.00

25,000.0 0

35.00

1000.00

35,000.00

Semi Finished Good 2 (SFG2)

20.00

1000.00

20,000.0 0

18.00

1000.00

18,000.00 2,000.00

ADMIN

1.50

1000.00

1,500.00

1.50

1000.00

1,500.00

0.00

DEPRIN

1.75

1000.00

1,750.00

1.75

1000.00

1,750.00

0.00

MACOOH

1.25

1000.00

1,250.00

1.25

1000.00

1,250.00

0.00

LABOUR

1.30

1000.00

1,300.0 0

1.30

1000.00

1,300.00

0.00

POWER

0.43

1000.00

430.00

0.43

1000.00

430.00

0.00

1000.00

69,230.0 0

(8,000.0 0)

Finished Good 2 (FG2)

61.23

61,230. 1000.00 00 Table 4.0

69.23

Scenario 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 Std. Material / OverHead Rate Std. Qty. Std. Cost Act. Rate Act. Qty. Act. Cost Variance Raw Material 1 (RM1)

10.00

1000.00

10,000.00

8.00

1000.00

8,000.00

2,000.00

Raw Material 2 (RM2)

20.00

1000.00

20,000.00

22.00

1000.00

22,000.00

(2,000.00)

Raw Material 3 (RM3)

25.00

1000.00

25,000.00

30.00

1000.00

30,000.00

(5,000.00)

ADMIN

1.50

1000.00

1,500.00

1.50

1000.00

1,500.00

0.00

DEPRIN

1.75

1000.00

1,750.00

1.75

1000.00

1,750.00

0.00

MACOOH

1.30

1000.00

1,300.00

1.30

1000.00

1,300.00

0.00

LABOUR

1.25

1000.00

1,250.00

1.25

1000.00

1,250.00

0.00

POWER

0.43

1000.00

430.00

0.43

1000.00

430.00

0.00

61.23

1000.00

Finished Good 3 (FG3)

61,230.00 66.23 1000.00 66,230.00 (5,000.00) Table 5.0 The GL Entries Posted during Confirmation of Finished Good 3 (Production); Debit Credit Stock of Finished Good 3 (FG3)

XXX

COGM of Finished Good 3 (FG3)

XXX

Raw Material Consumption

XXX

Stock of Raw Material

XXX Table 6.0

Figure 1.0 The GL Entries Posted during Confirmation Cancellation: Debit COGM of Finished Good 3 (FG3)

Credit

XXX

Stock of Finished Good 3 (FG3)

XXX

Stock of Raw Material

XXX

Raw Material Consumption

XXX

Price Diff-Production Order Variance

XXX 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.