Understanding Production Order Variance Part 1

SAP ERP Manufacturing - Production Planning (SAP PP): Understanding Production Order Variance - Part 2 The SAP Perspective Posted by Ranjit John  13  13 Mar, 2012  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 having a tough time while processing monthend 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 across few conclusions. For better understanding I will divide this blog into two categories; O rder • 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: 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.

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SAP ERP Manufacturing - Production Planning (SAP PP): Understanding Production Order Variance - Part 2 The SAP Perspective

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

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SAP ERP Manufacturing - Production Planning (SAP PP): Understanding Production Order Variance - Part 2 The SAP Perspective 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:

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SAP ERP Manufacturing - Production Planning (SAP PP): Understanding Production Order Variance - Part 2 The SAP Perspective 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

XXX

COGM of Finished Good Raw Material Consumption

Credit

XXX 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.

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SAP ERP Manufacturing - Production Planning (SAP PP): Understanding Production Order Variance - Part 2 The SAP Perspective 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.

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SAP ERP Manufacturing - Production Planning (SAP PP): Understanding Production Order Variance - Part 2 The SAP Perspective 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 

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SAP ERP Manufacturing - Production Planning (SAP PP): Understanding Production Order Variance - Part 2 The SAP Perspective 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

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SAP ERP Manufacturing - Production Planning (SAP PP): Understanding Production Order Variance - Part 2 The SAP Perspective 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

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SAP ERP Manufacturing - Production Planning (SAP PP): Understanding Production Order Variance - Part 2 The SAP Perspective

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

(Figure 2.0) (Figure 2.0)

Actual Rate

Actual Qty. Actual

Variance

(Figure 4.0) Cost (Figure 4.0)

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

Act Cost /  Act Qty

49,663.00

496,630.00

Std Cost Act Cost

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

Act Cost /  Act Qty

3,411.00

89,824.45

Std Cost Act Cost

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

Act Cost /  Act Qty

5,798.00

104,162.8

Std Cost Act Cost

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

Act Cost /  Act Qty

1,003.00

209,858.91

Std Cost Act Cost

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

Act Cost /  Act Qty

9.00

517.57

Std Cost Act Cost

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SAP ERP Manufacturing - Production Planning (SAP PP): Understanding Production Order Variance - Part 2 The SAP Perspective RAWMATERIAL6 Total value /  Per Ton Qty Std Qty * Qty * FG Prd. Std Rate Qty

Act Cost /  Act Qty

21.00

735.00

Std Cost Act Cost

Labor

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

Act Cost /  Act Qty

59,900.00

119,800.00

Std Cost Act Cost

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

Act Cost /  Act Qty

59,900.00

59,900.00

Std Cost Act Cost

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

Act Cost /  Act Qty

59,900.00

59,900.00

Std Cost Act Cost

MACOOH

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

Act Cost /  Act Qty

59,900.00

44,326.00

Std Cost Act Cost

POWER

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

Act Cost /  Act Qty

1,609,780.00 692,205.4

Std Cost Act Cost

FINISHED GOOD

59,900.00

2,006,051.00

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

Std. Rate

Std. Qty.

Std. Cost

Actual Rate

(Figure 2.0) (Figure 2.0)

Actual Qty. Actual

Variance

(Figure 4.0) Cost (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

Administration1.00

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

33.49

59,900.00

FINISHED GOOD

80,504.6

2,006,051.00 TOTAL

128,190.87

Table 5.0

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SAP ERP Manufacturing - Production Planning (SAP PP): Understanding Production Order Variance - Part 2 The SAP Perspective 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

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

Target Input Qty

Target Cost

RAWMATERIAL1 10.00

48,519.00

RAWMATERIAL2 24.4262

Actual Input Qty

Actual Cost

485,190.00 10.00

49,663.00

496,630.00 C1

11,440.00

3,653.90

89,251.00

26.3338

3,411.00

80,824.45

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

1,797,000.00772,710.00 0.43

C1

(80,504.6)

TOTAL

(128,190.27)

0.43

Actual Price

1,609,780.00692,205.4

Variance Class

C2

Variance

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 )

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 )

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SAP ERP Manufacturing - Production Planning (SAP PP): Understanding Production Order Variance - Part 2 The SAP Perspective 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

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SAP ERP Manufacturing - Production Planning (SAP PP): Understanding Production Order Variance - Part 2 The SAP Perspective 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)

GC01 RM2

0.00

152,000.00

(152,000.00)

GC01 RM4

0.00

5,500.00

(5,500.00)

TOTAL

(7,910)

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SAP ERP Manufacturing - Production Planning (SAP PP): Understanding Production Order Variance - Part 2 The SAP Perspective 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, 1. i.e. the net difference will be then POWER = 17,000 + (17,000) = 0 Let us see a LIVE Process Order Example: Example Product : FG1 Standard Cost Estimate Released for Production Version "PO31" Table 11.0 Material Recipee for FG1 (CK13N) Production Version

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

47.74

Figur 5.0 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

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

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SAP ERP Manufacturing - Production Planning (SAP PP): Understanding Production Order Variance - Part 2 The SAP Perspective 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

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SAP ERP Manufacturing - Production Planning (SAP PP): Understanding Production Order Variance - Part 2 The SAP Perspective 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)

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SAP ERP Manufacturing - Production Planning (SAP PP): Understanding Production Order Variance - Part 2 The SAP Perspective 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

Step 2

Qty

Ton

Step 3

Step 4

Closing

COGM

COGS

COGS

Stock Qty Stock

Variance

Qty

Variance

Step 5

Step 8

Step 9

Step 10

Variance Step 6

MATERIAL1V1

P1

VT1 = P1 /  C1 V1

C1 * VT1

COGM Qty * VT1

S1

S1 * VT1

MATERIAL2V2

P2

VT2 = P2 /  C2 V2

C2 * VT2

COGM Qty * VT2

S2

S2 * VT2

MATERIAL3V3

P3

VT3 = P3 /  C3 V3

C3 * VT3

COGM Qty * VT3

S3

S3 * 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

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SAP ERP Manufacturing - Production Planning (SAP PP): Understanding Production Order Variance - Part 2 The SAP Perspective 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  61667 Views Tags: sap, sap_netweaver_platform, enterprise_portal_(ep), erp, business_process_expert, business_process_management, enterprise_data_warehousing/business_warehouse, mobile, sap_process_integration_(pi), sap_developer_network, sap_business_suite, financial_excellence, emerging_technologies, ranting, public_sector, service-oriented_architecture, business_process_modeling, business_rules_management, enterprise_performance_management, utilities, fica, mill_products, enterprise_resource_planning, sap_erp_manufacturing_production_planning

Ranjit John 7 Dec, 2014 2:30 PM Happy to know that my efforts helped. Devendra F 8 Feb, 2014 7:16 AM Hi, It is definitely to save in special folder, Regards, Devendra AKS Sankar 29 Nov, 2013 11:57 AM Hi Ranjit, Thanks. In KOB1, posted unit is show with different units like HR, MIN and Sec. How to make this posted unit as any one of unit by default? Alex Barbieri in response to Ranjit John  on page 20  20 Nov, 2013 12:58 PM Dear Ranjit, is possible to have access to http://scn.sap.com/blogs-edit-post!default.jspa?blogPost=63513&blog=1130 What is the difference in the calculation and allocation of production variances when Material ledger is used respect to standard cost only? thanks a lot

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SAP ERP Manufacturing - Production Planning (SAP PP): Understanding Production Order Variance - Part 2 The SAP Perspective Ikram hazari 18 Jul, 2013 10:28 PM Thank you Ikram hazari 18 Jul, 2013 10:27 PM Than Mathew Aby 7 Jul, 2013 2:41 PM good article.. Ranjit John 28 Jun, 2013 12:23 AM Thank you Vinay Ashwathnarayan 27 Jun, 2013 12:31 PM Very Informative Thanks for Sharing Naresh Babu 21 Jun, 2013 10:50 AM Hello Sir, It is really very informative & thank you very much for sharing. I have a small doubt on WIP, While comparing monthly KKAO report for WIP and FS10N, we have found few Process Orders opened in Nov 2012 and never closed for FS10N. What could be the possible reasons for this & what are the steps reqired to close them. Thank you Himanshu Saxena 21 Jun, 2013 10:02 AM Very good document with detailed information. Thank you for sharing !!! Kader Mohideen 9 May, 2013 3:32 PM Excellent information with good examples..... Ranjit John in response to Sisir Pradhan  on page 19  24 Apr, 2013 2:56 AM Thank you . KIndly rate the artcile Sisir Pradhan 23 Apr, 2013 12:37 PM Very helpfull.... Regards, sisir pradhan.

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SAP ERP Manufacturing - Production Planning (SAP PP): Understanding Production Order Variance - Part 2 The SAP Perspective Ranjit John 13 Mar, 2013 1:10 PM Thank you Raheem RAHEEM BAKSH 6 Mar, 2013 9:00 AM Excellent....................... Zanhua Fan in response to Ranjit John  on page 20  27 Jan, 2013 7:17 AM I really appreciate that. Thanks Ranjit John 25 Jan, 2013 8:17 AM Dear Zanhua, Thank you. Great to know that the document helped. We have the similar scenario like you explained. Please find the below given blog to find how we resolved the scenario. http://scn.sap.com/blogs-edit-post!default.jspa?blogPost=63513&blog=1130 Also Check http://scn.sap.com/community/erp/financials/blog/2012/06/13/erp-post-implementation-challenges-part-3preparing-the-cost-sheet http://scn.sap.com/community/erp/financials/blog/2012/04/02/erp-post-implementation-challanges-part-2reconcilling-roh Regards Ranjit Zanhua Fan 24 Jan, 2013 8:06 AM Dear Mr. Ranjit, Thanks for your know-how. Gegarding the variance, I have following question. If the Material Ledger is inactive, how to classify the variance after settlement? For example: Finished Goods A, the plan quantity of the production order is 10, the standard cost is 9 while the actual cost is 7. in current month, the production order is completed. and the variance of the production order is 20. the FI document as follows: Dr: COGM offset

20

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SAP ERP Manufacturing - Production Planning (SAP PP): Understanding Production Order Variance - Part 2 The SAP Perspective Cr: COGM Variance 20 All the variance settled to PL account. That figure should be ok is all the Finished Goods is sold out in same period. But, If the quantity of the FG sold out is 6 in same period, we should split the variance manually. Amount 20*4/10=8 repost to inventory while amount 20*6/10=12 posted to Cost of Good Sold. some developed reports required to determine rate between Good sold and Inventory. Is there any standard solution for that case? Hope this is clear and look forward to your reply. Thanks Syed Hussain 23 Jan, 2013 10:22 AM Good information. Thank you. Ranjit John in response to Khoa Nguyen Anh  on page 21 10 Dec, 2012 11:44 AM Hi, TECO is one step in the whole cycle. You cannot calculate variance for a oredr which is not TECO done. Technical completion (TECO) means ending a production order from a logistical viewpoint. By doing TECO you inform the system that the activites scheduled in the order is completed. You have to do TECO before executing variance Khoa Nguyen Anh 8 Dec, 2012 4:39 AM Dear Mr. Ranjit, Thanks for preparing and sharing such a valuable document. It helps me a lot. Can I ask you some questions? I've been searching but could not found an clear answer what effects TECO has on variance calculation. Is it neccesary to TECO and what is the meaning behind it. Thank you. Eric Chen 9 Nov, 2012 7:45 AM great, valuable article, makes me clear, thanks for your shared. Ranjit John 14 Oct, 2012 10:23 AM Thank you :-) mahesh A 3 Oct, 2012 8:38 AM One of the Best article. Thanks,

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SAP ERP Manufacturing - Production Planning (SAP PP): Understanding Production Order Variance - Part 2 The SAP Perspective Mahesh mahesh A 3 Oct, 2012 8:36 AM Hi Ranjit, Thanks for posting such a good article , I can rate it 10 out of 10. Regards, Mahesh Ranjit John 13 Sep, 2012 4:58 AM Thank You padmaja gan 13 Sep, 2012 3:25 AM Hi Ranjit, Thank you soo much for helping me !! You are guru of product costing. My concepts got clear. Thank you for posting such an excellent document and it is impossible to get it any where. I am delighted and very thankful and giving you100% rating. Problem that I got was I could not see the actual cost in CO03--cost analysis after creating the confirmation in CO15. Ranjit helped me locate the problem as bill of materials are not getting issued to finished goods and the move moment type was 101 not 261. MM person did MB1A then raw materials got consumed to final good by movement type 261. then after that I ran the confirmation CO15 for the new order and then actual cost got posted. Thank you, Padmaja Raja Sekhar 21 Jun, 2012 11:24 AM Ranjith it is really good document vindhan ganesan 14 Jun, 2012 12:59 PM Hi sir, very useful information shared , thanks for for sharing your knowlwdge Vishal Thalla 12 Jun, 2012 3:09 PM Hi it was a very usefull blog i learnt many things from this and thanks for sharing your knowledge.

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SAP ERP Manufacturing - Production Planning (SAP PP): Understanding Production Order Variance - Part 2 The SAP Perspective Regards Vishal.T A SAP 20 Apr, 2012 7:24 AM Hi Ranjit, great blog, very helpful. gave you 100% rating. I have one related question, hoping you can answer this. My normal understanding was that KKS1 calculates variances and KKAO calculates WIP and when you run CO88, it settles both in FI. But recently, one user by mistake executed KKAO only at the middle of the month in real production mode and also executed CO88 subsequently. The strange thing is: system posted only variances (even if KKS1 was not run at all for the period) and no WIP was posted for the period even though KKAO was executed. Can someone solve this mystery as to why this happened? Is it due to the mid month running of KKAO and CO88? Is KKS1 not really necessary to run? Should the users reverse C088 postings and run CO88 again at month end? Or can CO88 be run multiple times during the month without reversing the results? Would it post only incremental postings or duplicate postings if not reversed? Ranjit John in respons e to Vimal Vijayan  on page 23  18 Apr, 2012 5:23 AM Thank You Vimal Vimal Vijayan 17 Apr, 2012 2:32 PM Good Job!! Variance analysis and stock valuation really simplified. All the best!! Best Regards Vimal Ranjit John in response to GYAN R  on page 23  16 Apr, 2012 12:23 PM Thank You Gyan, Check my other blogs as well http://scn.sap.com/people/ranjit.john/content#filterID=contentstatus%5Bpublished%5D~objecttype~objecttype %5Bblogpost%5D GYAN R 16 Apr, 2012 11:03 AM Dear Sir Its a excellent article. I am giving u 100% rating for this article.Thanks for sharing your valuable knowlege to us. GYAN R 16 Apr, 2012 11:00 AM Excellent article.I have ever seen GYAN R 16 Apr, 2012 10:58 AM Dear Sir

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SAP ERP Manufacturing - Production Planning (SAP PP): Understanding Production Order Variance - Part 2 The SAP Perspective Very good article.Keep sharing your valuable knowledge. Ranjit John in response to prakash k  on page 24  13 Apr, 2012 4:34 PM thank you prakash check my other blogs also prakash k 13 Apr, 2012 3:16 PM Its good forme to help a lot. Ranjit John in response to MS kaushek  on page 24  11 Apr, 2012 12:01 PM Thank you Manish, Great to know that it helped. Please check http://scn.sap.com/people/ranjit.john/content#filterID=contentstatus%5Bpublished%5D~objecttype~objecttype %5Bblogpost%5D MS kaushek 11 Apr, 2012 11:54 AM Very informative...Good Job Ranjit , please suggest how i can check your other blogs too. Ranjit John in response to Jyosh New  on page 24  29 Mar, 2012 6:33 AM Thank you Jyosh, rating option will be at the end of the article. thanks Jyosh New in response to Ranjit John  on page 24  29 Mar, 2012 5:49 AM Rating option is not working here or may be it is not under my knowledge, but I am giving ( 5/5 ) . 100 % worth Ranjit John in response to Jyosh New  on page 24  26 Mar, 2012 10:52 AM Thank you Jyosh. Kindly rate the article Jyosh New 26 Mar, 2012 10:46 AM hi ranjith, It is a very good document. Thanks. Ranjit John in response to Atif Farooq  on page 24  26 Mar, 2012 9:37 AM Thank You Atif, I will Say this is the best reward I can get for my work . Thanks :-) Atif Farooq 26 Mar, 2012 9:17 AM Excellent interpretation...I must say that today i learned so many new things from your blogs on COGS and Variances... Ranjit John in response to Krishna Achanta  on page 25 

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SAP ERP Manufacturing - Production Planning (SAP PP): Understanding Production Order Variance - Part 2 The SAP Perspective 23 Mar, 2012 7:21 PM thank u venkata Krishna Achanta 23 Mar, 2012 2:28 PM i hope i made right choice in giving rating Ranjit John in response to Krishna Achanta  on page 25  22 Mar, 2012 8:07 PM thank u venkata, kindly rate the article Krishna Achanta 22 Mar, 2012 3:54 PM very lucid and simply superb explanation. I can use it for further reference thanks Muhamed Faisal 22 Mar, 2012 8:19 AM Excellent one... Faisal Ranjit John in response to Godavari SAP  on page 25  22 Mar, 2012 4:28 AM Thank you. Kindly rate the article Godavari SAP 22 Mar, 2012 3:23 AM Well-explained. Appreciating your effort. Narasimhulu Konnipati in response to Ranjit John  on page 25  21 Mar, 2012 7:27 PM Tremendous effort my dear Nice to hear that you are also working on Product cost planning. It's been long time that i have worked on COPC, probably your new document will refresh and give the confidence to move further. Naresh Patil 19 Mar, 2012 12:15 PM Sir, I am waiting for reply on product cost planning. Ranjit John in response to Naresh Patil  on page 25  19 Mar, 2012 11:49 AM Thank you Naresh. Sure in my next blog I will mention about product cost planning. Kindly rate the article if it helped. Naresh Patil 19 Mar, 2012 11:47 AM It's really very helpful, Thanks. Also can you help me for product cost planning?

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SAP ERP Manufacturing - Production Planning (SAP PP): Understanding Production Order Variance - Part 2 The SAP Perspective I need steps which are simple to understand in SAP PP scenario for calculating product cost? Thanks, Naresh Patil Ranjit John in response to Ram Vepuri  on page 26  19 Mar, 2012 4:31 AM Thank you Ram Kumar Ram Vepuri 18 Mar, 2012 4:35 PM Very informative...Thank You Very much...:) Ranjit John in response to Sharat Sugur  on page 26  16 Mar, 2012 1:43 PM Thank you Sharat Sharat Sugur 16 Mar, 2012 1:15 PM Thank you for detailed explanation Ranjit, really helpful Sachin Pancholi in response to Ranjit John  on page 26  16 Mar, 2012 12:28 PM Thanks Ranjit --its really helpful. Ranjit John in response to pushpalas Vasudeva  on page 26  16 Mar, 2012 10:16 AM Thank you. Great to know that it helped. pushpalas Vasudeva 16 Mar, 2012 9:59 AM Its a very useful document i am looking for such document Ranjit John in response to Vikram raj  on page 26  16 Mar, 2012 3:59 AM Thank you Vikram. Vikram raj 15 Mar, 2012 5:12 PM Very informative...Good Job Ranjit :-) Ranjit John in response to R K  on page 26  15 Mar, 2012 4:16 AM Thank you. Great to know that it helped. RK 15 Mar, 2012 2:25 AM Dear Ranjit, i was just searching for how to calculate variance of production order and got your analysis. really great. it will help me a lot to understand.

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