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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 month-end activities. Production Order Variance posted against each process orders will have to be examined, explained & investigated thoroughly. Major questions arising will be;

  • Origin of Variance
  • How to Categorize the variance
  • How to cut down the variance.
  • Impact of variance on COGM, COGS & Closing Stock.

Answering these will be really tough.

  We have faced all these scenarios and after months of deep research in this field I came across few conclusions.

For better understanding I will divide this blog into two categories;

  • Category A: Basic understanding of Production Order
  • Category B: Co-relating Category A scenarios with real life scenarios.

  Now let us examine the main points under Category A: 

The ultimate end point of any industry is sales. For selling the product several process has to be carried out. The success of any management depends on how well they forecast the sales, plan and schedules the activities.

ERP Process.JPG

                                                                    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 a credit based on standard price. Total variance is the difference between actual costs debited to  the order and costs credited to the order due to deliveries to stock.

            f) Preliminary Cost Estimate:

    The  Preliminary Cost Estimate is involved with production, variance calculation and valuating scrap variance and WIP.

            g) Mixed Cost Estimate:

  If there are different procurement alternatives for the same material, such as two production lines or two vendors, mixed costing can be used when inventory valuation has to reflect the mixed procurement costs.

                3) Actual Postings

          Plan costs are posted prior to a fiscal period. Actual costs are posted in real time during a fiscal period.

          Actual Cost can be divided into two groups based on the posting origin;

  • Postings to CO from external business transactions results in Primary Costs.
  • Business transactions within CO results in Secondary Costs.

    3.1 Primary Cost:

                Primary cost will be posted to CO mainly in the following scenarios:

                  3.1.1 Goods Issue to Production Order:

                      When goods are issued from inventory, a general ledger balance sheet account is credited, and profit and loss consumption (expense) account is debited. A primary cost element with the same number and identifier as the inventory consumption is usually created in CO during initial system implementation. When the system detects a corresponding primary cost element in CO during a posting to General ledger expense account, a posting to CO cost object is also required.

            Primary Cost are posted to CO from FI. 

            GL entry during  Goods Issue

Debit Credit
Raw Material Consumption 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 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

Figure2.0.jpg                                                                      Figure 3.0

                                                            KOB1

Figure3.0.jpg

                                                          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 Rate

Actual Qty.

(Figure 4.0)

Actual Cost

(Figure 4.0)

Variance
RAWMATERIAL1 Total value / Qty Per Ton Qty * FG Prd. Qty Std Qty * Std Rate Act Cost / Act Qty 49,663.00 496,630.00 Std Cost – Act Cost
RAWMATERIAL2 Total value / Qty Per Ton Qty * FG Prd. Qty Std Qty * Std Rate Act Cost / Act Qty 3,411.00 89,824.45 Std Cost – Act Cost
RAWMATERIAL3 Total value / Qty Per Ton Qty * FG Prd. Qty Std Qty * Std Rate Act Cost / Act Qty 5,798.00 104,162.8 Std Cost – Act Cost
RAWMATERIAL4 Total value / Qty Per Ton Qty * FG Prd. Qty Std Qty * Std Rate Act Cost / Act Qty 1,003.00 209,858.91 Std Cost – Act Cost
RAWMATERIAL5 Total value / Qty Per Ton Qty * FG Prd. Qty Std Qty * Std Rate Act Cost / Act Qty 9.00 517.57 Std Cost – Act Cost
RAWMATERIAL6 Total value / Qty Per Ton Qty * FG Prd. Qty Std Qty * Std Rate Act Cost / Act Qty 21.00 735.00 Std Cost – Act Cost
Labor Total value / Qty Per Ton Qty * FG Prd. Qty Std Qty * Std Rate Act Cost / Act Qty 59,900.00 119,800.00 Std Cost – Act Cost
Depriciation Total value / Qty Per Ton Qty * FG Prd. Qty Std Qty * Std Rate Act Cost / Act Qty 59,900.00 59,900.00 Std Cost – Act Cost
Administration Total value / Qty Per Ton Qty * FG Prd. Qty Std Qty * Std Rate Act Cost / Act Qty 59,900.00 59,900.00 Std Cost – Act Cost
MACOOH Total value / Qty Per Ton Qty * FG Prd. Qty Std Qty * Std Rate Act Cost / Act Qty 59,900.00 44,326.00 Std Cost – Act Cost
POWER Total value / Qty Per Ton Qty * FG Prd. Qty Std Qty * Std Rate 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

(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 48,519.00 485,190.00 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
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 Actual Price Actual Input Qty Actual Cost Variance Class Variance
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)

d)    Standard Cost estimate released for one production version and confirmation done against another production order. (Category OV.3)

e)    Total Planned Quantity and Actual Produced Quantity Difference (Category IV.4)

f)    Material used not included in BOM ((Category IV.2)

Let us try to analyze all the scenarios.

a)    Material BOM not updated 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)
GC01 RM2 0.00 152,000.00 (152,000.00)
GC01 RM4 0.00 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,

  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

Planned Cost for Producing 25,302.00 TO of FG1

PO31.JPG

                    Figure 6.0

Process Order has been created in Production version “PO32“. During Confirmation System calculates actual cost as follows;

PO31-PO32.JPG

                                      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
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

poDIFF.JPG

                                                        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

Step 2

Production Qty

Step 3

Variance / Ton

Step 4

Closing Stock Qty

Step 5

Closing Stock Variance

Step 6

COGM Variance

Step 8

COGS Qty

Step 9

COGS Variance

Step 10

MATERIAL1 V1 P1 VT1 = P1 / V1 C1 C1 * VT1 COGM Qty * VT1 S1 S1 * VT1
MATERIAL2 V2 P2 VT2 = P2 / V2 C2 C2 * VT2 COGM Qty * VT2 S2 S2 * VT2
MATERIAL3 V3 P3 VT3 = P3 / V3 C3 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_11.0.jpg

                                      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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81 Comments

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  1. Nisit Shah

    Superb document…. Very good, informative, detailed explanation with example.

    Though I haven’t worked on Product costing, COGS & variance but after reading this excellent document I am thinking that I should start to learn.

    I really appreciate that people are putting great efforts for others & definitely your effort helped us.

    Thanks for sharing your knowledge.

    (0) 
  2. Nikko Pamfilo

    Hi All,

    Can I ask about the Settlement of Production Orders?

    How is the first and last used dates of the settlement being filled by SAP?
    Is it after the settlement process (KO88/CO88)?
    We have an issue that there are Production Orders that didn’t imputed because they don’t have a “first and last used dates” on their Settlement Header.

    Process:
    CO03 > Header > Settlement Rule.

    (0) 

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