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
POWER 0.43 1.00 0.43
Finished Good 1 (FG1) 116.23 1.00 116.23

Table 1.0

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 / OverHead Std. Rate Std. Quantity Std. Cost Actual Rate Actual Quantity Actual 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) 116.23 1000.00 116,230.00 128.23 1000.00 128,230.00 (12,000.00)

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
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
Raw Material 1 (RM1) 10.00 1000.00 10,000.00 10.00 1000.00 10,000.00 0.00
Semi Finished Good 1 (SFG1) 25.00 1000.00 25,000.00 35.00 1000.00 35,000.00 (10,000.00)
Semi Finished Good 2 (SFG2) 20.00 1000.00 20,000.00 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 1,300.00 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 2 (FG2) 61.23 1000.00 61,230.00 69.23 1000.00 69,230.00 (8,000.00)

Table 4.0

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

Material / OverHead Std. 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
Finished Good 3 (FG3) 61.23 1000.00 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

FG.JPG

Figure 1.0

The GL Entries Posted during Confirmation Cancellation:

Debit Credit
COGM of Finished Good 3 (FG3) 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

FG2.JPG

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.

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32 Comments

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  1. padmaja gan

    Dear Simon,

    Thanks a million helping me trough the process of costing. I am getting my concepts clear.I am reading this material several times. Thanks a lot for the valuable information and I really appreciate your help!

    Thank you,

    Padmaja

    (0) 
  2. Nitin Jagtap

    Hi Sir,

    Its very good article , Thanks a lot.

    I have one question.What are the setting/steps we have to carried out to activate/or to see the Variances in Cost Analysis of Production Order.

    Nitin

    (0) 

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