Understanding Production Order Variance — Part 1 Performance Evaluvation Through Standard Costs Understanding Production Order Variance — Part 1 Managerial Accounting — Performance Evaluation Through Standard Costs The ultimate aim of any company will be generating profit and increasing the profit margin, There are many interpretations of the word profit. Time, resource, money, effod, effectiveness etc are in one instance or the other equated to profit. We can say all these words can be consolidated and merged into “Efficiency”. By measuring the eficiency of a ficm we can calculate the profit and by improving the efficiency the proft margin grows. Lets aril down to find the ingredients of “Efficiency’. Efficiency focuses on the cost of accomplishing the task, Lets explain “Efficiency’ with an example. To evaluate the effectiveness of a praduct protkiced the following questions has to be answered effectively; Was the best cost obtained in purctiasing raw materiais ‘Whether the speciied quantity of raw material was used. Was extra raw materials used Was the specified amount and level of overheads used ‘Was the task completed within specified time PWEERS Measuring all hase and confirming to the specified range will increase the eflectivenessthere by increasing eliciency ‘The importance of “STANDARDS* Many finance managers arques on the point, actual price should only be followed while valuating finished and sem finished goods, not the standard price, The starting point of batter controling begins with better " STANDARD*, let it be for price determination or far employee performance evaluation. In our daily life we are bound to meet certain standards; the food we eat, the mobile phone we use, the car we drive, Government standards, organizational standards are few to be noted. All and everything in our daily life has to meet certain “STANDARD* Difference between Standard Cost and Budget, Standards and Budgets are essentially the same in concepl. Both are predetermined costs and bath contribute significantly to management planning and control. A Standard is a Unitamount, whereas a budget is a Total amount. There af@ important accounting differences belween budgets and standards, Budgel data are not jawnalized in cost accounting, Standard cost vail be incorporated into accounting systems. 2 Standard Cost offer the following advantages: «Facilitate Management Planning by establishing expected future casts + Makes employees more “Gast Cansafaus” ‘+ Useful for Setting “Selling Price” for fnisned goods = Contribute to Management Control by providing a basis for evaluating the performance of managers responsible for controlling costs, Performance may be evaluated through management by exception, as devations (or Variances) from standard are highlighted ‘When standard costs are incorporated into the accounting system, they simplify the costing of imentories: and reduce clerical costs, «Provides @ clear overMew of the entire process in the company, Salling Standard Costs Solting up standard cost is a highly difficul task. Standards may be set at one of two levels: /deal Standards or Normal Standards. deal Standards represent the optimum level of performance under perfect operating conditians. Normal Standards represent an efficient level of performance thal is attainable under expected operaiti To be effective in controlling costs, standard costs need to be current at all times. Thus, Standards should be under continuo’s review and should be changed whenever it is determined that the existing standard is not good measure of performance.To establish the standard cost of producirig a product, itis nocessary to establish standards for each manufacturing cast element - direct ‘materials, direct labor and manufacturing overhead. The standard for each element is derived from a consideration of the standard price to be paid and the standard quantily to be used. The standard cost provides the basis for determining variances ftom standards. Determining Variances from Standards. One of the major management use of standard cost is the determination of Variances: Variances are the differences between total actual costs and total standard cost. The process by which the total difference batwean standard and actual results is analysed is known as variance analysis, When actual results are better than the expected results, we have .a favourable variance (F). #, on the other hand, actual resulls are worse than expected results, we have an adverse (A). The following types of variance can be calculated; + Planning variances — Input price variance = Resouree-usage variance = Input quatity variance — Remaining input variance — Sctap variance + Production variances = Input price = variance = Resource-usage variance = Input quaitlty variance — Remaining input variance Production variance of the period — Input price variance = Resource-usage variance = Input quantity variance —Rer ng input variance = Scrap variance ~Mixed-price variance = Oulput price variance = Lot size variance «Total variance= input price ~ variance = Resource-tisage variance ~ input quantity variance — Remaining input variance = Scrap variance = Mived-price variance: = Output price variance ~ Lotsize variance = Remaining variance * In make-to-stock production, standard cost Is calculated in the standard cost estimate for the material * During production, actual costs are collected on the order (product cost collector or manufacturing order). The actual ovsis thal are campared with the target costs are reduced by the work in process and scrap variances (the result is called the net actual cost}, Unfavourable and Favourable Variance When actual costs exceed standard casts, the variance is unfavourable (A). Thus, the 2,500.00 variance is unfavourable. An unfavourable variance has a negative connotation. t suggests that too much was paid for one or more manufacturing cost elements or that the elements were usedf inefficiently. fF the actual casts are less than standard costs, the variance is favourable (F). A favourable variance has a positive inference. It suiggests efficiencies in incurring manufacturing costs and in using direct materials, direct labour, and manufacturing overhead. Favourable variance can also be by using inferior quality materials. Analyzing variances begins wih a determination of the cost elements that comprise the variance, For each Cost element total variance is calculated. Then this variance is analyzed into a price variance and @ quantity variance. =] : =| =| : 8] =| - S| Direct Material Variance For producing 1,000 Ton of Cement, compainy A used 4,200 Ton of raWv material purchased ata cost 6f 3.10 per unit, The total material variance is computed from the following farmwal; Each of the Variance are explained in detail below.Sa eaites Bae Cheat ea as ‘Tossl Mdateital Veriance: ‘Actual Price (AP) ‘Stondard Price (SP) ~ erm) The total material variance for Comapny A is 1,020 (A) (13,020 - 12,000). (unfavourable variance) (4,200 x 3.10) —(4,000 x 3.00) = 1,020.00 (A) The mate rial pr is computed from the formula given below Al ete! _ 2 Material Price Variance Actual Price (AP) BAe The material price variance for Company A is 420.00 (A) (13,020 = 12,600). (unfavourable Variance) (4.200 x 3.10)— (4,200 x 3.00) = 420.00 (A) The mate rial quantity (usage) variance is determined fromthe following formula: Aciaicientyo} || Standarioinny(5@) | sae caityVaane Standiord Price (SP) Standard Price (SP) food The material quantit unfavourable variance is 600 (A) (12,600 — 12,000), (Unfavourable Variance) (4.200 x 3.00) = (4.000 x 3.00) = 600 (A) Maicral Quantity Variance Toul Material Variance taa0 (A) ‘Variance Matrix Variance matrix can be used to determine and analyze a variance. When the matrix is used, the formulas foreach cost elomentare computed first and then the variances. Applying variance marti “Actual Quaitity (AQ) x Direct Labor Variance: ‘The process of determining direct labor variance Is the same as for determining the direct material variance. The total labor variance is oblained from the formula; ‘Actual Hours (AM) ‘Standard Hours (SH) Total Labor x - x = Vasiance ‘Actual Rate (AR) ‘Standard Rate (SR) am The total labor unfavourable variance is 580 (A) (20,850 ~ 20,000). (Unfayourable Variance)(2,190 x 9.8) ~ (2,000 x 10.00) = 580 (A) The labor price (o1 variance is calculated using the formula; The labor price variance is 420 (F) (20,580 —21,000), (Favourable Variance) (2,100 x 9:8) ~ (2,100 x 10.00) = 420 (F) ‘The labor quantity (ar efficiency) variance is calculated using the formula; The labor quantity variance is 1,000 (A) (21,000 ~20,000). (uniavourable variance) (2,100 x 10,00) — (2,000 10 ,000 (A) The total direct labor variance can be derieved trom: Labor Prige Variance Total Direct Labor Variance 580 (Ay Using the Variance Matrix a ® c '20,$80 = 22,000 » (420) Note: When idle time occurs the efficiency variance is based on hours actually worked (not hours paid for} andan idle time variance (hours of idle time x standard rate per hour) is calculated. Manufacturing Overhead Variance The computation of the manufacturing overhead variance Is conceptually the same as the computation of the materials and labor variances. Total Overhead Variance The total overhead variance is the difference between actual overhead costs and overhead costs applied to work done. With standard costs. manufacturing overhead casts are applied to work in process on the basis of the standard hours allowed for the work done. Standard hours allowed are the hours that should have been worked for the units produced. in the example company A's standard hours allowed for completing work B is 2,000 and the predetermined overhead rate [Is 5 per direct labor hour. Thus overhead applied is 10,000 (2,000 x5) Note: The actual hours of diract labor are not used in applying manufacturing overhead. The formula for the total overhead variance is:Thus total overhead variance for Comapny A is 900. 10,900 ~ 10,000 = 800 The overhead variance is generally analyzed through @ price variance and a quantity variance, The name usuatly given to the price vastance is tne overfiead controllable variance, whereas the quantity variance is referred to as the ov val rane The overhead controllable variance (also called the budget or spending variance) is the difference between the actual overhead costs incurred and the budgeted costs for the standard hours allowed. The budgeted costs are determined from the flexible manufactruning overhead budget. The budgel far Company A is as fallow, As shown, the budgeted casts for 2,000 standard hours are 10,400 (6,000 variable and 4,400 fixed) The formula for the overhead controllable variance is: ‘Overhead Actual Gothen = Controllable Overhead (AO) = en = Variance The overhead controllable variance for Comapny A is 500 (unfavourable). 10,900 - 10,400 = 500 Most controllable variance are associated with variable costs which are controllable costs. Fixed costs are usually at the time the budget Is prepared. Overhead Volume Variance: The overhead volume variance indicates whether plan! facilities ware efficiently used during the period, The formula for calculating overhead volume variance is as follows: Overhead ‘Overhead ‘Overhead Vowume Budgeted ‘Applied = (oa) on) ae Both the factors on this formula has been explained above. The overhead budgeted is the sameas the amount used in computing the controliable variance . Gverhead applied is the amount used in determining the totoal overhead variance, In example for Company A the pyerhead volume variance (unfavourable) is 400 10,400 - 10,000 = 400 The budgeted overhead consist of variable and fixed,A careful examination of this analysis indicates that the overhead volume variance relates solely to fixed costs. Thus, the volume variance measures the amount that fixed overhead costs are under -or aver applied IF the standard hours allowed are less than the standard hours at normal capacity, fiwed overhead costs: will be underapplied. if praduction exceads normal capacity, fixad overhead costs will be overapplied, {An allemative formula for computing the overhead volume variance is shown below, Fixed Normal Capacity Hours ‘Overhead ‘Overhead = Volume Rate x : = Voriance (FOR) Standard Hours Allowed in example the normal capacity is 26,400 hours for the year or 2,200 hours for a month (26,400 / 12), and the fixed averhead rate is 2 per hour. Thus, the volume variance is 400 unfavourable; 2x (2.200 — 2.000) = 400 [Overhead controllable variance 008 [Overhead volume variance [300 Total Overhead Variance p00" Using Variance Matrix: ag 8 c ‘Actual Overhead (AO) 30,900 ‘Controllable Variance a8 130,900 =20, 400.» 500 All variances should be reported to appropriate levels of management as soon as possible. The sooner management is informed, the sooner problems can be evaluvated and corrective actions taken if necessary. Cause of Variances The causes of variance may relate to both external and intrenal factors, Materials Variance Labor Variance Manufacturing Overhead VarianceEvery PP, Fl 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 ansing will be; Origin of Variance How to Categorize the variance How tocut downthe variance. Impact of variance on COGM, COGS & Closing Stock, Answering these will be realty tough. We have faced all these scenarios and after months of deep research in this field 1 came across few conclusions, ndard Cost Estimate: The Standard Cast Estimate is involved in variance analysis because It is used for stack valuation. When a production or process order delivers production to inventory, it receives credit based on standard price. Total variance is the difference between actual costs debited to theorderand costs credited ta the orderdue to deliveries to stock. f) Preliminary Cost Estimate: The Preliminary Cost Estimate is involved with praduction, variance calculation and valuating scrap variance and WiP. 4g) Mixed Cost Estimate: If there are different procurement altemativesforthe same material, suchas two productionlines or two vendors, mixed costing can be used when inventory valuation has to reflect the rrixed procurement costs, 3) Actual Postings Plan costsare posted prior to a fiseal period. Actual costsare posted in real timeduring a fiscal period. Actual Cost can be divided into two groups based on the pasting origin; = Postings ta CO from externa/ business transactions results in Primary Costs. '* Business transactions within CO results in Secondary Costs. 3.1 Bomar Cost: Primary cost will be posted toCO mainly in the Following scenarios: ‘ZL. Goods issue to Production Order: When goods are issued from inventory, a generat ledger balance sheet account is credited, and profit and lass consumption (expense) accountis debited. A prirnary cost element with the some number and identifier as the inventory consumption |s usually createdin CO during initial systemimplementation. When the system, detects. 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: pasted to CO from FI, GLentry during Goods Issue rod earn Raw Material Consungption [xxx | | Stock of Raw Material XX Table 1.03.2 Secondary Cost: ‘The costs inCO are allocated from overhead cost centers to production cost centers during assessmentand then onto production order during activity confirmation. 3.2.1 Assessment Period- end assessments move costs from overhead cost centers to praduction 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 centeris credited. There are no FI postings during activity confirmation. 3.3 Primary Credits Primary Credits occurwhen 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 abject 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. 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 Cregit ‘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 7100 Raw Material 100 Labor 100 Over Heads Credit (250) Finished Good alanee [50 Variance Table 3.0 Total Variance is the diflerence 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 grass profit margin level. Cost Center under/over absorption costs assessed to CO-PA are included at theoperating profit level.3:5) Post Actual Costs 1) Period - End Processing 5.1. The three common types af variance cakulation are as follows; '$.1.1) Total Variance Total variance is the difference between the actual cost debited to the onderand credits from deliveries to inventory. Total Variance is variance relevant to settlement. The variance is settled in Financial Accounting (Fl), Profit Center Accounting and Profitability Analysis 5 2) Production Variance Praduction 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 forsettlement, 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 caicuiation, the order balance is divided into categories on the input and output sides. Variance category provide reasons forthe cause of the variance, Thare areno Fl posting dunng variance calculation. Variance can be categorized into Input Variance and Output Variance 5.2.4) Input Varionce 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 ta their source: Category IV. 1) Input Price Variance Inia prion vation oceursing a ult of itariat pcm ohaning ater tna Nahar iaues wenaried Sosbastinateld release Teoccursinany of the below mentioned scenarios; “If the material valuation is based on standard price control, a standard cost estimate forthe ‘component. could be released after the cost estimate forthe assembly is released. ‘If the material valuation is basedon Moving average price control, a goods receipt of the component could change-the component price after the cost estimate for the materials released, input price variance = (actual price — plan price) * actual input quantity Category IV. 2) Resource ~ Usage Variance Resource ~ Usage variance occurs asa result of substituting components. This could occur if a component is nat available, and another component witha 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 oceurs as a result of a difference between plan and actual quantities of materials and activities consumed. put quantity variance = (actual input quantity = target input quantity) * plan price Category IV:4) Remaining Input Variance Wher Put 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 baing delivered, or becausethe delivered quantity was valuated differently. 5.2.2) Output Variance is divided into; Category OV, 1} Mixed - Price Variance Mixed-Price variance occurs when inventary is valuated using 2 mixed cost estimate forthe material. Category OV.2) Output Price Variance Output price variance can occur in the following scenarios; 1) IF thestandard price is changed atterdelivery to inventory, and before variance calculation, 2) _ If the material is valuated at moving average price and itis not delivered to inventory at standard price during target value calculation. uiput price variance = actual activity * (plan price ~ actual price) Category OV. 3} Lot Size Variance Lot Size variance oceursif 3 manufacturing ondar jot size is different from the standard cost estimate costing lot size. Category OV.4) Remaining Variance ‘Occursif variance cannot be assigned to any other variance categary. Category OV,5) Output Quantity Variance Represents the difference between manually entered actual costs and allacated actual quantities, Output Quantity variance = (actual quantity-manual actual quantity) * pian price 5.3) Period End ‘The most important petiad-end process relevant to production order variance analysis is; Variance can be calculated using the formula; Variance = Actual Cost— Actual Cast 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1 2 3 4a «Mixed -price variance + Qutput price variance «Lot Size Variance + Remaining Variance Settlement > Remaining input variance Settlement of Production Orders will be executed. K088 = Indivdual Settlement C088 — Collective Settlement Now let us examine the main points under Category B: Now you wil be having a basic idea about production order variance, variance calculation types & various categones, Now let us try to co-relatethis with real life scenarios, will divide the topic into below mentioned sections; How to analyze production order variance posted against production arders Major Reasons for the variance How to minimize the variance 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) whichis used as a raw material for production of Finished Good. Master Recipe of SFG1 is; Gertie fone Fixed Value Cre mn RAWMATERIALS RAWMATERIALS RAWMATERIALS TOTAL, 12.90 Pracess order No far SFG1 is 15000035 Figure 2.0 Variance Posted against the Process Order for the month is 128,190.87 AED Aftertechnically completing ("TECO") the process order & before executing casting run checkfor 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 & KOBL.Lat me explain differenee between KKBC_ORD and KOB1. 1RKBC_ORD is used for analyzing single order, Planned and Actual cost details relating to the production order will be recorded in KKBC_ORD. KOBL 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. KKEC_ORD Cast Element (Text) © Totaltarget costs © Total act.casts T Target/actual var. | T/1 vart%) cogu 0.00 2,006,051.00- 2,006,051.00- Limestone Consumotion 485,190.00 496,630.00 11,440.00 2.36 ‘Stca Consumption: 89,251.00 89,824.45, S73.45 0.64 ron Ore Consumotion’ 258,169.00 209,858.91 49,310.09 18 71- Slica Redshale Consumption 108,617.00 104,162.80 545620 4.98 Copper Steg Consumotion 0.00 735.00 735.00 Bauxte Consumption 7,186.00 517.57 6.67043 92.80 coc 0.00 128,190.87 128,190.87 Adimnistration & Other Expenses 59,800.00 59,900.00 0.00 Labour 119,800.00 119,800.00 6.00 Depreciation 59,900.00 99,900.00 0.00 Power 772,710.00 2,205.40 20,904.60 10.42: “Mantenance, Consumables & Overh 49,326.00 44,226.00 0.00 + 2,006,051.00 - 0.00 + — 2,006,051.00- Figure 3.0 KOBE Figure 4.0 Here you can see settlement (Variance) of 128,190.87 AED. 1 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 calculatedbased on the master details (Material Recipe Figure 2.0). All the Actual Rate, Actual Qty. Actual Cast vale fields in table 4,0 are extracted fromKOBL.estas RAWMATERIALL [496,630.00 Variance RAWMATERIAL2 [89,824.45 RAWMATERIALS. 104, 162.8 RAWMATERIALA RAWMATERIALS RAWMATERIALG [209,858.91 [Administration 1,609, 780. FINISHED GOOD. [2,006.05 1.00) Table 4.0 Now let us fill in valves in Table 5.0 with the production order values.fees eeas Std. Cost| Actual Neuen) ced RAWMATERIALL [c11,449,00) RAWMATERIAL? [24.4262 . E [(573.45) RAWMATERIALS [17.7670 z 5,454.20 RAWMATERIALA [179.5833 [48,310.08 RAWMATERIALS: ; i 5 [6,070.43 RAWMATERIALS (235.00) POWER FINISHED GOOD. Now let us categorize the variance. Variance has been posted in the following order Sn ce RMvi—[RAWMATERIALI |(11.440.00)|Catoyory IV.3 RMV2__|RAWMATERIAL2 (573.45) [Category 1V.3 + Category IV. 1 RMV3__|RAWMATERIALS [5,454.20 [Category IV.3 + Category 1V.1 RMV__[RAWMATERIALA [48,310.09 [Category IV.3 + Category IV.1 RAWMATERIALS [6,670.33 RMVé__[RAWMATERIAL6 (735.00) [Cateyory 1V.2 onvit [Power [80,508.6 [Category 1V3 Table 6.0 Let us try to calculate Variance by applying Formula for each category. Category V.1: Input Price Variance = (Actual Price ~ Plan Price) * Actual Input Quantity Gategory IV.2: Resource Usage Variance - Actual Cost - Target Cost - Input Price Variance Category 1V.3: Input Quantity Variance = (Actual Input Quantity ~ Target Input Quantity) * Plan Price es cr MC i ie ri om Cunt Cats Se A eM Sk A RAWMATERIALL 485,190,00)10.00 _|49,663.00_|a96,630.0c1___ [11,440.00 _ | JRAWMATERIAL2 |24.4262 [3,653.90 89,251 4H) 126.3338 [3.4 11.00, 80,824.45 [C2 [S73.45, IRAWMATERIALS [17.7670 [169.70 [100,617.00 17.968% [5,798.00 [sae RAWMATEERIALS |179,5833]1,437.6 RAWMATERIALS [60.00 [119.80 [7.18800 [57.5078 RAWMATERIALS [35.00 Power (48,3 10,09)Crt ar nr et en Mca Im urn) Feats aya) 1k" es SS ED Table 7.0 Category B.2) Majer Reasons or 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) €) Activity Price (Material Recipe) not updated properly (Category 1V.2) Standard Cost estimate released for ane productian versian and confirmation done against another production order. (Category OV.3) ) Total Planned Quantity and Actual Produced Quantity Difference (CategaryIV.4) ) Material used not included in BOM (( Category 1V.2) Let us try to analyze all the scenarios. a) Material BOM not updated properly Explained in Category 8.1 by Ae ty Price (Material Explained in Category 8.1 ‘Total POWER consumption as per KOB1 (Actual as per Material Recipe) and FBL3N should be approximately equal. KOBL -> 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 usingRM1 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 fein fees fom recy Pot GCPRODCGM1 PO31_ POWER 15.05 0.035 POs ]GCPRODCGM1 PO31_ ADMINE [0.50 1.00Gente cen fees eee meted PO31 GCPRODCGM1 PO31__DEPRN 1,00 1.00 POST GCPRODCGM1 PO31 LABOUR [0.70 1.00, Pos GCPRODCGMI PO31_ MACOOH [1.19 1.00 cor RMT 149.54 loss [cor RMB. laa? fo.0ss [rorAL 17RAS: Table 8.0 Process Order has been Created Under production version "PO32" ‘The Activity Price recorded in systemagainst "PO32"is as follows Goeteeunchecen foe neotenic PO32 |GCPRODCGM2 PO32_ POWER 17.00 0.080 POS? (GCPRODCGM2 PO32__ADMINI 00) 1.00 PO: ]SCPRODCGM2 PO32_DEPRN 00 POs? ]GCPRODCGM? PO32 LABOUR 100) 1.00 POR? [GCPRODCGM2 PO32_MACOOH [1.50 1.00 [econ RM2. 152.00 [0.930 [cor RMA [5.50 [0.075 TOTAL, 17781 Table 9.0 After Settlement (For 1000 TO of FG1) entries will be in the following sequence; Greteicn Cores Te CI Coe Wairicns Rte Rate post GCPRODCGM1 F031 POWER GCPRODEGMI POST [500.00 [ADMIN POST GCPRODCGM PO3L 1,000.00 [0.00 1,000.00) DEPRN POST (GCPRODCGMT POST 700.00 o.oo 700.00 LABGUR. GCPRODEGMI PO3I MACOOH COL RMI Post 1,190.00 149,540.00 COL RMS 14,470.00 [0.00 [4,470.00 Pose GCPRODCGM2 PO32 [0.00 17,000.00 (17,000.00) POWER Pose GCPRODCGM2 POS2 (0.00 7,000.00 |(1,000.00) ADMINI GCPRODCGM2 POS? DEPRN GCPRODCGM2 POR2 LABOUR PO3z GCPRODCGM2 POs2 MACOOH COL RMZ cor RMA 0.00 1,500.00 [a,so0. 0.00 152,000.00 _[(132,000.00) {0.00 15,500,00 (5,500.00) TOTAL _|(7.940)Table 10.0 Here if we see the total variance of POWER = 15,050 + (17,000) = (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 Le. the net difference willbe then POWER = 17,000 + (17,000) = 0 Let us see @ LIVE Process Order example: Product: FG1 Table 11.0 Material Recipee for FG1 (CK13N) Gerke ed Figur 5.0 Process Orderis Created under production Version "PO3Z" When a Process order is created for Material FG1 systemcalculates Planned cost as follows; Quantity Produced - > 25,302.00 TO. Use the same calculation logic used in Table 1.0; ries Crees im [23,910.39 13,916.10 [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 FG in7itao 6.00 #774140 100.00- 35,302.00 6.00 25,302.00- 160.00- 380,738.10 PO310.00 380,795.10- _100.00- 20,100.38 0.90 30,109.38 100.00- Adernistration & Other Exoenses 12,651.00 0.00 12,651.00- 100.00- Figure 6.0 Process Onder hay been crestedin Production version “POM. During Canfirnation Systemcalculates actus cost as follows; 17,7 ao 25,202.00 977,260.20 30,109.38 Figure 7.0 d) Total Planned Quantity and Actual Produced Quantity Difference We came across this praduction order variance in few process orders only. While doing final confirmation of process orders user made mistake by not allowing system to re calculatethe activity prices, Material: FG1 Total Process Order Quantity: 93,000TO Quantity Produced: 8,865.00T0 “The total quantity produced is 8,865.00 TO against which the activities booked are; Cm Eton ma LABOR, TON 17730000 DEPRIN 8865 1 DH TON 8,865.00 MACOOH 865 * 0.74 DH/ TON 6560.10 ADMIN 8,865" 1 DH] TON s.865,00 Powe 8.65 * 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 orderas below; ery Cres (Seri LABOR. 193,000* 2 DH / TON 186,000.00 DEPREN MACOOH 93,000Cis i 2,857,172.00 (User 1,228,583.96 TOTAL [a40,820.00 Table 14.0 A Variance of 440,820.00 ~ 42,020.00 = 39,880.00 TO was posted against all the activities (Cost Element (Text) ' Totaltarget costs = Total acticosts = Target/actualvar. T/Evar(%) f 17,730.00 186,000.00 168,270.00 49.07 Depreciation 8,865.00 93,000.00 4,135.00 349.07 Power 114,358.50 1,228,583.96 4,114,22546 974.33 “Mantenance, Consumables & Overh, 6,560.10 66,820.00 62,259.90 949.07 admnistration & Other Expenses 8,865.00 93,000.00 84,135.00 949.07 _* 1,669,403.96 313,025.36 Figure 9.0 Note: While doing final confirmation ensure that all the activity prices are recalculated as per the new output. 2) Variance Due to Price change Price change of material due to execution of standard cost estimate will be posted with document type "PR" 3) Hew toreduce variance For reducing production order variance 2) Material BOM should be up to date; User should not be modifying the material quantity manually while confirmation (COR6N) by Activity Price should be Updated periodically ©) Confirm activity getting booked while doing final confirmation d) _ Tryto ensure that process order for Finished Good is created an the same production version released in standard cost estimate. 4) Impactof 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 partion of variance should be allocated to COGM,COGS & closing stock We are following manual calculation. Step1: List down all the Semi Finished and Finished Gaods. Step 2: Record total variance posted against each material (FBL3N) (Document type “SA” & “AB") Step 3: Record total quantity produced (MBSB with movement types 101 & 102) Step4: Variance Per Ton = Step3 / Step 2 Step5: Record closing stock of Material (MBSB) Step6: Closing Stock Variance Allocation = StepS * StepaStep7: Record COGM Quantity (MBSB with mavement type 201 + 202 & 261 + 262) -Step8: COGM Variance Allocation = Step? * Step4 Step9: Record COGS Quantity (BSB with movement type 601 + 602) Step10: COGS Variance Allocation = Step9* Step4 Tern Few Important Document Types Posted in Production Order Variance GL are; AB -> Reversal of Production Grder Settlement SA -> Production Order Settlement PR -> Price Change WA -> Confirmation Reversal (If Price Changed after Confirmation) WL -> Sales Reversal (If Price Changed after Sales}Input Price Variance: Input price variance occurs asa 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 camponent ‘could change the component price afterthe 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; 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 Pracess 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 “RM” 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 [eran Bem Std. Quantity Semen Raw Material 1 (RMI) 25.00 1.00, 25.00 Raw Material 2 (RM2) 10.00) 1.00, 10,00, Raw Material 3 (M3) 60.00 1.00) 60.00 aw Material 4 (RMA) 15.00 1.00) 15.00, ADMIN 1.30 1.00 150 DEPRIN 75 1.00 1.75Etmio Eemeremn Bement Las 1.00 13s 1.00 1.30 POWER 0.43 1.00 0.43 Finished Good 1 (FGI) 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 "F G1" (1000 TO); Raw Material Std, Rate -> As per Released Standard Cost Estimate of Finished Good 7 (FG1), Released on 01.01.2012 Raw Material Actual Rate -> As per Moving Average Price as on 01.02.2012 Cc Ce mc ren crs Cra CMe mee teats Rate Quantity Cost [Raw Material) 25.00 | 1000.00 38,000.00 | (10,000.00) 1 eRMI) Raw Matera) 10.00 | 1000.00 2 (RM2) Raw Materia] 60,00 | 1000.00 3 (RM3) aw Material] 15.00 | 1000.00 4 (RMA) ADMIN, ee 10,000.00 | 13.00 | 1000.00 | 15,000.00 | (3,000.00) «60,000.00 | 37.00 | 1000.00 | 57,000.00 | 3,000.00 75,000.00 [13.00 | 1000.00 | 13,000.00 Ee A 0.00 1,750.00 | 1,75. | 1000.00 | 1,750.00 9.00 DEPRIN 175. | 1090.00 MacooH | 1.25 | 1000.00] 1,250.00 | 1.25 | 1000.00) 1,250.00 9.00 LaBouR | 1.30 | 1000.00] 1,300.00 | 1.30 | 1000.00) 1,300.00 0.00 rower | 0.43 | 1000.00] 430.00 | 0.43 | 1000.00] 430.00 0.00 Finished | 116.23 | 1000.00 | 116,230.00 | 128.23 | 1000.00 | 128,230.00 | (12,000.00) ‘Good (Fan) Table 2.0 The variance has been posted because of the change in Raw Material Price. 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 Sta. 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 Pei e) Bre Raw Material | (RMI) 10,00 [Semi Finished Good | (SFG1) 25.00 [Semi Finished Good 2 (SFG2) ADMIN 130 Be eo mmc eo 1.00 25.00 1.00 130 DEPRIN 17s 1.00 Ls MACOOH LABOUR 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 Sid. 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) Std. || ‘Sid. Std. Cast | Actual CVA MMC eMe re neg Ferrie) Reem cut ance Re) Raw Materia 1] 10.00 | 1000.00 10.00 | 1000.00 | 10,000.00 ] 0.00 (M1) [Semi Finished | 25.00 35.00 | 1000.00 [35,000.00 (10,000.00) (Good 1 (SFGI) [Semi Finished | 20.00 18.00 | 1000.00 | 18,000.00 | 2,000.00 Good 2 (SFG2) ADMIN. 150) 0.00(roc Len nr cand COC mmr cme ang ere Mee re nriLy mmer! 130 1,300.00 | 1.30 | 1000.00 | 1,300.00 | 0.00 1000.00 POWER 0.43 | 1000.00 | 430.00 | 0.43 | 1000.00 | 430.00 0.00 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 H 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. Nate: Std. Rate > During Confimration of Finished Good 3 (FG3) Std. Quantity > During Confimtation of Finished Good 3 (FG3) Std. Cost > During Confimration of Finished Gaod 3 (FG3) Actual Rate > During Finished Good 3 (FG3) Confimration Cancellation Actual Quantity -> During Finished Good 3 (FG3) Confimration Cancellation Actual Cast -> During Finished Good 3 (FG3) Confimration Cancellation Ce eeu ET Coo Cees Pea ih aie) Raw Material 1 .00 | 10,000.00 | 8 .00 | 8,000.00 | 2,000.00 (RMI) Raw Material 2 .00 | 20,000.00 | 22, 00 | 22,000.00 | (2,000.00) (ent) Raw Material 3 1.00 | 25,000.00 | 30, "30,000 00 | (5,000.00) (M3) ADMIN 1,500.00 [1 300.00 [0.00 DEPRIN, 1.00 | 1,750.00, i 0.00 POWER Finished Good 34FG3) 66,230.00 | (5,000.00)Table 5.0 The GL Entries Posted during Confirmation of Finished Good 3 (Production); [Stock of Finished Good 3 (FG3) COGM of Finished Good 3 (FG3) Raw Material Consumption XXX Jock of fou el ke Table 6.0 (ee ‘Deserption I Stock - FG = Cement cOGM 206,238.24- ‘Stock - Gypsum 3,630.79- ‘Gypsum Consumption (5,630.79 Figure 1.0 The GL Entries Posted during Confirmation Cancellation: COGM of Finished Good 3 (FG3) [Stock of Finished Good 3(FG3) Stock of Raw Material XXX Raw Material Consumption Price Diff+Produetion Order Variance Table 7.0 iB) Jf) ws | Description | “Amount ‘Stock - SFG 142,601.40 ‘cogm 142,601.40- a mae coe ce ‘Stock-Fuel Ol & Co 39,692.17 Natural Gas Cons (39,692.17- ae eae ‘coc 499,119.10 Pmt oe var 7882 b.2) Finished _/ Semi Fi hed 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.