Origin of Variance
How to Categorize the variance
How to cut down the variance.
Impact of variance on COGM, COGS & Closing Stock.
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;
The ultimate end point of any industry is sales. For selling the product several process has to be
carried out. The success of any management depends on how well they forecast the sales, plan
and schedules the activities.
Figure 1.0
1) Initial Planning
2) Cost Estimates
3) Actual Posting
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:
a) a) Master Data:
a.3) Routing:
List of tasks containing standard activity times required to perform operations to create
a Finished / Semi Finished Good.
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.
b) Overhead Costs:
Overhead rate is a percentage factor applied to the value of the calculation base (group
of cost elements).
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.
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.
The Preliminary Cost Estimate is involved with production, variance calculation and valuating scrap
variance and WIP.
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;
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.
Debit Credit
Raw Material Consumption XXX
Stock of Raw Material XXX
Table 1.0
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.
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
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.
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.
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
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.
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.
Input variance is divided into the following categories during variance calculation,
according to their source:
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
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
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
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.
Mixed-Price variance occurs when inventory is valuated using a mixed cost estimate for
the material.
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.
Lot Size variance occurs if a manufacturing order lot size is different from the standard cost
estimate costing lot size.
Represents the difference between manually entered actual costs and allocated actual
quantities.
Output Quantity variance = ( actual quantity –manual actual quantity) * plan price
The most important period-end process relevant to production order variance analysis is;
Overhead
WIP
Variance Calculation
During variance calculation, target and control costs are compared, and variance categories are
assigned. Variance categories are assigned in the following sequence:
Settlement :
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.
Figure 2.0
Variance Posted against the Process Order for the month is 128,190.87 AED
After technically completing (“TECO“) the process order & before executing costing run check for
the variance in transaction code KO88 (CO88 – Collective) in Test Run mode.
For analyzing the variance in detail we will use transaction codes KKBC_ORD & KOB1.
Let me explain difference between KKBC_ORD and KOB1.
KKBC_ORD is used for analyzing single order. Planned and Actual cost details relating to the
production order will be recorded in KKBC_ORD.
KOB1 you can execute for single as well as bulk order. KOB1 provides the “Actual” values (cost &
quantity) of raw materials and overheads used for the production of the material.
KKBC_ORD
Figure 3.0
KOB1
Figure 4.0
Here you can see settlement (Variance) of 128,190.87 AED.
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.
Std. Std.
Rate Qty. Actual Qty. Actual Cost
Std. Actual
Cost Elements Variance
Cost Rate
(Figure (Figure (Figure 4.0) (Figure 4.0)
2.0) 2.0)
Per Ton Std Act
Total Std Cost
Qty * Qty Cost /
RAWMATERIAL1 value / 49,663.00 496,630.00 – Act
FG Prd. * Std Act
Qty Cost
Qty Rate Qty
Per Ton Std Act
Total Std Cost
Qty * Qty Cost /
RAWMATERIAL2 value / 3,411.00 89,824.45 – Act
FG Prd. * Std Act
Qty Cost
Qty Rate Qty
Per Ton Std Act
Total Std Cost
Qty * Qty Cost /
RAWMATERIAL3 value / 5,798.00 104,162.8 – Act
FG Prd. * Std Act
Qty Cost
Qty Rate Qty
Per Ton Std Act
Total Std Cost
Qty * Qty Cost /
RAWMATERIAL4 value / 1,003.00 209,858.91 – Act
FG Prd. * Std Act
Qty Cost
Qty Rate Qty
Per Ton Std Act
Total Std Cost
Qty * Qty Cost /
RAWMATERIAL5 value / 9.00 517.57 – Act
FG Prd. * Std Act
Qty Cost
Qty Rate Qty
Per Ton Std Act
Total Std Cost
Qty * Qty Cost /
RAWMATERIAL6 value / 21.00 735.00 – Act
FG Prd. * Std Act
Qty Cost
Qty Rate Qty
Per Ton Std Act
Total Std Cost
Qty * Qty Cost /
Labor value / 59,900.00 119,800.00 – Act
FG Prd. * Std Act
Qty Cost
Qty Rate Qty
Std. Std.
Rate Qty. Actual Qty. Actual Cost
Std. Actual
Cost Elements Variance
Cost Rate
(Figure (Figure (Figure 4.0) (Figure 4.0)
2.0) 2.0)
Per Ton Std Act
Total Std Cost
Qty * Qty Cost /
Depriciation value / 59,900.00 59,900.00 – Act
FG Prd. * Std Act
Qty Cost
Qty Rate Qty
Per Ton Std Act
Total Std Cost
Qty * Qty Cost /
Administration value / 59,900.00 59,900.00 – Act
FG Prd. * Std Act
Qty Cost
Qty Rate Qty
Per Ton Std Act
Total Std Cost
Qty * Qty Cost /
MACOOH value / 59,900.00 44,326.00 – Act
FG Prd. * Std Act
Qty Cost
Qty Rate Qty
Per Ton Std Act
Total Std Cost
Qty * Qty Cost /
POWER value / 1,609,780.00 692,205.4 – Act
FG Prd. * Std Act
Qty Cost
Qty Rate Qty
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.
Table 5.0
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
Table 7.0
From My experience I can point out that Production order variance occur mainly from;
b) Material Price Change after release of Standard Cost Estimate (Category IV.1)
e) Total Planned Quantity and Actual Produced Quantity Difference (Category IV.4)
Total POWER consumption as per KOB1 (Actual as per Material Recipe) and FBL3N should be
approximately equal.
(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.
Table 8.0
Table 9.0
After Settlement (For 1000 TO of FG1) entries will be in the following sequence;
Table 10.0
= (1,950.00)
In order to avoid the Over head Variance input same activity price for all the production versions,
Example:
Example
Product : FG1
Table 11.0
Figur 5.0
When a Process order is created for Material FG1 system calculates Planned cost as follows;
Table 12.0
Figure 6.0
Process Order has been created in Production version “PO32“. During Confirmation System
calculates actual cost as follows;
Figure 7.0
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
The total quantity produced is 8,865.00 TO against which the activities booked are;
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;
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.
Price change of material due to execution of standard cost estimate will be posted with document
type “PR“
User should not be modifying the material quantity manually while confirmation (COR6N)
d) Try to ensure that process order for Finished Good is created on the same production
version released in standard cost estimate.
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)
Step7: Record COGM Quantity (MB5B with movement type 201 + 202 & 261 + 262)
Step9: Record COGS Quantity (MB5B with movement type 601 + 602)
Closin Closing
COGM COGS
Varianc Productio Varianc g Stock COG
Varianc Varianc
e n Qty e / Ton Stock Varianc S Qty
Material e e
Qty e
Step 2 Step 3 Step 4 Step 9
Step 8 Step 10
Step 5 Step 6
COGM
MATERIAL VT1 = C1 * S1 *
V1 P1 C1 Qty * S1
1 P1 / V1 VT1 VT1
VT1
COGM
MATERIAL VT2 = C2 * S2 *
V2 P2 C2 Qty * S2
2 P2 / V2 VT2 VT2
VT2
COGM
MATERIAL VT3 = C3 * S3 *
V3 P3 C3 Qty * S3
3 P3 / V3 VT3 VT3
VT3
Table 15.0
Figure 10.0
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