Understanding Production Order Variance

Understanding Production Order Variance - Part 2 The
SAP Perspective
Posted by Ranjit John in SAP ERP Manufacturing - Production Planning (SAP PP) on Mar 13, 2012 8:54:24
AM
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 facing a tough time during
period-end processing every month. Production Order Variance posted against each process
orders will have to be examined, explained & investigated thoroughly. Major questions arising
will be;
 From Where the Variance has come

 How to Categorize the variance
 How to cut down the variance.
 Impact of variance on COGM, COGS & Closing Stock, has to be answered to the
management.
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.
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
acredit 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
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.
100 Raw Material

100 Labor
Debit 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

Figure 3.0
KOB1
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.
Std. Rate Std. Qty. Actual Qty. Actual Cost
Cost Elements (Figure 2.0) (Figure 2.0) Std. Cost Actual Rate (Figure 4.0) (Figure 4.0) Variance
RAWMATERIAL Total value / Per Ton Qty * FG Std Qty * Std Act Cost / Act Std Cost - Act
1 Qty Prd. Qty Rate Qty 49,663.00 496,630.00 Cost
5 Qty Prd. Qty Rate Qty 9.00 517.57 Cost
6 Qty Prd. Qty Rate Qty 21.00 735.00 Cost
Total value / Per Ton Qty * FG Std Qty * Std Act Cost / Act Std Cost - Act
Labor Qty Prd. Qty Rate Qty 59,900.00 119,800.00 Cost
Depriciation Qty Prd. Qty Rate Qty 59,900.00 59,900.00 Cost
Administration Qty Prd. Qty Rate Qty 59,900.00 59,900.00 Cost
MACOOH Qty Prd. Qty Rate Qty 59,900.00 44,326.00 Cost
POWER Qty Prd. Qty Rate Qty 1,609,780.00 692,205.4 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.
Std. Rate Std. Qty. Actual Qty. Actual Cost
Cost Elements (Figure 2.0) (Figure 2.0) Std. Cost Actual Rate (Figure 4.0) (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
Serial No Cost Element Variance Variance Category Variance Class
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
Plan Target Input Target Actual Actual Input Actual Variance

Cost Elements Price Qty Cost Price Qty Cost Class Variance
RAWMATERIAL
1 10.00 48,519.00 485,190.00 10.00 49,663.00 496,630.00 C1 11,440.00
RAWMATERIAL
2 24.4262 3,653.90 89,251.00 26.3338 3,411.00 80,824.45 C2 573.45
RAWMATERIAL
3 17.7670 6,169.70 109,617.00 17.9653 5,798.00 104,162.80 C2 (5,454.25)
RAWMATERIAL
4 179.5833 1,437.6 258,169.00 209.2312 1,003.00 209,858.91 C2 (48,310.09
RAWMATERIAL
5 60.00 119.80 7,188.00 57.5078 9.00 517.57 C2 (6,670.43)
RAWMATERIAL
6 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 (128,190.2
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

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,
i. 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

Figure 6.0
Process Order has been created in Production version "PO32". During Confirmation System
calculates actual cost as follows;
Figure 7.0
d) Total Planned Quantity and Actual Produced Quantity Difference
We came across this production order variance in few process orders only. While doing final
confirmation of process orders user made mistake by not allowing system to re calculate the
activity prices.
Material: FG1
Total Process Order Quantity: 93,000 TO
Quantity Produced: 8,865.00 TO
The total quantity produced is 8,865.00 TO against which the activities booked are;
Activity Quantity Amount

LABOR 8,865 * 2 DH / TON 17,730.00
DEPRIN 8,865 * 1 DH / TON 8,865.00
MACOOH 8,865 * 0.74 DH / TON 6,560.10
ADMIN 8,865 * 1 DH / TON 8,865.00
POWER 8,865 * 0.03 * 1000 265,950.00
TOTAL 42,020.10
Table 13.0
Since during final confirmation of the Order, re calculation of activities were bypassed (by
user) system calculated the activities against the production order as below;
Activity Quantity Amount

LABOR 93,000 * 2 DH / TON 186,000.00
DEPRIN 93,000 * 1 DH / TON 93,000.00
MACOOH 93,000 * 0.74 DH / TON 68,820.00
ADMIN 93,000 * 1 DH / TON 93,000.00
POWER 2,857,172.00 (User Entered) 1,228,583.96
TOTAL 440,820.00
Table 14.0
A Variance of 440,820.00 - 42,020.00 = 39,880.00 TO was posted against all the activities

Figure 9.0
Note: While doing final confirmation ensure that all the activity prices are recalculated as per
the new output.
e) Variance Due to Price change
Price change of material due to execution of standard cost estimate will be posted with
document type "PR"
3) How to reduce variance
For reducing production order variance
a) Material BOM should be up to date;
User should not be modifying the material quantity manually while confirmation (COR6N)
b) Activity Price should be Updated periodically
c) Confirm activity getting booked while doing final confirmation
d) Try to ensure that process order for Finished Good is created on the same production
version released in standard cost estimate.
4) Impact of the variance on COGM, COGS, Closing Stock
Variances posted with document type "SA", "AB", should have been part of COGM, COGS and
Closing Stock. Because of variance material movement cannot be analysed correctly, material
value can either Overestimated or under estimated. In order to figure out how much portion
of variance should be allocated to COGM,COGS & closing stock We are following manual
calculation.
Step1: List down all the Semi Finished and Finished Goods.
Step 2: Record total variance posted against each material (FBL3N) (Document type "SA" &
"AB")
Step 3: Record total quantity produced (MB5B with movement types 101 & 102)
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
Varianc Production Variance / Closing Stock Closing Stock COGM COGS COGS
e Qty Ton Qty Variance Variance Qty Variance
Material Step 2 Step 3 Step 4 Step 5 Step 6 Step 8 Step 9 Step 10
VT1 = P1 / COGM Qty *
MATERIAL1 V1 P1 V1 C1 C1 * VT1 VT1 S1 S1 * VT1
Table 15.0
Few Important Document Types Posted in Production Order Variance GL are;
AB -> Reversal of Production Order Settlement
SA -> Production Order Settlement
PR -> Price Change
WA -> Confirmation Reversal (If Price Changed after Confirmation)
WL -> Sales Reversal (If Price Changed after Sales)
Figure 10.0
Few Important Transaction Codes
KKBC_ORD
KOB1
KOC4
FBL3N
CK13N
CK11N
CK24
MB5B
MB51
Reference: Production Variance Analysis in SAP Controlling By John Jordan, Published by SAP
Galileo PresAlso refer s
Understanding Production Order Variance - Part 3 Price

Difference Variance
Posted by Ranjit John in SAP ERP Manufacturing - Production Planning (SAP PP) on Mar 27, 2012 6:24:14
AM
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),
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) ,
Semi Finished Good Actual Rate -> As per Released Standard Cost Estimate of Semi Finished Good (SFG) ,
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
Table 6.0
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
Price Diff-Production Order Variance XXX
Table 7.0
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.

Understanding Production Order Variance

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Understanding Production Order Variance - Part 2 The

Understanding Production Order Variance - Part 2

 From Where the Variance has come

 Category A: Basic understanding of Production Order

Figure 1.0

Let us divide the process as given below;

1) Initial Planning

3) Actual Posting

4) Period – End Processing

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):

Transaction Codes: CS01, CS02, CS03

a.3) Routing:

Transaction Codes: CA01, CA02, CA03

a.4) Product Cost Collector:

Transaction Codes: KKF6N

a.5) Recipe:

Transaction Codes: C201, C202, C203

b) Overhead Costs:

All indirect cost like power, canteen etc.

Transaction Codes: KZS2

b.1) Calculation Base:

b.3) Credit Key

C ) Cost Component:

d) Costing Variant:

e) Standard Cost Estimate:

f) Preliminary Cost Estimate:

g) Mixed Cost Estimate:

3) Actual Postings

 Postings to CO from external business transactions results in Primary Costs.

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

3.1.1 Goods Issue to Production Order:

Primary Cost are posted to CO from FI.

GL entry during Goods Issue

3.2.1 Assessment

3.2.2 Activity Confirmation:

100 Raw Material

Cost Center under/over absorption costs assessed to CO-PA are included at the operating

3.5) Post Actual Costs

1) Period – End Processing

5.1.1) Total Variance

5.1.2) Production Variance

Production variance is not relevant for settlement, only for information.

5.1.3) Planning Variance

5.2) Variance Categories

Variance can be categorized into Input Variance and Output Variance

5.2.1) Input Variance

Category IV.1) Input Price Variance

It occurs in any of the below mentioned scenarios;

Category IV.2) Resource – Usage Variance

Category IV.3) Input quantity variance

Category IV.4) Remaining Input Variance

5.2.2) Output Variance is divided into;

Category OV.1) Mixed – Price Variance

Category OV.2) Output Price Variance