Understanding Production Order Variance Part 1

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Planning (SAP PP):

Planning (SAP PP): Understanding

Understanding

Production Order Variance - Part 2 The SAP

Perspective

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Posted by Ranjit John Ranjit John 13 Mar, 2012 13 Mar, 2012

Understanding Production Order Variance - Part 2 The SAP Perspective Understanding Production Order Variance - Part 2 The SAP Perspective Author: Ranjit Simon John

Author: Ranjit Simon John

Every PP, FI and CO user in any Manufacturing Industry will be having a tough time while processing Every PP, FI and CO user in any Manufacturing Industry will be having a tough time while processing month-end activities. Production Order Variance posted against each process orders will have to be examined, end activities. Production Order Variance posted against each process orders will have to be examined, explained & investigated thoroughly. Major questions arising will be;

explained & investigated thoroughly. Major questions arising will be; •

• Origin of Variance has comeOrigin of Variance has come •

• How to Categorize the varianceHow to Categorize the variance •

• How to cut down the variance.How to cut down the variance. •

• Impact of variance on COGM, COGS & Closing Stock.Impact of variance on COGM, COGS & Closing Stock. Answering these will be really tough.

Answering these will be really tough. We have faced all these scenarios

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

conclusions.

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

•

• Category A: Basic understanding of Production OCategory A: Basic understanding of Production Orderrder •

• Category B: Co-relating Category A scenarios with real life scenarios.Category B: Co-relating Category A scenarios with real life scenarios. Now let us examine the main points under

Now let us examine the main points under Category ACategory A::

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

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Figure Figure 1.01.0 Let us divide the process as given below;

Let us divide the process as given below; 1)

1) Initial Initial PlanningPlanning 2)

2) Cost Cost EstimatesEstimates 3)

3) Actual Actual PostingPosting 4)

4) Period – End ProcessingPeriod – End Processing 1) Initial Planning:

1) Initial Planning: Forecasting the

Forecasting the sales for sales for future. future. Sales and Sales and Operation Planning, Operation Planning, Long term Long term planning, Cost planning, Cost center planningcenter planning should be well executed by the management.

should be well executed by the management. 2) Cost Estimates:

2) Cost Estimates: The

The major major points points to to be be considered considered here here are;are; a)

a) a) a) Master Master Data:Data: a.1)

a.1) Material Material Master:Master: All

All the the required required information information to to manage manage a a material.material. Transaction

Transaction Codes: Codes: MM01, MM01, MM02, MM02, MM03MM03 a.2)

a.2) Bill Bill of of Material Material (BOM):(BOM): Structured

Structured hierarchy hierarchy of of raw raw materials materials necessary necessary to to create create a a Finished Finished / / Semi Semi Finished Finished Good.Good. Transaction

Transaction Codes: Codes: CS01, CS01, CS02, CS02, CS03CS03 a.3)

a.3) Routing:Routing: List

List of of tasks tasks containing containing standard standard activity activity times times required required to to perform perform operations operations to to create create aa Finished / Semi Finished Good.

Finished / Semi Finished Good. Transaction

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a.4) Product Cost Collector:

Collects actual costs during the production of a material. Transaction Codes: KKF6N

a.5) Recipe:

Recipes comprise information about the products and components of a process, the process steps to be executed, and the resources required for the production.

Transaction Codes: C201, C202, C203 b) Overhead Costs:

All indirect cost like power, canteen etc. Transaction Codes: KZS2

b.1) Calculation Base:

A base is a group of cost elements to which overhead is applied b.2) Overhead Rate:

Overhead rate is a percentage factor applied to the value of the calculation base (group of cost elements).

b.3) Credit Key

During Overhead calculation, a manufacturing order in product cost collector is debited, and a cost center is credited. The credit key defines which cost center receives the credit.

C ) Cost Component:

The cost component split allows a cost estimate to group costs of similar types of components, such as material, labor, and overhead.

d) Costing Variant:

The costing variant contains information on how a cost estimate calculates the standard price. e) Standard Cost Estimate:

The Standard Cost Estimate is involved in variance analysis because it is used for stock valuation. When a production or process order delivers production to inventory, it receives a credit based on standard price. Total variance is the difference between actual costs debited to the order and costs credited to the order due to deliveries to stock.

f) Preliminary Cost Estimate:

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

g) Mixed Cost Estimate:

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

3) Actual Postings

Plan costs are posted prior to a fiscal period. Actual costs are posted in real time during a fiscal period. Actual Cost can be divided into two groups based on the posting origin;

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

3.1 Primary Cost:

Primary cost will be posted to CO mainly in the following scenarios: 3.1.1 Goods Issue to Production Order:

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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

Stockof RawMaterial 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

COGMofFinishedGood XXX

Raw Material Consumption XXX

Stockof RawMaterial 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.

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Debit _{100 Raw Material} 100 Labor

100 Over Heads

Credit (250)FinishedGood

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.

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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;

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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

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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

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Figure 4.0

Here you can see settlement (Variance) of 128,190.87 AED. I will explain how we are calculating the variance.

Below table shows the formula used for Variance Calculation.

All the Std. Rate, Std. Qty, Std. Cost value fields in Table 4.0 are calculated based on the master details (Material Recipe Figure 2.0).

All the Actual Rate, Actual Qty. Actual Cost vale fields in table 4.0 are extracted from KOB1. Cost Elements Std. Rate (Figure 2.0) Std. Qty. (Figure 2.0) Std. Cost Actual Rate Actual Qty. (Figure 4.0) Actual Cost (Figure 4.0) Variance

RAWMATERIAL1Total value / Qty

Per Ton Qty * FG Prd. Qty Std Qty * Std Rate Act Cost / Act Qty 49,663.00 496,630.00 Std Cost -Act Cost

Per Ton Qty * FG Prd. Qty Std Qty * Std Rate Act Cost / Act Qty 9.00 517.57 Std Cost -Act Cost

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Per Ton Qty * FG Prd. Qty Std Qty * Std Rate Act Cost / Act Qty 21.00 735.00 Std Cost -Act Cost

Labor Total value / Qty

Depriciation Total value / Qty

Per Ton Qty * FG Prd. Qty Std Qty * Std Rate Act Cost / Act Qty 59,900.00 59,900.00 Std Cost -Act Cost AdministrationTotal value / Qty

MACOOH Total value / Qty

POWER Total value / Qty

Per Ton Qty * FG Prd. Qty Std Qty * Std Rate Act Cost / Act Qty 1,609,780.00 692,205.4 Std Cost -Act Cost FINISHED GOOD 59,900.00 2,006,051.00 Table 4.0 Now let us fill in values in Table 5.0 with the production order values.

Cost Elements Std. Rate (Figure 2.0) Std. Qty. (Figure 2.0) Std. Cost Actual Rate Actual Qty. (Figure 4.0) Actual Cost (Figure 4.0) Variance RAWMATERIAL110.00 48,519.00 485,190.00 10.00 49,663.00 496,630.00 (11,440.00) RAWMATERIAL224.4262 3,653.9 89,250.89 26.3338 3,411.00 89,824.45 (573.45) RAWMATERIAL317.7670 6,169.7 109,617.00 17.9653 5,798.00 104,162.80 5,454.20 RAWMATERIAL4179.5833 1,437.6 258,169.00 209.2312 1,003.00 209,858.91 48,310.09 RAWMATERIAL560.00 119.8 7,188.00 57.5078 9.00 517.57 6,670.43 RAWMATERIAL600.00 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 Administration1.00 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

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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

Category IV.1

C2

Category IV.1

C2

RMV6 RAWMATERIAL6 (735.00) Category IV.2 C3

OHV1 Power 80,504.6 Category IV.3

Table 6.0

Let us try to calculate Variance by applying Formula for each category.

Category IV.1: Input Price Variance = (Actual Price – Plan Price) * Actual Input Quantity Category IV.2: Resource Usage Variance – Actual Cost – Target Cost – Input Price Variance Category IV.3: Input Quantity Variance = (Actual Input Quantity – Target Input Quantity) * Plan Price Cost Elements Plan Price Target Input Qty Target Cost Actual Price Actual Input Qty Actual Cost Variance Class Variance RAWMATERIAL110.00 48,519.00 485,190.00 10.00 49,663.00 496,630.00 C1 11,440.00 RAWMATERIAL224.4262 3,653.90 89,251.00 26.3338 3,411.00 80,824.45 C2 573.45 RAWMATERIAL317.7670 6,169.70 109,617.00 17.9653 5,798.00 104,162.80 C2 (5,454.25) RAWMATERIAL4179.5833 1,437.6 258,169.00 209.2312 1,003.00 209,858.91 C2 (48,310.09) RAWMATERIAL560.00 119.80 7,188.00 57.5078 9.00 517.57 C2 (6,670.43) RAWMATERIAL60.00 0.00 0.00 35.00 21.00 735.00 C3 735.00 Power 0.43 1,797,000.00772,710.00 0.43 1,609,780.00692,205.4 C1 (80,504.6) TOTAL (128,190.27) Table 7.0

Category B.2) Major Reasons for the variance

From My experience I can point out that Production order variance occur mainly from; a) Material BOM not updated properly (Category IV.3 )

b) Material Price Change after release of Standard Cost Estimate (Category IV.1) c) Activity Price (Material Recipe) not updated properly (Category IV.2 )

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

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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 GC01RM3 4.47 0.055 TOTAL 172.45 Table 8.0

Process Order has been Created Under production version “ PO32” The Activity Price recorded in system against “PO32” is as follows

Production Version Resource Total Value Quantity

PO32 GCPRODCGM2 P032

POWER

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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 GC01RM4 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)

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Table 10.0 Here if we see the total variance of POWER = 15,050 + (17,000)

= (1,950.00) Similarly for all the Material and resources.

In order to avoid the Over head Variance input same activity price for all the production versions, 1. i.e. the net difference will be then POWER = 17,000 + (17,000) = 0

Let us see a LIVE Process Order Example:

Example Product : FG1

Standard Cost Estimate Released for Production Version "PO31"

Table 11.0 Material Recipee for FG1 (CK13N)

Production Version

Resource Total Value Fixed Value Quantity

PO31 POWER 15.05 15.05 0.035 PO31 ADMINI 0.50 0.00 1.00 PO31 DEPRIN 1.00 0.00 1.00 PO31 LABOUR 0.70 0.00 1.00 PO31 MACOOH 1.19 0.00 1.00 RM1 149.54 32.69 0.945 RM3 4.47 0.00 0.055 TOTAL 172.45 47.74 Figur 5.0 Process Order is Created under production Version "PO32 "

When a Process order is created for Material FG1 system calculates Planned cost as follows; Quantity Produced -> 25,302.00 TO

Use the same calculation logic used in Table 1.0;

Resource Quantity Amount

RM1 23,910.39 3,783,661.17 RM3 13,916.10 1,130,999.021 ADMIN 25,302.00 12,651.00 LABOR 25,302.00 17,711.40 DEPRIN 25,302.00 25,302.00 MACOOH 25,302.00 30,109.38 POWER 885,570.00 380,795.10 Table 12.0

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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

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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.

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Step4: Variance Per Ton = Step3 / Step 2 Step5: Record closing stock of Material (MB5B)

Step6: Closing Stock Variance Allocation = Step5 * Step4

Step7: Record COGM Quantity (MB5B with movement type 201 + 202 & 261 + 262) Step8: COGM Variance Allocation = Step7 * Step4

Step9: Record COGS Quantity (MB5B with movement type 601 + 602) Step10: COGS Variance Allocation = Step9 * Step4

Material _Variance Step 2 Production Qty Step 3 Variance / Ton Step 4 Closing Stock Qty Step 5 Closing Stock Variance Step 6 COGM Variance Step 8 COGS Qty Step 9 COGS Variance Step 10 MATERIAL1V1 P1 VT1 = P1 / V1 C1 C1 * VT1 COGM Qty * VT1 S1 S1 * VT1 MATERIAL2V2 P2 VT2 = P2 / V2 C2 C2 * VT2 COGM Qty * VT2 S2 S2 * VT2 MATERIAL3V3 P3 VT3 = P3 / V3 C3 C3 * VT3 COGM Qty * VT3 S3 S3 * VT3 Table 15.0

Few Important Document Types Posted in Production Order Variance GL are; AB -> Reversal of Production Order Settlement

SA -> Production Order Settlement PR -> Price Change

WA -> Confirmation Reversal (If Price Changed after Confirmation) WL -> Sales Reversal (If Price Changed after Sales)

Figure 10.0 Few Important Transaction Codes KKBC_ORD KOB1 KOC4 FBL3N CK13N CK11N

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CK24 MB5B MB51

Reference: Production Variance Analysis in SAP Controlling By John Jordan, Published by SAP Galileo PresAlso refer s

Also Refer: http://scn.sap.com/community/erp/manufacturing-pp/blog/2012/03/27/understanding-production- order-variance--part-2-price-difference-variance

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Ranjit John 7 Dec, 2014 2:30 PM

Happy to know that my efforts helped. Devendra F

8 Feb, 2014 7:16 AM Hi,

It is definitely to save in special folder,

Regards,

Devendra AKS Sankar

29 Nov, 2013 11:57 AM Hi Ranjit,

Thanks. In KOB1, posted unit is show with different units like HR, MIN and Sec. How to make this posted unit as any one of unit by default?

Alex Barbieri in response to Ranjit John on page 20 20 Nov, 2013 12:58 PM

Dear Ranjit,

is possible to have access to

http://scn.sap.com/blogs-edit-post!default.jspa?blogPost=63513&blog=1130

What is the difference in the calculation and allocation of production variances when Material ledger is used respect to standard cost only?

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Ikram hazari 18 Jul, 2013 10:28 PM Thank you Ikram hazari 18 Jul, 2013 10:27 PM Than Mathew Aby 7 Jul, 2013 2:41 PM good article.. Ranjit John 28 Jun, 2013 12:23 AM Thank you Vinay Ashwathnarayan 27 Jun, 2013 12:31 PM

Very Informative Thanks for Sharing Naresh Babu

21 Jun, 2013 10:50 AM Hello Sir,

It is really very informative & thank you very much for sharing.

I have a small doubt on WIP, While comparing monthly KKAO report for WIP and FS10N, we have found few Process Orders opened in Nov 2012 and never closed for FS10N. What could be the possible reasons for this & what are the steps reqired to close them. Thank you

Himanshu Saxena 21 Jun, 2013 10:02 AM

Very good document with detailed information. Thank you for sharing !!!

Kader Mohideen 9 May, 2013 3:32 PM

Excellent information with good examples...

Ranjit John in response to Sisir Pradhan on page 19 24 Apr, 2013 2:56 AM

Thank you . KIndly rate the artcile Sisir Pradhan

23 Apr, 2013 12:37 PM Very helpfull....

Regards, sisir pradhan.

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Ranjit John

13 Mar, 2013 1:10 PM Thank you Raheem

RAHEEM BAKSH 6 Mar, 2013 9:00 AM Excellent...

Zanhua Fan in response to Ranjit John on page 20 27 Jan, 2013 7:17 AM

I really appreciate that. Thanks

Ranjit John

25 Jan, 2013 8:17 AM Dear Zanhua,

Thank you. Great to know that the document helped. We have the similar scenario like you explained.

Please find the below given blog to find how we resolved the scenario.

http://scn.sap.com/blogs-edit-post!default.jspa?blogPost=63513&blog=1130 Also Check http://scn.sap.com/community/erp/financials/blog/2012/06/13/erp-post-implementation-challenges-part-3-preparing-the-cost-sheet http://scn.sap.com/community/erp/financials/blog/2012/04/02/erp-post-implementation-challanges-part-2-reconcilling-roh Regards Ranjit Zanhua Fan 24 Jan, 2013 8:06 AM Dear Mr. Ranjit,

Thanks for your know-how.

Gegarding the variance, I have following question.

If the Material Ledger is inactive, how to classify the variance after settlement? For example:

Finished Goods A, the plan quantity of the production order is 10, the standard cost is 9 while the actual cost is 7. in current month, the production order is completed. and the variance of the production order is 20. the FI document as follows:

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Cr: COGM Variance 20

All the variance settled to PL account. That figure should be ok is all the Finished Goods is sold out in same period. But, If the quantity of the FG sold out is 6 in same period, we should split the variance manually.

Amount 20*4/10=8 repost to inventory while amount 20*6/10=12 posted to Cost of Good Sold. some developed reports required to determine rate between Good sold and Inventory.

Is there any standard solution for that case? Hope this is clear and look forward to your reply. Thanks

Syed Hussain 23 Jan, 2013 10:22 AM

Good information. Thank you.

Ranjit John in response to Khoa Nguyen Anh on page 21 10 Dec, 2012 11:44 AM

Hi,

TECO is one step in the whole cycle. You cannot calculate variance for a oredr which is not TECO done. Technical completion (TECO) means ending a production order from a logistical

viewpoint.

By doing TECO you inform the system that the activites scheduled in the order is completed. You have to do TECO before executing variance

Khoa Nguyen Anh 8 Dec, 2012 4:39 AM Dear Mr. Ranjit,

Thanks for preparing and sharing such a valuable document. It helps me a lot.

Can I ask you some questions? I've been searching but could not found an clear answer what effects TECO has on variance calculation. Is it neccesary to TECO and what is the meaning behind it.

Thank you. Eric Chen

9 Nov, 2012 7:45 AM

great, valuable article, makes me clear, thanks for your shared. Ranjit John

14 Oct, 2012 10:23 AM Thank you :-)

mahesh A

3 Oct, 2012 8:38 AM One of the Best article.

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Mahesh mahesh A

3 Oct, 2012 8:36 AM Hi Ranjit,

Thanks for posting such a good article , I can rate it 10 out of 10.

Regards, Mahesh Ranjit John 13 Sep, 2012 4:58 AM Thank You padmaja gan 13 Sep, 2012 3:25 AM Hi Ranjit,

Thank you soo much for helping me !! You are guru of product costing. My concepts got clear. Thank you for posting such an excellent document and it is impossible to get it any where.

I am delighted and very thankful and giving you100% rating.

Problem that I got was I could not see the actual cost in CO03--cost analysis after creating the confirmation in CO15. Ranjit helped me locate the problem as bill of materials are not getting issued to finished goods and the move moment type was 101 not 261. MM person did MB1A then raw materials got consumed to final good by movement type 261. then after that I ran the confirmation CO15 for the new order and then actual cost got posted.

Thank you, Padmaja

Raja Sekhar

21 Jun, 2012 11:24 AM

Ranjith it is really good document vindhan ganesan

14 Jun, 2012 12:59 PM

Hi sir, very useful information shared , thanks for for sharing your knowlwdge Vishal Thalla

12 Jun, 2012 3:09 PM Hi

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Regards

Vishal.T A SAP

20 Apr, 2012 7:24 AM

Hi Ranjit, great blog, very helpful. gave you 100% rating. I have one related question, hoping you can answer this.

My normal understanding was that KKS1 calculates variances and KKAO calculates WIP and when you run CO88, it settles both in FI. But recently, one user by mistake executed KKAO only at the middle of the month in real production mode and also executed CO88 subsequently. The strange thing is: system posted only variances (even if KKS1 was not run at all for the period) and no WIP was posted for the period even though KKAO was executed. Can someone solve this mystery as to why this happened? Is it due to the mid month running of KKAO and CO88? Is KKS1 not really necessary to run? Should the users reverse C088 postings and run CO88 again at month end? Or can CO88 be run multiple times during the month without reversing the results? Would it post only incremental postings or duplicate postings if not reversed?

Ranjit John in respons e to Vimal Vijayan on page 23 18 Apr, 2012 5:23 AM

Thank You Vimal Vimal Vijayan 17 Apr, 2012 2:32 PM

Good Job!! Variance analysis and stock valuation really simplified. All the best!!

Best Regards Vimal

Ranjit John in response to GYAN R on page 23 16 Apr, 2012 12:23 PM

Thank You Gyan, Check my other blogs as well

http://scn.sap.com/people/ranjit.john/content#filterID=contentstatus%5Bpublished%5D~objecttype~objecttype %5Bblogpost%5D

GYAN R

16 Apr, 2012 11:03 AM Dear Sir

Its a excellent article. I am giving u 100% rating for this article.Thanks for sharing your valuable knowlege to us.

GYAN R

16 Apr, 2012 11:00 AM

Excellent article.I have ever seen GYAN R

16 Apr, 2012 10:58 AM Dear Sir

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Very good article.Keep sharing your valuable knowledge. Ranjit John in response to prakash k on page 24

13 Apr, 2012 4:34 PM

thank you prakash check my other blogs also prakash k

13 Apr, 2012 3:16 PM Its good forme to help a lot.

Ranjit John in response to MS kaushek on page 24 11 Apr, 2012 12:01 PM

Thank you Manish, Great to know that it helped. Please check

http://scn.sap.com/people/ranjit.john/content#filterID=contentstatus%5Bpublished%5D~objecttype~objecttype %5Bblogpost%5D

MS kaushek

11 Apr, 2012 11:54 AM

Very informative...Good Job Ranjit , please suggest how i can check your other blogs too. Ranjit John in response to Jyosh New on page 24

29 Mar, 2012 6:33 AM

Thank you Jyosh, rating option will be at the end of the article. thanks Jyosh New in response to Ranjit John on page 24

29 Mar, 2012 5:49 AM

Rating option is not working here or may be it is not under my knowledge, but I am giving ( 5/5 ) . 100 % worth Ranjit John in response to Jyosh New on page 24

26 Mar, 2012 10:52 AM

Thank you Jyosh. Kindly rate the article Jyosh New

26 Mar, 2012 10:46 AM hi ranjith,

It is a very good document. Thanks.

Ranjit John in response to Atif Farooq on page 24 26 Mar, 2012 9:37 AM

Thank You Atif, I will Say this is the best reward I can get for my work . Thanks :-) Atif Farooq

26 Mar, 2012 9:17 AM

Excellent interpretation...I must say that today i learned so many new things from your blogs on COGS and Variances...

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23 Mar, 2012 7:21 PM thank u venkata

Krishna Achanta 23 Mar, 2012 2:28 PM

i hope i made right choice in giving rating

Ranjit John in response to Krishna Achanta on page 25 22 Mar, 2012 8:07 PM

thank u venkata, kindly rate the article Krishna Achanta

22 Mar, 2012 3:54 PM

very lucid and simply superb explanation. I can use it for further reference

thanks

Muhamed Faisal 22 Mar, 2012 8:19 AM Excellent one...

Faisal

Ranjit John in response to Godavari SAP on page 25 22 Mar, 2012 4:28 AM

Thank you. Kindly rate the article Godavari SAP

22 Mar, 2012 3:23 AM

Well-explained. Appreciating your effort.

Narasimhulu Konnipati in response to Ranjit John on page 25 21 Mar, 2012 7:27 PM

Tremendous effort my dear

Nice to hear that you are also working on Product cost planning. It's been long time that i have worked on CO-PC, probably your new document will refresh and give the confidence to move further.

Naresh Patil

19 Mar, 2012 12:15 PM

Sir, I am waiting for reply on product cost planning. Ranjit John in response to Naresh Patil on page 25 19 Mar, 2012 11:49 AM

Thank you Naresh. Sure in my next blog I will mention about product cost planning. Kindly rate the article if it helped.

Naresh Patil

19 Mar, 2012 11:47 AM

It's really very helpful, Thanks.

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I need steps which are simple to understand in SAP PP scenario for calculating product cost? Thanks,

Naresh Patil

Ranjit John in response to Ram Vepuri on page 26 19 Mar, 2012 4:31 AM

Thank you Ram Kumar Ram Vepuri

18 Mar, 2012 4:35 PM

Very informative...Thank You Very much...:)

Ranjit John in response to Sharat Sugur on page 26 16 Mar, 2012 1:43 PM

Thank you Sharat Sharat Sugur 16 Mar, 2012 1:15 PM

Thank you for detailed explanation Ranjit, really helpful Sachin Pancholi in response to Ranjit John on page 26 16 Mar, 2012 12:28 PM

Thanks Ranjit --its really helpful.

Ranjit John in response to pushpalas Vasudeva on page 26 16 Mar, 2012 10:16 AM

Thank you. Great to know that it helped. pushpalas Vasudeva

16 Mar, 2012 9:59 AM

Its a very useful document i am looking for such document Ranjit John in response to Vikram raj on page 26 16 Mar, 2012 3:59 AM

Thank you Vikram. Vikram raj

15 Mar, 2012 5:12 PM

Very informative...Good Job Ranjit :-)

Ranjit John in response to R K on page 26 15 Mar, 2012 4:16 AM

Thank you. Great to know that it helped. R K

15 Mar, 2012 2:25 AM Dear Ranjit,

i was just searching for how to calculate variance of production order and got your analysis. really great. it will help me a lot to understand.