production variances in sap product costing

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Understanding Production Order Variance - Part 2 The SAP PerspectivePosted byRanjit JohninSAP ERP Manufacturing - Production Planning (SAP PP)on Mar 13, 2012 8:54:24 AMinShare5Understanding Production Order Variance - Part 2 The SAP PerspectiveAuthor: Ranjit Simon JohnEvery 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 andafter 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 underCategory 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 1.0Let us divide the process as given below; 1)Initial Planning 2)Cost Estimates 3)Actual Posting 4)Period End Processing1)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 acreditbased onstandard 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 postedpriorto a fiscal period. Actual costs are posted in real timeduringa fiscal period. Actual Cost can be divided into two groups based on the posting origin; Postings to CO fromexternalbusiness transactions results in Primary Costs. Business transactionswithinCO results in Secondary Costs. 3.1Primary 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 IssueDebitCredit

Raw Material ConsumptionXXX

Stock of Raw MaterialXXX

Table 1.03.2Secondary Cost: The costs in CO are allocated from overhead cost centers to production cost centers duringassessmentand then onto production order duringactivity 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.3.3Primary 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.DebitCredit

Stock of Finished GoodXXX

COGM of Finished GoodXXX



Table 2.03.4Secondary CreditAt 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.Debit100 Raw Material100 Labor100 Over Heads

Credit(250) Finished Good

Balance50 Variance

Table 3.0Total 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 thegross profitmargin level.Cost Center under/over absorption costsassessedto CO-PA are included at theoperating profitlevel.3.5)Post Actual Costs1)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 intoInput VarianceandOutput Variance5.2.1) 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 onstandard pricecontrol, 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 onMoving averageprice 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 quantityCategory IV.2) Resource Usage VarianceResource 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 varianceCategory IV.3) Input quantity varianceInput 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 priceCategory IV.4) Remaining Input VarianceWhen input variance cannot be assigned to any other variance category.5.2.2) Output VarianceVariance 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 price5.3) Period End The most importantperiod-end process relevant to production order variance analysis is; Overhead WIP Variance CalculationVariance can be calculated using the formula; Variance = Actual Cost Actual Cost Allocated (credits) WIP ScrapDuring 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 VarianceSettlement :Settlement of Production Orders will be executed. KO88 - Individual Settlement CO88 - Collective SettlementNow let us examine the main points underCategory 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 orders2.Major Reasons for the variance3.How to minimize the variance4.Impact of production order variance on COGM, COGS & Closing StockCategory B.1) How to analyze variance posted against production orderFor 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;ItemResourceTotal ValueFixed ValueQuantityUnit

1POWER12.9012.900.030MWH

2ADMINI1.000.001.00TO

3DEPRIN1.000.001.00TO

4LABOUR2.000.001.00TO

5MACOOH0.740.001.00TO

6RAWMATERIAL18.100.000.81TO





TOTAL33.4912.90

Figure 2.0Process order No for SFG1 is 15000035Variance Posted against the Process Order for the month is128,190.87 AEDAfter 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 4.0Here you can see settlement (Variance) of128,190.87 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 ElementsStd. Rate(Figure 2.0)Std. Qty.(Figure 2.0)Std. CostActual RateActual Qty.(Figure 4.0)Actual Cost(Figure 4.0)Variance

RAWMATERIAL1Total value / QtyPer Ton Qty * FG Prd. QtyStd Qty * Std RateAct Cost / Act Qty49,663.00496,630.00Std Cost - Act Cost




RAWMATERIAL5Total value / QtyPer Ton Qty * FG Prd. QtyStd Qty * Std RateAct Cost / Act Qty9.00517.57Std Cost - Act Cost

RAWMATERIAL6Total value / QtyPer Ton Qty * FG Prd. QtyStd Qty * Std RateAct Cost / Act Qty21.00735.00Std Cost - Act Cost

LaborTotal value / QtyPer Ton Qty * FG Prd. QtyStd Qty * Std RateAct Cost / Act Qty59,900.00119,800.00Std Cost - Act Cost

DepriciationTotal value / QtyPer Ton Qty * FG Prd. QtyStd Qty * Std RateAct Cost / Act Qty59,900.0059,900.00Std Cost - Act Cost

AdministrationTotal value / QtyPer Ton Qty * FG Prd. QtyStd Qty * Std RateAct Cost / Act Qty59,900.0059,900.00Std Cost - Act Cost

MACOOHTotal value / QtyPer Ton Qty * FG Prd. QtyStd Qty * Std RateAct Cost / Act Qty59,900.0044,326.00Std Cost - Act Cost

POWERTotal value / QtyPer Ton Qty * FG Prd. QtyStd Qty * Std RateAct Cost / Act Qty1,609,780.00692,205.4Std Cost - Act Cost

FINISHED GOOD59,900.002,006,051.00

Table 4.0Now let us fill in values in Table 5.0 with the production order values.Cost ElementsStd. Rate(Figure 2.0)Std. Qty.(Figure 2.0)Std. CostActual RateActual Qty.(Figure 4.0)Actual Cost(Figure 4.0)Variance

RAWMATERIAL110.0048,519.00485,190.0010.0049,663.00496,630.00(11,440.00)

RAWMATERIAL224.42623,653.989,250.8926.33383,411.0089,824.45(573.45)

RAWMATERIAL317.76706,169.7109,617.0017.96535,798.00104,162.805,454.20

RAWMATERIAL4179.58331,437.6258,169.00209.23121,003.00209,858.9148,310.09

RAWMATERIAL560.00119.87,188.0057.50789.00517.576,670.43

RAWMATERIAL600.000.000.0035.0021.00735.00(735.00)

Labor2.0059,900.00119,800.001.0059,900.00119,800.000.00

Depriciation1.0059,900.0059,900.001.0059,900.0059,900.000.00

Administration1.0059,900.0059,900.001.0059,900.0059,900.000.00

MACOOH0.7459,900.0044,326.000.7459,900.0044,326.000.00

POWER0.431,797,000.00772,719.000.431,609,780.00692,205.480,504.6

FINISHED GOOD33.4959,900.002,006,051.00

TOTAL128,190.87

Table 5.0Now let us categorize the variance.Variance has been posted in the following orderSerial NoCost ElementVarianceVariance CategoryVariance Class

RMV1RAWMATERIAL1(11,440.00)Category IV.3C1

RMV2RAWMATERIAL2(573.45)Category IV.3 + Category IV.1C2

RMV3RAWMATERIAL35,454.20Category IV.3 + Category IV.1C2



RMV6RAWMATERIAL6(735.00)Category IV.2C3

OHV1Power80,504.6Category IV.3

Table 6.0Let us try to calculate Variance by applying Formula for each category.Category IV.1:Input Price Variance = (Actual Price Plan Price) * Actual Input QuantityCategory IV.2:Resource Usage Variance Actual Cost Target Cost Input Price VarianceCategory IV.3:Input Quantity Variance = (Actual Input Quantity Target Input Quantity) * Plan PriceCost ElementsPlan PriceTarget Input QtyTarget CostActual PriceActual Input QtyActual CostVariance ClassVariance

RAWMATERIAL110.0048,519.00485,190.0010.0049,663.00496,630.00C111,440.00

RAWMATERIAL224.42623,653.9089,251.0026.33383,411.0080,824.45C2573.45

RAWMATERIAL317.76706,169.70109,617.0017.96535,798.00104,162.80C2(5,454.25)

RAWMATERIAL4179.58331,437.6258,169.00209.23121,003.00209,858.91C2(48,310.09)

RAWMATERIAL560.00119.807,188.0057.50789.00517.57C2(6,670.43)

RAWMATERIAL60.000.000.0035.0021.00735.00C3735.00

Power0.431,797,000.00772,710.000.431,609,780.00692,205.4C1(80,504.6)

TOTAL(128,190.27)

Table 7.0Category B.2) Major Reasons for the varianceFrom 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 properlyExplained inCategory B.1b) Activity Price (Material Recipe) not updated properlyExplained inCategory B.1Total POWER consumption as per KOB1 (Actual as per Material Recipe) and FBL3N should be approximately equal.KOB1 -> POWER consumption for the Materials ProducedFBL3N -> 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 GoodFG1. Production Version 1 will be usingRM1as raw material and production version 2 will be usingRM2as 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 ofFG1Production VersionResourceTotal ValueQuantity

PO31GCPRODCGM1 P031 POWER15.050.035

PO31GCPRODCGM1 P031 ADMINI0.501.00

PO31GCPRODCGM1 P031 DEPRN1.001.00

PO31GCPRODCGM1 P031 LABOUR0.701.00

PO31GCPRODCGM1 P031 MACOOH1.191.00

GC01 RM1149.540.945

GC01 RM34.470.055

TOTAL172.45

Table 8.0Process Order has been Created Under production version PO32The Activity Price recorded in system against PO32 is as followsProduction VersionResourceTotal ValueQuantity

PO32GCPRODCGM2 P032 POWER17.000.040

PO32GCPRODCGM2 P032 ADMINI1.001.00

PO32GCPRODCGM2 P032 DEPRN1.461.00

PO32GCPRODCGM2 P032 LABOUR1.001.00

PO32GCPRODCGM2 P032 MACOOH1.501.00

GC01 RM2152.000.930

GC01 RM45.500.075

TOTAL177.51

Table 9.0After Settlement (For 1000 TO of FG1) entries will be in the following sequence;Production VersionResourceTarget ValueActual ValueVariance

PO31GCPRODCGM1 P031 POWER15,050.000.0015,050.00

PO31GCPRODCGM1 P031 ADMINI500.000.00500.00

PO31GCPRODCGM1 P031 DEPRN1,000.000.001,000.00

PO31GCPRODCGM1 P031 LABOUR700.000.00700.00

PO31GCPRODCGM1 P031 MACOOH1,190.000.001,190.00

GC01 RM1149,540.000.00149,540.00

GC01 RM34,470.000.004,470.00

PO32GCPRODCGM2 P032 POWER0.0017,000.00(17,000.00)

PO32GCPRODCGM2 P032 ADMINI0.001,000.00(1,000.00)

PO32GCPRODCGM2 P032 DEPRN0.001,460.00(1,460.00)

PO32GCPRODCGM2 P032 LABOUR0.001,000.00(1,000.00)

PO32GCPRODCGM2 P032 MACOOH0.001,500.00(1,500.00)

GC01 RM20.00152,000.00(152,000.00)

GC01 RM40.005,500.00(5,500.00)

TOTAL(7,910)

Table 10.0Here 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 OrderExample:Example

Product : FG1Standard Cost Estimate Released for Production Version "PO31"

Table 11.0Material Recipee for FG1 (CK13N)Production VersionResourceTotal ValueFixed ValueQuantity

PO31POWER15.0515.050.035

PO31ADMINI0.500.001.00

PO31DEPRIN1.000.001.00

PO31LABOUR0.700.001.00

PO31MACOOH1.190.001.00

RM1149.5432.690.945

RM34.470.000.055

TOTAL172.4547.74

Figur 5.0Process Order is Created under production Version "PO32"When a Process order is created for Material FG1 system calculatesPlannedcost as follows;Quantity Produced -> 25,302.00 TOUse the same calculation logic used in Table 1.0;ResourceQuantityAmount

RM123,910.393,783,661.17

RM313,916.101,130,999.021

ADMIN25,302.0012,651.00

LABOR25,302.0017,711.40

DEPRIN25,302.0025,302.00

MACOOH25,302.0030,109.38

POWER885,570.00380,795.10

Table 12.0Planned Cost for Producing 25,302.00 TO of FG1

Figure 6.0Process Order has been created in Production version "PO32". During Confirmation System calculates actual cost as follows;

Figure 7.0d) Total Planned Quantity and Actual Produced Quantity DifferenceWe 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: FG1Total Process Order Quantity: 93,000 TOQuantity Produced: 8,865.00 TOThe total quantity produced is 8,865.00 TO against which the activities booked are;ActivityQuantityAmount

LABOR8,865 * 2 DH / TON17,730.00

DEPRIN8,865 * 1 DH / TON8,865.00

MACOOH8,865 * 0.74 DH / TON6,560.10

ADMIN8,865 * 1 DH / TON8,865.00

POWER8,865 * 0.03 * 1000265,950.00

TOTAL42,020.10

Table 13.0Since during final confirmation of the Order, re calculation of activities were bypassed (by user) system calculated the activities against the production order as below;ActivityQuantityAmount

LABOR93,000 * 2 DH / TON186,000.00

DEPRIN93,000 * 1 DH / TON93,000.00

MACOOH93,000 * 0.74 DH / TON68,820.00

ADMIN93,000 * 1 DH / TON93,000.00

POWER2,857,172.00 (User Entered)1,228,583.96

TOTAL440,820.00

Table 14.0A Variance of 440,820.00 - 42,020.00 = 39,880.00 TO was posted against all the activities

Figure 9.0Note: While doing final confirmation ensure that all the activity prices are recalculated as per the new output.e) Variance Due to Price changePrice change of material due to execution of standard cost estimate will be posted with document type "PR"3) How to reduce varianceFor reducing production order variancea) 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 periodicallyc) Confirm activity getting booked while doing final confirmationd) 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 StockVariances 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 2Step5:Record closing stock of Material (MB5B)Step6:Closing Stock Variance Allocation = Step5 * Step4Step7:Record COGM Quantity (MB5B with movement type 201 + 202 & 261 + 262)Step8:COGM Variance Allocation = Step7 * Step4Step9:Record COGS Quantity (MB5B with movement type 601 + 602)Step10:COGS Variance Allocation = Step9 * Step4MaterialVarianceStep 2Production QtyStep 3Variance / TonStep 4Closing Stock QtyStep 5Closing Stock VarianceStep 6COGM VarianceStep 8COGS QtyStep 9COGS VarianceStep 10

MATERIAL1V1P1VT1 = P1 / V1C1C1 * VT1COGM Qty * VT1S1S1 * VT1



Table 15.0Few Important Document Types Posted in Production Order Variance GL are;AB -> Reversal of Production Order SettlementSA -> Production Order SettlementPR -> Price ChangeWA -> Confirmation Reversal (If Price Changed after Confirmation)WL -> Sales Reversal (If Price Changed after Sales)

Figure 10.0Few Important Transaction CodesKKBC_ORDKOB1KOC4FBL3NCK13NCK11NCK24MB5BMB51Reference: Production Variance Analysis in SAP Controlling By John Jordan, Published by SAP Galileo PresAlso refer sAlso Refer:http://scn.sap.com/community/erp/manufacturing-pp/blog/2012/03/27/understanding-production-order-variance--part-2-price-difference-varianceUnderstanding Production Order Variance - Part 3 Price Difference VariancePosted byRanjit JohninSAP ERP Manufacturing - Production Planning (SAP PP)on Mar 27, 2012 6:24:14 AMinShare1Understanding Production Order Variance - Part 3 Price Difference VarianceAuthor: Ranjit Simon JohnIn 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 onstandard pricecontrol, 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 onMoving averageprice 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; LetThe 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 DifferenceLet 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 01.01.2012Raw Material Std. Quantity -> As per Released Standard Cost Estimate of Finished Good 1 (FG1), Released on 01.01.2012Material / OverHeadStd. RateStd. QuantityStd. Cost

Raw Material 1 (RM1)25.001.0025.00

Raw Material 2 (RM2)10.001.0010.00

Raw Material 3 (RM3)60.001.0060.00

Raw Material 4 (RM4)15.001.0015.00

ADMIN1.501.001.50

DEPRIN1.751.001.75

MACOOH1.251.001.25

LABOUR1.301.001.30

POWER0.431.000.43

Finished Good 1 (FG1)116.231.00116.23

Table 1.0Scenario 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 01.01.2012Raw Material Actual Rate -> As per Moving Average Price as on 01.02.2012Material / OverHeadStd. RateStd. QuantityStd. CostActual RateActual QuantityActual CostVariance

Raw Material 1 (RM1)25.001000.0025,000.0035.001000.0035,000.00(10,000.00)

Raw Material 2 (RM2)10.001000.0010,000.0015.001000.0015,000.00(5,000.00)

Raw Material 3 (RM3)60.001000.0060,000.0057.001000.0057,000.003,000.00

Raw Material 4 (RM4)15.001000.0015,000.0015.001000.0015,000.000.00

ADMIN1.501000.001,500.001.501000.001,500.000.00

DEPRIN1.751000.001,750.001.751000.001,750.000.00

MACOOH1.251000.001,250.001.251000.001,250.000.00

LABOUR1.301000.001,300.001.301000.001,300.000.00

POWER0.431000.00430.000.431000.00430.000.00

Finished Good (FG1)116.231000.00116,230.00128.231000.00128,230.00(12,000.00)

Table 2.0The 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 01.01.2012Semi Finished GoodStd. Quantity -> As per Released Standard Cost Estimate of Finished Good 2 (FG2), Released on 01.01.2012Material / OverHeadStd. RateStd. QuantityStd. Cost

Raw Material 1 (RM1)10.001.0010.00

Semi FInished Good 1 (SFG1)25.001.0025.00

Semi FInished Good 2 (SFG2)20.001.0020.00

ADMIN1.501.001.50

DEPRIN1.751.001.75

MACOOH1.251.001.25

LABOUR1.301.001.30

POWER0.431.000.43

Finished Good 2 (FG2)61.231.0061.23

Table 3.0Let us consider that Standard Cost Etimate for Semi Finished Good 1 ("SFG1") was released on 01.02.2012.New Standard Cost of SFG1 = 35.00Standard Cost Estimate for "FG2" was not run or released after "SFG1" cost estimate release.Planned and Actual Material Consumption for "FG2" (1000 TO);Semi Finished Good Std. Rate -> As per Released Standard Cost Estimate of Finished Good 2 (FG2) , Released on 01.01.2012Semi Finished GoodActual Rate -> As per Released Standard Cost Estimate of Semi Finished Good (SFG) , Released on 01.02.2012Material / OverHeadStd. RateStd. QuantityStd. CostActual RateActual QuantityActual CostVariance

Raw Material 1 (RM1)10.001000.0010,000.0010.001000.0010,000.000.00

Semi Finished Good 1 (SFG1)25.001000.0025,000.0035.001000.0035,000.00(10,000.00)

Semi Finished Good 2 (SFG2)20.001000.0020,000.0018.001000.0018,000.002,000.00

ADMIN1.501000.001,500.001.501000.001,500.000.00

DEPRIN1.751000.001,750.001.751000.001,750.000.00

MACOOH1.251000.001,250.001.251000.001,250.000.00

LABOUR1.301000.001,300.001.301000.001,300.000.00

POWER0.431000.00430.000.431000.00430.000.00

Finished Good 2 (FG2)61.231000.0061,230.0069.231000.0069,230.00(8,000.00)

Table 4.0Scenario 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 CancellationActual Quantity -> During Finished Good 3 (FG3) Confimration CancellationActual Cost -> During Finished Good 3 (FG3) Confimration CancellationMaterial / OverHeadStd. RateStd. Qty.Std. CostAct. RateAct. Qty.Act. CostVariance

Raw Material 1 (RM1)10.001000.0010,000.008.001000.008,000.002,000.00

Raw Material 2 (RM2)20.001000.0020,000.0022.001000.0022,000.00(2,000.00)

Raw Material 3 (RM3)25.001000.0025,000.0030.001000.0030,000.00(5,000.00)

ADMIN1.501000.001,500.001.501000.001,500.000.00

DEPRIN1.751000.001,750.001.751000.001,750.000.00

MACOOH1.301000.001,300.001.301000.001,300.000.00

LABOUR1.251000.001,250.001.251000.001,250.000.00

POWER0.431000.00430.000.431000.00430.000.00

Finished Good 3 (FG3)61.231000.0061,230.0066.231000.0066,230.00(5,000.00)

Table 5.0The GL Entries Posted during Confirmation of Finished Good 3 (Production);DebitCredit

Stock of Finished Good 3 (FG3)XXX

COGM of Finished Good 3 (FG3)XXX



Table 6.0

Figure 1.0The GL Entries Posted during Confirmation Cancellation:DebitCredit

COGM of Finished Good 3 (FG3)XXX

Stock of Finished Good 3 (FG3)XXX



Price Diff-Production Order VarianceXXX

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.

production variances in sap product costing

Documents

cost center planning

cost estimates

indirect cost

product cost collector

transaction codes

cost component split

c cost component

manufacturing order