Understanding Production Order Variance – Part 1

Managerial Accounting – Performance Evaluation

Through Standard Costs
Author: Ranjit Simon John
The ultimate aim of any company will be generating profit and increasing the profit margin. There are
manyinterpretations of the word profit. Time, resource, money, effort, effectiveness etc are in one
instance or the other equated to profit. We can say all these words can be consolidated and merged
into “Efficiency“. By measuring the efficiency of a firm we can calculate the profit and by improving
the efficiency the profit margin grows. Lets drill down to find the ingredients of “Efficiency“. Efficiency
focuses on the cost of accomplishing the task.
Lets explain “Efficiency” with an example. To evaluate the effectiveness of a product produced the
following questions has to be answered effectively;

1. Was the best cost obtained in purchasing raw materials.

2. Whether the specified quantity of raw material was used.
3. Was extra raw materials used
4. Was the specified amount and level of overheads used
5. Was the task completed within specified time

Measuring all these and confirming to the specified range will increase the effectiveness there by
increasing efficiency.
The importance of “STANDARDS“
Many finance managers argues on the point, actual price should only be followed while valuating
finished and semi-finished goods, not the standard price. The starting point of better controlling
begins with better “STANDARD“, let it be for price determination or for employee performance
evaluation.
In our daily life we are bound to meet certain standards; the food we eat, the mobile phone we use,
the car we drive, Government standards, organizational standards are few to be noted. All and
everything in our daily life has to meet certain “STANDARD“.
Difference between Standard Cost and Budget:
Standards and Budgets are essentially the same in concept. Both are predetermined costs and both
contribute significantly to management planning and control. A Standard is a Unit amount, whereas a
budget is a Total amount.
There are important accounting differences between budgets and standards. Budget data are not
journalized in cost accounting. Standard cost will be incorporated into accounting systems.
Why Standard Costs?
Standard Cost offer the following advantages;

 Facilitate Management Planning by establishing expected future costs

  Makes employees more “Cost Conscious”
 Useful for Setting “Selling Price” for finished goods
 Contribute to Management Control by providing a basis for evaluating the performance of
managers responsible for controlling costs.
 Performance may be evaluated through management by exception, as deviations (or
Variances) from standard are highlighted
 When standard costs are incorporated into the accounting system, they simplify the costing of
inventories and reduce clerical costs.
 Provides a clear overview of the entire process in the company.

Setting Standard Costs

Setting up standard cost is a highly difficult task. Standards may be set at one of two levels: Ideal
Standards or Normal Standards.
Ideal Standards represent the optimum level of performance under perfect operating conditions.
Normal Standards represent an efficient level of performance that is attainable under expected
operating conditions.
To be effective in controlling costs, standard costs need to be current at all times. Thus, Standards
should be under continuo’s review and should be changed whenever it is determined that the
existing standard is not good measure of performance.
To establish the standard cost of producing a product, it is necessary to establish standards for
each manufacturing cost element – direct materials, direct labour and manufacturing overhead.
The standard for each element is derived from a consideration of the standard price to be paid and
the standard quantity to be used.
The three Standard Cost calculation sections;
1) Direct Materials:
Direct Materials Price Standard
The direct materials price standard is the cost per unit of direct materials that should be
incurred. This standard should be the Cost of raw materials, which is frequently based on an
analysis of current purchase prices.
Item / Unit Price

Raw Material Purchase Price 2.70

Transportation Charge 0.20

Receiving and Handling 0.10

Standard Direct Material Price Per Ton 3.00

Direct Materials Quantity Standard

The direct materials quantity standard is the quantity of direct materials that’s should be used
per unit of finished goods. The standard is expressed as a physical measure. Consideration should
be given to both the quality and quantity of material required to manufacture the product. The
standard should include allowances for unavoidable waste and normal spoilage.
Item Quantity

Required Raw Material 3.50

Allowance for Waste 0.40

Allowance for Spoilage 0.10

Standard Direct Materials Quantity per Unit 4.00

The Standard Direct Material Cost Per Unit = Standard Direct Material Price x

Standard Direct Materials Quantity

2) Direct Labour
Direct Labour Price Standard
The direct labour price standard is the rate per hour that should be incurred for direct labor.
Item Price

Hourly Wage Rate 7.50

Cost of Living 0.25

Other benefits 2.25

Standard Direct Labour Rate / Hour 10.00

Direct Labour Quantity Standard

The direct labour quantity standard is the time that should be required to make one unit of the
product.
Item Quantity

Actual Production Time 1.50

Rest Periods and Clean-up 0.20

Setup and Downtime 0.30

Standard Direct Labour Hours Per Unit 2.00

The Standard Direct Labour Cost Per Unit = Standard Direct Labour Rate x

Standard Direct Labour Hours

3) Manufacturing Overhead
For manufacturing overhead, a Standard Predetermined Overhead rate is used in setting the
standard. This overhead rate is determined by dividing budget overhead costs by an expected
standard activity index. For example the index can be standard direct labour hours or standard
machine hours.
Budgeted Standard Overhead Rate

Overhead Amount Direct Per Direct

Costs Labour Hours Labour Hour

/ Standard Direct Labour Overhead Rate Per Direct Labour

Budgeted Overhead Costs Amount =
Hour Hour

Variable 79,200.00 26,400.00 3.00

Fixed 52,800.00 26,400.00 2.00

Total 132,000.00 26,400.00 5.00

The Standard Manufacturing Overhead Rate Per Unit = Predetermined Overhead

Rate x Direct Labor Quantity Standard

The total standard cost per unit is the sum of the standard costs of Direct Materials, Direct Labor
and Manufacturing Overheads.
Manufacturing Cost Elements Standard Quantity x Standard Price = Standard Cost

Direct Materials 4 TON 3 12.00

Direct Labor 2 Hours 10 20.00

Manufacturing Overheads 2 Hours 5 10.00

Total Manufacturing Cost 42.00

The standard cost provides the basis for determining variances from standards.
Determining Variances from Standards
One of the major management use of standard cost is the determination
of Variances. Variances are the differences between total actual costs and total standard cost.
The process by which the total difference between standard and actual results is analysed is known
as variance analysis. When actual results are better than the expected results, we have a
favourable variance (F). If, on the other hand, actual results are worse than expected results, we
have an adverse (A).
The following types of variance can be calculated;

 Planning variances

– Input price variance

– Resource-usage variance
– Input quantity variance

– Remaining input variance

– Scrap variance

 Production variances

– Input price
– variance
– Resource-usage variance
– Input quantity variance

– Remaining input variance

 Production variance of the period

– Input price

– variance
– Resource-usage variance

– Input quantity variance

– Remaining input variance
– Scrap variance

– Mixed-price variance

– Output price variance

– Lot size variance

 Total variance

– Input price

– variance
– Resource-usage variance

– Input quantity variance

– Remaining input variance
 – Scrap variance

– Mixed-price variance
– Output price variance

– Lot size variance

– Remaining variance

* In make-to-stock production, standard cost is calculated in the standard cost estimate for the
material. In sales-order-related production with a valuated sales order stock, standard cost is
determined using a predefined valuation strategy.

* During production, actual costs are collected on the order (product cost collector or manufacturing
order). The actual costs that are compared with the target costs are reduced by the work in process
and scrap variances (the result is called the net actual cost).
* We can determine the production variances of the period by comparing an alternative material
cost estimate with the (net) actual costs. This alternative material cost estimate can be the modified
standard cost estimate or the current cost estimate, for example.

Example: Let us assume that the standard manufacturing cost per ton of “Material A” is 42.00.
Production department has produced 100 Ton of the material. So Standard manufacturing cost =
100 * 42 = 42,000.00
In actual the consumption was as follows
Item Amount

Direct Materials 13,020.00

Direct Labor 20,580.00

Variable Overhead 6,500.00

Fixed Overhead 4,400.00

Total Actual Cost 44,500.00

Variance Posted

Actual Cost 44,500.00

Standrad Cost 42,000.00

Total Variance 2,500.00 (A)

Unfavourable and Favourable Variance

When actual costs exceed standard costs, the variance is unfavourable (A). Thus, the 2,500.00
variance is unfavourable. An unfavourable variance has a negative connotation. It suggests
that too much was paid for one or more manufacturing cost elements or that the elements
were used inefficiently.
If the actual costs are less than standard costs, the variance is favourable (F). A favourable
variance has a positive inference. It suggests efficiencies in incurring manufacturing costs and in
using direct materials, direct labour, and manufacturing overhead. Favourable variance can also
be by using inferior quality materials.
Analysing variances begins with a determination of the cost elements that comprise the
variance. For each Cost element a total variance is calculated. Then this variance is
analysed into a price variance and a quantity variance.

Each of the Variance are explained in detail below.

Direct Material Variance
For producing 1,000 Ton of Cement, company A used 4,200 Ton of raw material purchased at a
cost of 3.10 per unit. The total material variance is computed from the following formual;

The total material variance for Company A is 1,020 (A) (13,020 – 12,000). (Unfavourable
variance)
(4,200 x 3.10) – (4,000 x 3.00) = 1,020.00 (A)
The material price variance is computed from the formula given below

The material price variance for Company A is 420.00 (A) (13,020 – 12,600). (Unfavourable
Variance)
(4,200 x 3.10) – (4,200 x 3.00) = 420.00 (A)
The material quantity (usage) variance is determined from the following formula;

The material quantity unfavourable variance is 600 (A) (12,600 – 12,000). (Unfavourable
Variance)
(4,200 x 3.00) – (4,000 x 3.00) = 600 (A)
Item Variance

Material Price Variance 420

Material Quantity VAriance 600

Total Material Variance 1,020 (A)

Variance Matrix
Variance matrix can be used to determine and analyse a variance. When the matrix is used,
the formulas for each cost element ar computed first and then the variances.
Applying variance matrix:

Direct Labour Variance

The process of determining direct labour variance is the same as for determining the direct material
variance.
The total labour variance is obtained from the formula;
The total labour unfavourable variance is 580 (A) (20,850 – 20,000). (Unfavourable Variance)
(2,100 x 9.8) – (2,000 x 10.00) = 580 (A)
The labour price (or rate) variance is calculated using the formula;

The labour price variance is 420 (F) (20,580 – 21,000). (Favourable Variance)
(2,100 x 9.8) – (2,100 x 10.00) = 420 (F)
The labour quantity (or efficiency) variance is calculated using the formula;

The labour quantity variance is 1,000 (A) (21,000 – 20,000). (Unfavourable variance)
(2,100 x 10.00) – (2,000 x 10.00) = 1,000 (A)
The total direct labour variance can be derived from;
Item Variance

Labour Price Variance (420)

Labour Quantity Variance 1,000

Total Direct Labour Variance 580 (A)

Using the Variance Matrix;

Note: When idle time occurs the efficiency variance is based on hours actually worked (not
hours paid for) and an idle time variance (hours of idle time x standard rate per hour) is
calculated.
Manufacturing Overhead Variance
The computation of the manufacturing overhead variance is conceptually the same as the
computation of the materials and labor variances.
Total Overhead Variance
The total overhead variance is the difference between actual overhead costs and overhead costs
applied to work done. With standard costs, manufacturing overhead costs are applied to work in
process on the basis of the standard hours allowed for the work done. Standard hours
allowedare the hours that should have been worked for the units produced. In the example
company A’s standard hours allowed for completing work B is 2,000 and the predetermined
overhead rate is 5 per direct labor hour. Thus overhead applied is 10,000 (2,000 x 5)
Note: The actual hours of direct labor are not used in applying manufacturing overhead.
The formula for the total overhead variance is:

Thus total overhead variance for Comapny A is 900.

10,900 – 10,000 = 900
The overhead variance is generally analyzed through a price variance and a quantity variance.
The name usually given to the price variance is the overhead controllable variance, whereas
the quantity variance is referred to as the overhead volume variance.
Overhead Controllable Variance
The overhead controllable variance (also called the budget or spending variance) is the
difference between the actual overhead costs incurred and the budgeted costs for the standard
hours allowed. The budgeted costs are determined from the flexible manufacturing overhead
budget.
The budget for Company A is as follow;

As shown, the budgeted costs for 2,000 standard hours are 10,400 (6,000 variable and 4,400
fixed)
The formula for the overhead controllable variance is;

The overhead controllable variance for Company A is 500 (unfavourable).

10,900 – 10,400 = 500
Most controllable variance are associated with variable costs which are controllable costs. Fixed
costs are usually at the time the budget is prepared.
Overhead Volume Variance:
The overhead volume variance indicates whether plant facilities were efficiently used during the
period. The formula for calculating overhead volume variance is as follows;
Both the factors on this formula has been explained above. The overhead budgeted is the same
as the amount used in computing the controllable variance. Overhead applied is the amount used
in determining the total overhead variance.
In example for Company A the overhead volume variance (unfavourable) is 400
10,400 – 10,000 = 400
The budgeted overhead consist of variable and fixed.

A careful examination of this analysis indicates that the overhead volume variance relates
solely to fixed costs. Thus, the volume variance measures the amount that fixed overhead
costs are under -or over applied.
If the standard hours allowed are less than the standard hours at normal capacity, fixed overhead
costs will be under applied.
If production exceeds normal capacity, fixed overhead costs will be over applied.
An alternative formula for computing the overhead volume variance is shown below;

In example the normal capacity is 26,400 hours for the year or 2,200 hours for a month (26,400 /
12), and the fixed overhead rate is 2 per hour. Thus, the volume variance is 400 unfavourable;
2x (2,200 – 2,000) = 400

Overhead controllable variance 500

Overhead volume variance 400

Total Overhead Variance 900

Using Variance Matrix:

All variances should be reported to appropriate levels of management as soon as possible. The
sooner management is informed, the sooner problems can be evaluated and corrective actions
taken if necessary.
Cause of Variances
The causes of variance may relate to both external and internal factors.
Materials Variance
Labour Variance
Manufacturing Overhead Variance
Reference: “Accounting Principles” by Weygand. Kiso. Kell

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 having a tough time while
processing month-end activities. Production Order Variance posted against each process
orders will have to be examined, explained & investigated thoroughly. Major questions arising
will be;
  Origin of Variance
 How to Categorize the variance
 How to cut down the variance.
 Impact of variance on COGM, COGS & Closing Stock.

Answering these will be really tough.

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

centre 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 centre is credited. The credit key defines which cost centre 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, labour, 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:

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 centres to production cost centres
during assessment and then onto production order during activity confirmation.
 3.2.1 Assessment

Period-end assessments move costs from overhead cost centres to production cost

centres.

3.2.2 Activity Confirmation:

When production order activities are confirmed, the production or product cost collector
is debited, and the production cost centre is credited. There are no FI postings during activity
confirmation.

3.3 Primary Credits

Primary Credits occur when production orders deliver Finished / Semi finished good
into inventory.

As finished goods are delivered from manufacturing order into inventory, an inventory
balance sheet account is debited, and profit and loss production output account is credited.
Because there is a primary cost element corresponding to the production output account, a
CO object is also credited. The finished goods are delivered from a production order, so the
system automatically chooses the production order or product cost collector to receive the
primary credit.

The credit value is calculated by multiplying the finished goods standard price by the
quantity delivered to inventory.

Debit Credit

Stock of Finished Good XXX

COGM of Finished Good XXX

Raw Material Consumption XXX

Stock of Raw Material XXX

Table 2.0

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

Debit 100 Labor

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 Centre 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 Centre 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 analyse 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 analyse 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

 Item Resource Total Value Fixed Value Quantity Unit

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 analysing 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 analysing 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.

Cost Elements Std. Rate Std. Qty. Std. Cost Actual Rate Actual Qty. Actual Cost Variance
(Figure 2.0) (Figure 2.0) (Figure 4.0) (Figure 4.0)
Total value / Per Ton Qty * FG Std Qty * Std Act Cost / Act Std Cost – Act
RAWMATERIAL1 49,663.00 496,630.00
Qty Prd. Qty Rate Qty Cost

Total value / Per Ton Qty * FG Std Qty * Std Act Cost / Act Std Cost – Act
RAWMATERIAL2 3,411.00 89,824.45
Qty Prd. Qty Rate Qty Cost

Total value / Per Ton Qty * FG Std Qty * Std Act Cost / Act Std Cost – Act
RAWMATERIAL3 5,798.00 104,162.8
Qty Prd. Qty Rate Qty Cost

Total value / Per Ton Qty * FG Std Qty * Std Act Cost / Act Std Cost – Act
RAWMATERIAL4 1,003.00 209,858.91
Qty Prd. Qty Rate Qty Cost
 Cost Elements Std. Rate Std. Qty. Std. Cost Actual Rate Actual Qty. Actual Cost Variance
(Figure 2.0) (Figure 2.0) (Figure 4.0) (Figure 4.0)
Total value / Per Ton Qty * FG Std Qty * Std Act Cost / Act Std Cost – Act
RAWMATERIAL5 9.00 517.57
Qty Prd. Qty Rate Qty Cost

Total value / Per Ton Qty * FG Std Qty * Std Act Cost / Act Std Cost – Act
RAWMATERIAL6 21.00 735.00
Qty Prd. Qty Rate Qty Cost

Total value / Per Ton Qty * FG Std Qty * Std Act Cost / Act Std Cost – Act
Labor 59,900.00 119,800.00
Qty Prd. Qty Rate Qty Cost

Total value / Per Ton Qty * FG Std Qty * Std Act Cost / Act Std Cost – Act
Depriciation 59,900.00 59,900.00
Qty Prd. Qty Rate Qty Cost

Total value / Per Ton Qty * FG Std Qty * Std Act Cost / Act Std Cost – Act
Administration 59,900.00 59,900.00
Qty Prd. Qty Rate Qty Cost

Total value / Per Ton Qty * FG Std Qty * Std Act Cost / Act Std Cost – Act
MACOOH 59,900.00 44,326.00
Qty Prd. Qty Rate Qty Cost

Total value / Per Ton Qty * FG Std Qty * Std Act Cost / Act Std Cost – Act
POWER 1,609,780.00 692,205.4
Qty Prd. Qty Rate Qty 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 Std. Qty. Std. Cost Actual Rate Actual Qty. Actual Cost Variance
(Figure 2.0) (Figure 2.0) (Figure 4.0) (Figure 4.0)
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

 Cost Elements Std. Rate Std. Qty. Std. Cost Actual Rate Actual Qty. Actual Cost Variance
(Figure 2.0) (Figure 2.0) (Figure 4.0) (Figure 4.0)
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

RMV4 RAWMATERIAL4 48,310.09 Category IV.3 + Category IV.1 C2

RMV5 RAWMATERIAL5 6,670.43 Category IV.3 + 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

Plan Target Input Target Actual Actual Input Actual Variance

Cost Elements Variance
Price Qty Cost Price Qty Cost Class

RAWMATERIAL1 10.00 48,519.00 485,190.00 10.00 49,663.00 496,630.00 C1 11,440.00

RAWMATERIAL2 24.4262 3,653.90 89,251.00 26.3338 3,411.00 80,824.45 C2 573.45

RAWMATERIAL3 17.7670 6,169.70 109,617.00 17.9653 5,798.00 104,162.80 C2 (5,454.25)

RAWMATERIAL4 179.5833 1,437.6 258,169.00 209.2312 1,003.00 209,858.91 C2 (48,310.09)

 Plan Target Input Target Actual Actual Input Actual Variance
Cost Elements Variance
Price Qty Cost Price Qty Cost Class

RAWMATERIAL5 60.00 119.80 7,188.00 57.5078 9.00 517.57 C2 (6,670.43)

RAWMATERIAL6 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 (128,190.27)

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)

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

 Production Version Resource Total Value Quantity

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)

 Production Version Resource Target Value Actual Value Variance

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

Production Variance / Closing Stock Closing Stock COGM COGS COGS

Material Variance
Qty Ton Qty Variance Variance Qty Variance
Step 2
Step 3 Step 4 Step 5 Step 6 Step 8 Step 9 Step 10
VT1 = P1 / COGM Qty *
MATERIAL1 V1 P1 C1 C1 * VT1 S1 S1 * VT1
V1 VT1

VT2 = P2 / COGM Qty *

MATERIAL2 V2 P2 C2 C2 * VT2 S2 S2 * VT2
V2 VT2

VT3 = P3 / COGM Qty *

MATERIAL3 V3 P3 C3 C3 * VT3 S3 S3 * VT3
V3 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

CK24

MB5B

MB51

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

 Material / OverHead Std. Rate Std. Quantity Std. Cost

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), Released on 01.01.2012
Material / OverHead Std. Rate Std. Quantity Std. Cost

Raw Material 1 (RM1) 10.00 1.00 10.00

 Material / OverHead Std. Rate Std. Quantity Std. Cost

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) , Released on 01.01.2012
Semi Finished Good Actual Rate -> As per Released Standard Cost Estimate of Semi Finished
Good (SFG) , Released on 01.02.2012
Material / 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

Raw Material Consumption XXX

Stock of Raw Material 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

Stock of Raw Material XXX

Raw Material Consumption 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.