Understanding Production Order Variance Part 1

SAP ERP Manufacturing - Production
Planning (SAP PP): Understanding

Production Order Variance - Part 2 The SAP
Perspective
Posted by Ranjit John 13 Mar, 2012
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 monthend 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 has come
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.
Generated by Jive on 2014-12-13+01:00

1
SAP ERP Manufacturing - Production Planning (SAP PP): Understanding Production Order Variance - Part 2
The SAP Perspective
Figure 1.0
Let us divide the process as given below;
1) Initial Planning
2) Cost Estimates
3) Actual Posting
4)
Period End Processing
1) Initial Planning:
Forecasting the sales for future. Sales and Operation Planning, Long term planning, Cost center planning
should be well executed by the management.
2) Cost Estimates:
The major points to be considered here are;
a) a) Master Data:
a.1) Material Master:
All the required information to manage a material.
Transaction Codes: MM01, MM02, MM03
a.2) Bill of Material (BOM):
Structured hierarchy of raw materials necessary to create a Finished / Semi Finished Good.
Transaction Codes: CS01, CS02, CS03
a.3) Routing:
List of tasks containing standard activity times required to perform operations to create a
Finished / Semi Finished Good.
Transaction Codes: CA01, CA02, CA03

2
The SAP Perspective
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:

3
The SAP Perspective
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
Raw Material Consumption
Credit
XXX
Stock of Raw Material
XXX
Table 1.0
3.2 Secondary Cost:
The costs in CO are allocated from overhead cost centers to production cost centers during
assessment and then onto production order during activity confirmation.
3.2.1 Assessment
Period-end assessments move costs from overhead cost centers to production cost centers.
3.2.2 Activity Confirmation:
When production order activities are confirmed, the production or product cost collector is
debited, and the production cost center is credited. There are no FI postings during activity confirmation.
3.3 Primary Credits
Primary Credits occur when production orders deliver Finished / Semi finished good into inventory.
As finished goods are delivered from manufacturing order into inventory, an inventory balance sheet
account is debited, and profit and loss production output account is credited. Because there is a primary cost
element corresponding to the production output account, a CO object is also credited. The finished goods are
delivered from a production order, so the system automatically chooses the production order or product cost
collector to receive the primary credit.
The credit value is calculated by multiplying the finished goods standard price by the quantity delivered
to inventory.
Debit
Stock of Finished Good
XXX
COGM of Finished Good

Raw Material Consumption
Credit
XXX
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.

4
The SAP Perspective
Debit
100 Raw Material

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 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.

5
The SAP Perspective
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

6
The SAP Perspective
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
POWER
12.90
12.90
0.030
MWH
ADMINI
1.00
0.00
1.00
TO
DEPRIN
1.00
0.00
1.00
TO
LABOUR
2.00
0.00
1.00
TO
MACOOH
0.74
0.00
1.00
TO
RAWMATERIAL1 8.10
0.00
0.81
TO
RAWMATERIAL2 1.49
0.00
0.061
TO
RAWMATERIAL3 1.83
0.00
0.103
TO
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

7
The SAP Perspective
Process order No for SFG1 is 15000035
Variance Posted against the Process Order for the month is 128,190.87 AED
After technically completing ("TECO") the process order & before executing costing run check for the variance
in transaction code KO88 (CO88 - Collective) in Test Run mode.
For analyzing the variance in detail we will use transaction codes KKBC_ORD & KOB1.
Let me explain difference between KKBC_ORD and KOB1.
KKBC_ORD is used for analyzing single order. Planned and Actual cost details relating to the production order
will be recorded in KKBC_ORD.
KOB1 you can execute for single as well as bulk order. KOB1 provides the "Actual" values (cost & quantity) of
raw materials and overheads used for the production of the material.
KKBC_ORD
Figure 3.0
KOB1

8
The SAP Perspective
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. Cost
Std. Rate
Std. Qty.
(Figure 2.0) (Figure 2.0)
Actual
Rate
Variance
Actual Qty. Actual
(Figure 4.0) Cost
(Figure 4.0)
RAWMATERIAL1
Total value / Per Ton Qty Std Qty *
Qty
* FG Prd.
Std Rate
Qty
Act Cost /
Act Qty
49,663.00
496,630.00
Std Cost Act Cost
RAWMATERIAL2
Qty
* FG Prd.
Std Rate
Qty
Act Cost /
Act Qty
3,411.00
89,824.45
Std Cost Act Cost
RAWMATERIAL3
Qty
* FG Prd.
Std Rate
Qty
Act Cost /
Act Qty
5,798.00
104,162.8
Std Cost Act Cost
RAWMATERIAL4
Qty
* FG Prd.
Std Rate
Qty
Act Cost /
Act Qty
1,003.00
209,858.91
Std Cost Act Cost
RAWMATERIAL5
Qty
* FG Prd.
Std Rate
Qty
Act Cost /
Act Qty
9.00
517.57
Std Cost Act Cost

9
The SAP Perspective
RAWMATERIAL6
Qty
* FG Prd.
Std Rate
Qty
Act Cost /
Act Qty
21.00
735.00
Std Cost Act Cost
Labor

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

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

Qty
* FG Prd.
Std Rate
Qty
Act Cost /
Act Qty
59,900.00
59,900.00
Std Cost Act Cost
MACOOH

Qty
* FG Prd.
Std Rate
Qty
Act Cost /
Act Qty
59,900.00
44,326.00
Std Cost Act Cost
POWER

Qty
* FG Prd.
Std Rate
Qty
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. Cost
Std. Rate
Std. Qty.
(Figure 2.0) (Figure 2.0)
Actual
Rate
Variance
Actual Qty. Actual
(Figure 4.0) Cost
(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
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
33.49
59,900.00
FINISHED
GOOD
80,504.6
2,006,051.00
TOTAL
128,190.87
Table 5.0

10
The SAP Perspective
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
Cost
Elements
Plan
Price
Target
Input Qty
Target
Cost
RAWMATERIAL1
10.00
48,519.00
RAWMATERIAL2
24.4262
Actual
Input Qty
Actual
Cost
485,190.00 10.00
49,663.00
496,630.00 C1
11,440.00
3,653.90
89,251.00
26.3338
3,411.00
80,824.45
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)
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
1,797,000.00772,710.00 0.43
C1
(80,504.6)
TOTAL
(128,190.27)
0.43
Actual
Price
1,609,780.00692,205.4
Variance
Class
C2
Variance
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)

11
The SAP Perspective
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

12
The SAP Perspective
PO32
GCPRODCGM2 P032
ADMINI
1.00
1.00
PO32
GCPRODCGM2 P032
DEPRN
1.46
1.00
PO32
GCPRODCGM2 P032
LABOUR
1.00
1.00
PO32
GCPRODCGM2 P032
MACOOH
1.50
1.00
GC01 RM2
152.00
0.930
GC01 RM4
5.50
0.075
TOTAL
177.51
Table 9.0
After Settlement (For 1000 TO of FG1) entries will be in the following sequence;
Production
Version
Resource
Target Value
Actual Value
Variance
PO31
GCPRODCGM1
P031 POWER
15,050.00
0.00
15,050.00
PO31
GCPRODCGM1
P031 ADMINI
500.00
0.00
500.00
PO31
GCPRODCGM1
P031 DEPRN
1,000.00
0.00
1,000.00
PO31
GCPRODCGM1
P031 LABOUR
700.00
0.00
700.00
PO31
GCPRODCGM1
P031 MACOOH
1,190.00
0.00
1,190.00
GC01 RM1
149,540.00
0.00
149,540.00
GC01 RM3
4,470.00
0.00
4,470.00
PO32
GCPRODCGM2
P032 POWER
0.00
17,000.00
(17,000.00)
PO32
GCPRODCGM2
P032 ADMINI
0.00
1,000.00
(1,000.00)
PO32
GCPRODCGM2
P032 DEPRN
0.00
1,460.00
(1,460.00)
PO32
GCPRODCGM2
P032 LABOUR
0.00
1,000.00
(1,000.00)
PO32
GCPRODCGM2
P032 MACOOH
0.00
1,500.00
(1,500.00)
GC01 RM2
0.00
152,000.00
(152,000.00)
GC01 RM4
0.00
5,500.00
(5,500.00)
TOTAL
(7,910)

13
The SAP Perspective
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

14
The SAP Perspective
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

15
The SAP Perspective
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)

16
The SAP Perspective
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 Variance / Closing

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

17
The SAP Perspective
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-productionorder-variance--part-2-price-difference-variance
61667 Views Tags: sap, sap_netweaver_platform, enterprise_portal_(ep), erp, business_process_expert,
business_process_management, enterprise_data_warehousing/business_warehouse, mobile,
sap_process_integration_(pi), sap_developer_network, sap_business_suite, financial_excellence,
emerging_technologies, ranting, public_sector, service-oriented_architecture, business_process_modeling,
business_rules_management, enterprise_performance_management, utilities, fica, mill_products,
enterprise_resource_planning, sap_erp_manufacturing_production_planning
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?
thanks a lot

18
The SAP Perspective
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.

19
The SAP Perspective
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-3preparing-the-cost-sheet
http://scn.sap.com/community/erp/financials/blog/2012/04/02/erp-post-implementation-challanges-part-2reconcilling-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:
Dr: COGM offset
20

20
The SAP Perspective
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.
Thanks,

21
The SAP Perspective
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
it was a very usefull blog i learnt many things from this and thanks for sharing your knowledge.

22
The SAP Perspective
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 response 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

23
The SAP Perspective
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...
Ranjit John in response to Krishna Achanta on page 25

24
The SAP Perspective
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 COPC, 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.
Also can you help me for product cost planning?

25
The SAP Perspective
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.
RK
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.

26

Understanding Production Order Variance Part 1

Uploaded by

Document Information

Original Description:

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

Understanding Production Order Variance Part 1

Uploaded by

Copyright:

Available Formats

SAP ERP Manufacturing - Production

Planning (SAP PP): Understanding

Generated by Jive on 2014-12-13+01:00

Period End Processing

Generated by Jive on 2014-12-13+01:00

Generated by Jive on 2014-12-13+01:00

Stock of Raw Material

COGM of Finished Good

Stock of Raw Material

Generated by Jive on 2014-12-13+01:00

100 Raw Material

(250) Finished Good

Period End Processing

5.1 The three common types of variance calculation are as follows;

Generated by Jive on 2014-12-13+01:00

Variance can be calculated using the formula;

Generated by Jive on 2014-12-13+01:00

Generated by Jive on 2014-12-13+01:00

Generated by Jive on 2014-12-13+01:00

Std Cost Act Cost

Std Cost Act Cost

Std Cost Act Cost

Std Cost Act Cost

Std Cost Act Cost

Generated by Jive on 2014-12-13+01:00

Std Cost Act Cost

Total value / Per Ton Qty Std Qty *

Std Cost Act Cost

Depriciation Total value / Per Ton Qty Std Qty *

Std Cost Act Cost

AdministrationTotal value / Per Ton Qty Std Qty *

Std Cost Act Cost

Total value / Per Ton Qty Std Qty *

Std Cost Act Cost

Total value / Per Ton Qty Std Qty *

Std Cost Act Cost

Generated by Jive on 2014-12-13+01:00

Generated by Jive on 2014-12-13+01:00

Process Order has been Created Under production version PO32

Generated by Jive on 2014-12-13+01:00

Generated by Jive on 2014-12-13+01:00

Generated by Jive on 2014-12-13+01:00

8,865 * 0.74 DH / TON

8,865 * 0.03 * 1000

Generated by Jive on 2014-12-13+01:00

93,000 * 0.74 DH / TON

2,857,172.00 (User Entered)

Generated by Jive on 2014-12-13+01:00

Production Variance / Closing

Generated by Jive on 2014-12-13+01:00

Generated by Jive on 2014-12-13+01:00

Generated by Jive on 2014-12-13+01:00

Generated by Jive on 2014-12-13+01:00

Generated by Jive on 2014-12-13+01:00

Generated by Jive on 2014-12-13+01:00

Generated by Jive on 2014-12-13+01:00

Generated by Jive on 2014-12-13+01:00

Generated by Jive on 2014-12-13+01:00

Generated by Jive on 2014-12-13+01:00

You might also like