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former_member183818
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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 / OverHeadStd. RateStd. QuantityStd. Cost
Raw Material 1 (RM1)25.001.0025.00
Raw Material 2 (RM2)10.001.0010.00
Raw Material 3 (RM3)60.001.0060.00
Raw Material 4 (RM4)15.001.0015.00
ADMIN1.501.001.50
DEPRIN1.751.001.75
MACOOH1.251.001.25
LABOUR1.301.001.30
POWER0.431.000.43
Finished Good 1 (FG1)116.231.00116.23

Table 1.0

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 / OverHeadStd. RateStd. QuantityStd. CostActual RateActual QuantityActual CostVariance
Raw Material 1 (RM1)25.001000.0025,000.0035.001000.0035,000.00(10,000.00)
Raw Material 2 (RM2)10.001000.0010,000.0015.001000.0015,000.00(5,000.00)
Raw Material 3 (RM3)60.001000.0060,000.0057.001000.0057,000.003,000.00
Raw Material 4 (RM4)15.001000.0015,000.0015.001000.0015,000.000.00
ADMIN1.501000.001,500.001.501000.001,500.000.00
DEPRIN1.751000.001,750.001.751000.001,750.000.00
MACOOH1.251000.001,250.001.251000.001,250.000.00
LABOUR1.301000.001,300.001.301000.001,300.000.00
POWER0.431000.00430.000.431000.00430.000.00
Finished Good (FG1)116.231000.00116,230.00128.231000.00128,230.00(12,000.00)

Table 2.0

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 / OverHeadStd. RateStd. QuantityStd. Cost
Raw Material 1 (RM1)10.001.0010.00
Semi FInished Good 1 (SFG1)25.001.0025.00
Semi FInished Good 2 (SFG2)20.001.0020.00
ADMIN1.501.001.50
DEPRIN1.751.001.75
MACOOH1.251.001.25
LABOUR1.301.001.30
POWER0.431.000.43
Finished Good 2 (FG2)61.231.0061.23

Table 3.0

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 / OverHeadStd. RateStd. QuantityStd. CostActual RateActual QuantityActual CostVariance
Raw Material 1 (RM1)10.001000.0010,000.0010.001000.0010,000.000.00
Semi Finished Good 1 (SFG1)25.001000.0025,000.0035.001000.0035,000.00(10,000.00)
Semi Finished Good 2 (SFG2)20.001000.0020,000.0018.001000.0018,000.002,000.00
ADMIN1.501000.001,500.001.501000.001,500.000.00
DEPRIN1.751000.001,750.001.751000.001,750.000.00
MACOOH1.251000.001,250.001.251000.001,250.000.00
LABOUR1.301000.001,300.001.301000.001,300.000.00
POWER0.431000.00430.000.431000.00430.000.00
Finished Good 2 (FG2)61.231000.0061,230.0069.231000.0069,230.00(8,000.00)

Table 4.0

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 / OverHeadStd. RateStd. Qty.Std. CostAct. RateAct. Qty.Act. CostVariance
Raw Material 1 (RM1)10.001000.0010,000.008.001000.008,000.002,000.00
Raw Material 2 (RM2)20.001000.0020,000.0022.001000.0022,000.00(2,000.00)
Raw Material 3 (RM3)25.001000.0025,000.0030.001000.0030,000.00(5,000.00)
ADMIN1.501000.001,500.001.501000.001,500.000.00
DEPRIN1.751000.001,750.001.751000.001,750.000.00
MACOOH1.301000.001,300.001.301000.001,300.000.00
LABOUR1.251000.001,250.001.251000.001,250.000.00
POWER0.431000.00430.000.431000.00430.000.00
Finished Good 3 (FG3)61.231000.0061,230.0066.231000.0066,230.00(5,000.00)

Table 5.0

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

DebitCredit
Stock of Finished Good 3 (FG3)XXX
COGM of Finished Good 3 (FG3)XXX
Raw Material ConsumptionXXX
Stock of Raw MaterialXXX

Table 6.0

Figure 1.0

The GL Entries Posted during Confirmation Cancellation:

DebitCredit
COGM of Finished Good 3 (FG3)XXX
Stock of Finished Good 3 (FG3)XXX
Stock of Raw Material XXX
Raw Material ConsumptionXXX
Price Diff-Production Order VarianceXXX

Table 7.0

b.2) Finished / Semi Finished Good Price Difference

          When a cost estimate for a finished / semi finished good is released and the higher level product cost estimate is not updated.

36 Comments
muhamed_faisal
Active Participant
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Hi Ranjit

thanks again for sharing valuable information

Expecting more .....!!!!!!!!!!!!!!!

Faisal

former_member183818
Contributor
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Thank You Muhamed,

Kindly rate the article

Former Member
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Hi,

Thanks for sharing such a good information.

former_member183818
Contributor
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Thank You

former_member184670
Active Participant
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Dear Ranjit,

Wonderful article and Thanks for sharing.. :smile: . Keep posting!!

Regards,

Sundhu

former_member183818
Contributor
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Thank you Sundhu

Former Member
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Dear Ranjit,

Nice and well composed article. Thanks for sharing,

With warm regards,

Sunil Deshpande

former_member183818
Contributor
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thank u sunil.please check my first blog understanding production order variance part 1

Former Member
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Thanks Ranjit,

Nice article to know in depth.

Thanks,

Taral Patel

former_member183818
Contributor
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Thank you Taral, Kindly rate the articles.

former_member184066
Participant
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Good Work

Former Member
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Hi Ranjith,

Good one------

Former Member
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Dear Simon,

Thanks a million helping me trough the process of costing. I am getting my concepts clear.I am reading this material several times. Thanks a lot for the valuable information and I really appreciate your help!

Thank you,

Padmaja

mohan_madaiah
Active Participant
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Hi Ranjit,

thanks a lot for very nice doc with full of infomation with easy to understand concepts.

thanks

Mohan 

mohan_madaiah
Active Participant
0 Kudos

gud one...

thanks

Mohan

Former Member
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Hi Sir,

Its very good article , Thanks a lot.

-Mahesh Amale

former_member183818
Contributor
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Thank You 🙂

Former Member
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HI ,Sir

       It is good material , thanks you so much,

   davis

former_member183818
Contributor
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Thank you. Great to know that the effort helped.

Former Member
0 Kudos

Good Work

former_member183818
Contributor
0 Kudos

Thank You

0 Kudos

Thank you

Former Member
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Hi Sir,

Its very good article , Thanks a lot.

I have one question.What are the setting/steps we have to carried out to activate/or to see the Variances in Cost Analysis of Production Order.

Nitin

former_member183818
Contributor
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Thank you Nithin. Setting to see variance?

Kindly rate the article

Former Member
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nice article, thanks a lot

former_member183818
Contributor
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Thank You Ikram

Former Member
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Hi Ranjit,

U have worked on detailed level,

It is valuable guide,

Devendra

former_member183818
Contributor
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Thank you

venkatesh27_arya
Explorer
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Thanks Mr.Ranjit for sharing this article. It helped me to understand better on this topic.

former_member183818
Contributor
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Thanks guys for the encouragement. Happy to hear that my efforts helped.

Former Member
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Thank you Ranjith. Very good information.

former_member183818
Contributor
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Thanks

krishnakishore_gaddam
Contributor
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Hi Ranjit

Very useful information for COPC consultant
crosbyjeffery
Member
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Hello,

We mainly run into issue where the process order is tied to a certain closing date for the processes issued. We are finding we may issue the process after this date - leading to a timing variance.

What would you suggest and or recommend to reduce poor planning of when the process will close and its effect on creating timing variances due to the closure date issued on the process order.

 
lokesh0310
Explorer
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Thank you for sharing.

Good explanation with examples.
b_amarendra
Explorer
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Hi sir,

It is very valuable information which is your elaborated but I have one dought when we do settlement to material in which table we can get that particular batch final cost once settlement done actually we are using price control V in materials Fg, SFG I have checked in coep table but settled cost is not there multiple batches could you kindly please tell me the solution I want give the  logic to abaper I hope you give solution.

Thanks you.
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