Hello SAP Consultants,
In this blog, I have given detailed explanation of end to end flow of Production order ( Product Cost By order) with WIP and Variance. This blog will give you better idea about when WIP and Variance is calculated and posted. This will help you when business asks you to provide the details about WIP and Variance details related to Production Order.
Product Cost by Order is a cost accounting method in SAP used to calculate and track the costs related to production orders. It accumulates all actual costs incurred during production (materials, labor, overheads) on a specific production order.
Creation of Production Order
- Process: A production order is created to manufacture a product.
Note - No accounting entry is posted at this stage.
Release of Production Order
- The order is released to begin execution. Reservations for materials are triggered.
Note - No accounting entry is posted at this stage.
Goods Issue to Production Order
- Raw materials are issued from inventory to the production order for manufacturing.
- Accounting Entries:
- Debit: Raw Consumption Account (e.g., Raw Material Consumption A/c) – GBB/VBR in OBYC.
- Credit: Material Stock Account (Raw Material Inventory A/c) – BSX in OBYC.
Goods Receipt from Production Order
- Finished or semi-finished goods are received into inventory after production is complete.
- Accounting Entries:
- Debit: Material Stock Account (Finished/Semi-Finished Goods Inventory A/c) – BSX in OBYC.
- Credit: COGM (Offsetting Entry, e.g., Cost of Goods Produced A/c) – GBB/AUF in OBYC.
WIP vs. Variance Calculation: Understanding the Basics
In case of Product Cost by Order, system can calculate either WIP (Work in Progress) or Variance, but never both simultaneously for a single order. The calculation depends on the status of the production order:
- Order Status Not TECO or DEL:
Only WIP is calculated but actual posting to Finance will be done Order settlement is done at the month end. - Order Status Changed to TECO (Technically Complete) or DEL (Delivered):
WIP is reversed, and Variance is calculated but FI posting will be done at the time of settlement during month end.
How Does the System Calculate WIP and Variance?
The key formula used for calculation is:
GR Value - (GI Value + Activity Value + Overheads)
Where:
- GR (Goods Receipt) Value: Value of materials received against the order.
- GI (Goods Issue) Value: Value of goods issued.
- Activity Value: Cost of activities performed.
- Overheads: Allocated overhead costs.
- WIP represents the value of production that is still in progress.
- Variance represents the difference between actual debits and credits on the order.
Accounting Entries in Production Order for WIP and Variance
- WIP Entries (During Production)
At the first settlement stage, when the order is still in progress, the accounting entry typically is:
- Dr: WIP Inventory Account (Balance Sheet)
- Cr: Change in WIP Account (Profit & Loss)
- Variance Entries (After Order Completion)
Once the order is Technically Complete (TECO) or Delivered (DLV), variance is calculated and settled with two accounting documents. WIP will be reversed and Variance document will be posted.
WIP reversal accounting document:
- Dr: Change in WIP Account
- Cr: WIP Inventory Account
Variance accounting document:
Case 1- Actual cost is less than the planned cost.
- Dr: Cost of Goods Manufactured (COGM) Account
- Cr: Production Variance Account
Case 2 – Actual cost is more than the planned cost.
- Dr: Production Variance Account
- Cr: Cost of Goods Manufactured (COGM) Account
Note: Both debit and credit for variance postings are in the Profit & Loss account, which means variance does not affect overall profitability directly.
Important Clarifications
- WIP or Variance depends solely on order status, unlike product cost by period, where both can occur in a product cost collector.
- WIP account should be zero. If it is not, this means production is still ongoing, and the stock is still at the work-in-progress stage.
- Target Cost is calculated as the goods received from the production order quantity multiplied by the material standard price. It used as a basis for variance calculation.
Understanding Cost Types in Production Orders
Cost Type | Formula or Explanation |
Target Cost | GR Quantity × Material Standard Price |
Plan Price | Planned Order Quantity × Planned Price |
Actual Cost | Actual Quantity × Actual Price (available post month-end) |
Net Actual Cost | Total Actual Cost – WIP |
Production Order Settlement Process
Settlement ensures all costs are properly accounted for and the order balance reaches zero. This includes:
- Confirming the order (Status: CNF)
- Posting Goods Receipt (GR) against the order (Status: DLV)
- Marking the order as Technically Complete (Status: TECO) if no jobs are pending
I hope this blog will help you to understand the Production order ( Product Cost by Order) process and how WIP and Variance is calculated and posted. Please provide your feedback.
Thank you
Vijaykumar
