Dear All, presenting below information aiming to simplify the concept of variances and their calculation bases so it will be easy to understand the different types of variance which occurs in manufacturing process.
Variance calculation provides the difference between “Actual Costs” and “Target Costs” posted on order.
There three types of commonly found variances in manufacturing process –
Total variance generally found on the order because of difference between “Actual Debit” and “Actual Credits” which is delivered to inventory. The important points to consider here “Total Variances” are the only variances which are “relevant for settlement”.
Total variances are calculated with help of target cost version “0”.
Production variance is always the difference between the debit actual costs consumed on order and target cost which is based on the preliminary cost estimate and quantity delivered to inventory.
Production variance is calculated with the help of target cost version 1. These type variances are like “For Your Information” purpose only and are not relevant for settlement activity.
Planning variance generally arises because of the difference between plan costs on an order and standard cost based on cost estimate. Planning variances are generally computed based on Target Cost Version “2”. Again these kinds of variance are not meant for settlement and for analysis purpose only.
Example can be used here is – BoM and Routing chosen for production and costing use are different and this results in planning variance.
Input Variance | Output Variance |
Input Price Variance | Mixed Price Variance |
Resource Usage Variance | Output Price Variance |
Input Quantity Variance | Lot-Size Variance |
Remaining Input Variance | Remaining Variance |
Scrap Variance |
Let’s see all variance categories explanation one by one –
Input Variance –
Variances reported on the input side of manufacturing orders from business transaction like goods issue, general ledger and overhead calculation etc.
Input price variance occurs because of changes in prices which is planned price and actual price.
Let’s say material is valued $20 at the time of costing run. Afterwards prices changes of material and at the time of goods issue for a production order material is valued at $30. The variance report will show input price variance as $10.
This kind of variance generally occurs when the substitute component is used instead of planned one.
When the planned material is not and alternate material is used in production process the resource usage variance is seen because of cost difference of both materials.
It was planned to use material X in production process at value of $35 and due to shortage of material X, material Y is issued for production order which is valued at $40. Now due to the issuing of material Y instead of X the resource usage variance will be $5.
Input quantity variance occurs because of difference between the planned and actual quantity and activities consumed.
The activity of with the time of 20 minutes was planned and actual time confirm against production order operation is 30 minutes and activity rate for this is $10 per minute then input quantity variance is $100.
When available variance on order is not possible to assign to any of the categories above mentioned system treats this as a remaining input variance.
The possible reason to get the remaining input variance is overheads rates are changed meanwhile.
A component is valued at $200, and associated material overhead is valued at $10 (10% of $200), during the initial costing. The material price subsequently changes, and during goods issue to a production order, it is valued at $220.
During period-end overhead calculation, actual overhead is posted as $22 (10% of $220). Variance analysis will report an input price variance of $20 due to the component price change, and it will report a remaining input variance of $2 due to the overhead change.
A scrap variance is kind of variance which is calculated based on difference between the planned scrap and actual scrap.
Actual scrap posting occurs at the time confirming the activity and mostly if actual scrap quantity is as per the planned scrap quantity then there is no scrap variance.
Output Variance –
Output variance can be seen on the order because of less or high quantity is delivered on the order or the delivered quantity is valuated unlikely.
Mixed price variance occurs when material is valuated based on using mix cost estimate. The target cost of credit in this case is dependent on confirmed quantity of standard cost from procurement alternative and actual cost is depend on actual quantity confirmed on standard price.
Procurement Alternatives are stored in Table CKMLMV001
Generally this is the difference of planned credit of Actual Quantity X Standard Cost of procurement alternatives defined and Actual Credit of Actual Quantity X Standard Price.
Suppose if you have standard price based on production version X and production version Y.
Production Version X – 200
Production Version X – 300
The cost estimate is release with 50:50 ratios at 250
If the actual production happens based on production version X the mixed price variance will be 200 – 250 = -50
If the actual production happens based on production version Y the mixed price variance will be 300 – 250 = +50
The output price variance occurs because if standard price is changed after the credit posted to stock and before calculation of variances on production order.
The standard price of the material is marked at $85 and system delivers to stock 20 quantities for a production order at a standard price. Now if new value is calculated at $100, the system calculates the target cost $2000 and in this situation the output price variance will be $300.
The lot size variance arises due the difference between the lot size used in manufacturing order and lot size at the time of standard cost estimate.
Suppose user has setup cost $2000 for 20 HRS which is fixed in nature. Now while actual manufacturing process the lot size used is 200 and standard lot size is 150 then we may see lot size variance as a $1000.
Remaining variances occurs on order when system is not able to assign variance to any categories.
Remaining variance also considered when target cost of the material is not present in system as like when standard cost estimate does not available in system or goods receipt against a production order has not been performed.
Thanks all for reading this, I will appreciate your comments / guidance notes and suggestions on this.
Regards,
Pankaj Bhalerao.
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