One of the most misunderstood aspects in all of SAP is how to analyze production variances. This is partly because SAP’s method of Product Cost Controlling is different from other accounting software systems, in that production costs are passed through the P&L as well as the Balance Sheet. And also, because production activity (Labor, Machine Time, Overhead) is tracked using Secondary Cost Elements, which are not part of your typical Financial Statements. Even some of the most seasoned cost accountants are flummoxed with how the manufacturing information is represented in Financial and Management Accounting, and how to measure price and efficiency variances. To put it simply, Production Variance Analysis involves three steps:
1. Creating a standard cost estimate, which calculates the expected cost to manufacture an assembly.
2. Collecting the Actual manufacturing costs on a manufacturing order (production order/process order /product cost collector).
3. Calculating the Variance, which is the difference between:
actual costs: components, labor, overhead
actual credits: value of finished goods manufactured.
If you would like to learn more, and untangle the web that is Variance Analysis in SAP, watch this Webcast with FI/CO expert and Best-Selling Author, John Jordan of ERP Corp to learn:
- Basics of SAP product costing
- Object credits and debits
- Variance configuration
- Variance categories
- Period-end processing
- Variances and SAP S/4HANA Margin Analysis
Watch The Recorded Webcast:
Q&A
Q: What is the purpose of a cost object:
A: To send, receive, collect, and analyze costs.
Q: What is the difference between input quantity and resource usage variance?They seem similar?
A: Input quantity variance is a result of the difference between plan and actual quantities.
Resource-usage variance occurs as a result of substituting components. For example:
Part "A" has a plan quantity of X and an actual quantity of zero.
Part "B" has a plan quantity of zero and an actual quantity of X.
Q: When does a production order receive the credit?
A: During goods receipt into inventory of the assembly at standard.
Q: When does a production order receive material debits?
A: When components are issued from inventory to the production line.
Q: How many variance categories are there?
A: Eight: 4 input and 4 output.
Q: Are mix price cost estimates only possible if you use the same material SKU?
A: Yes
Q: In the case of Mixed costing if we are using SFG or FG or RM at split valuation but with respect to not doing the mixed costing the variance ends up in resource usage variance is there some way we can tackle this problem without doing mixed costing ??
A: Try to avoid split valuation and mixed costing because it gets complicated.
Q: Our business wants to re-cost every month, so each SKU has 12 different std costs per year, doesn't this continue to change the budget for each re-costing process?
A: As we discussed during the webcast it's a trade-off. Yes, it's standard SAP, but you have to ask what are you trying to achieve.
Q: Could you elaborate on the difference between the Plan cost estimate vs. the Target cost estimate?
A: The plan value is the quantity you plan to manufacture. The preliminary cost estimate is used to calculate the target.
Q: Is it possible to calculate the variance if we only work with ML? The cost calculated by ML is released every month and this is the standard cost of the next month
A: Even if you're using ML you must still carry out period-end processing including variance calculation.
Q: Is there a way to analyze input price variance based on actual cost from the material ledger?
A: You must carry out period-end processing before ML.
Q: Not very relevant but how variances meet the statutory reporting?
A: Variances are for internal reporting only, however that may be different since variances are mapped to GL accounts in Margin Analysis.
Q: Can you configure separate account determinations for each input and output variance?
A: You can map them to different GL accounts in Margin Analysis.
Q: Our business wants to analyze variances by cost element (cost element group) and production order joined together. When we use KKBC_HOE_H we can't have both, it's one or the other. Do you know if there is a way to do it?
A: variances are mapped to GL accounts in Margin Analysis.
Q: Is the actual cost component split a good functionality Can we use it without doing the CKMLCP Actual costing? There are lots of std reports available can you shed some light on it as per your experience??
A: You must carry out actual costing to use the actual cost component split
Q: What are the benefits of implementing Material Ledger for costing and variance analysis?
A: Variance Analysis allows you to analyze your production variances and improve your production efficiency. ML distributes your differences such as PPV and exchange rate up through the actual BOM to finished goods.
Q: If you use ML, will we still need/use Variance Analysis? The reason for this question is, I have read that if you use Actual Costing in ML, the Variances get rolled up into Actual Cost.
A: Yes, you first need to calculate variances to be able to roll them up in ML.
Q: Most probably everyone's issue that while doing var calculations if the orders are huge it takes a long time to execute. Any suggestions for improving the performance of var calculations and settlement?
A: Try setting the deletion flag on old production orders.
Q: Can you map your variances by cost component in S/4HANA?
A: You can map them to different GL accounts in Margin Analysis
Q: Does variance analysis work the same with product cost by order (instead of using product cost collectors with product cost by period)?
A: Yes.
Q: What is the industry standard way to analyze variances by using SAP standard report or Z_Reports created by the company?
A: Standard report.
Q: Why is WIP PnL Account not created as a Cost Element?
A: A cost element generally causes a posting from FI to CO. We're posting WIP from CO to FI, so we don't want the posting to then post back again to CO.
Q: Is it possible to capture the Actual Component Scrap?
A: Scrap is not a cost component.
Q: What should be the status of a Production Order to calculate Variance?
A: Technically complete or Delivered.
Q: Does the new costing model in S4Hana display marginal cost per unit using actual settled costs of an order or does the data model need an enhancement /customization?
A: We only covered variance analysis in the webcast.