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Product variances explained

Can you tell me where I can find GOOD documentation on the explanation of production variances? I have looked at...

all the SAP help docs and still can't figure out why most of the variances happen. I have to put together a user training material on this topic. Any suggestions would be great.


Unfortunately, there's not a lot of good documentation out there on production variances. This is no doubt related to customization options specific to each install. But I'll take a stab at production variances from a generic level, and maybe this will get you started on your training material.

Simply put, production variances in SAP are warning flags that one or more of your standard costs are not right, "right" being defined as "equal to actual cost".

Variances are based around the standard values that are set up in the Material Master file. These standard values represent what it "should" cost to produce (or purchase) a unit of the product. Variances are calculated automatically when settlement jobs are ran in SAP.

Here are a couple of scenarios that show how variances can be used as analytical tools:

Purchase Price Variances: These are caused by a difference between the standard cost in the MM file and the actual price on the purchase order.

For example, let's say a blue widget has a standard cost in SAP of $5.00. The Purchasing Manager hears about a going out of business sale at Widget World and creates a purchase order for 100 blue widgets at $4.00 each.

The SAP entries associated with the goods receipt for the 100 blue widgets from Widget World will look like this:

Debit Inventory $500 (100 blue widgets @ $5 each)
Credit Accounts Payable $400 (100 blue widgets at $4 each)
Credit Price Variance $100 (100 blue widgets at $1 each)

The question to ask whenever dollars appear in the Price Variance account is: Should I adjust my standard cost to be more in line with reality, or is this a one-time event that will not repeat itself?

Production Variances: Theoretically, no production facility in SAP should create either revenue or cost of goods sold dollars. SAP uses a "Production Credit at Standard" account to credit the production facility for the costs it incurs in producing the widgets. The debit side of the settlement entry will either be inventory or cost of goods sold. In this example, the costs of producing a widget are $2 direct labor, $2 materials, and $1 manufacturing overhead, for a total production cost of $5.

Let's say one widget was produced during the month to keep things simple. When that unit is backflushed in SAP, the following accounting entry is created:

Debit Inventory $5
Credit Production at Standard $5

Looking exclusively at the production facility's profit center, its P & L statement for the month would show:

Labor $2
Materials $2
Depreciation on the Mfg Plant $1
Total Costs $5

Production at Standard ($5)

For a Net Income/Loss of zero.

If our labor estimate used to generate our inventory standard value was wrong, the P&L might look like this:

Labor $3
Materials $2
Depreciation on the Mfg Plant $1
Total Costs $6

Production at Standard ($5)

For a Net Loss of $1, which indicates something in our process did not perform as expected. Then, management would look closely at the labor to see if the high cost was due to a one-time event, or if the standard should be adjusted so it is more realistic.


This was last published in May 2002

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