The target cost versions allow you to calculate variances with different cost comparisons in parallel. Target version 0 is the version with a standard setting. The target costs are calculated based on the standard material cost estimate (the so-called standard price), which has been released in the material master record of the product. Due to the valuation of the material in Financial Accounting (FI) based on the standard cost estimate, the variance calculated in target version 0 has to be settled to FI. All other variance calculations are additional information.
The standard system uses the following target cost versions:
Target cost version 0 (total variance):
The total variance equals the order balance. For this version, choose actual costs as the control costs, and the standard cost estimate as the target costs.
Target cost version 1 (production variance):
For this version, choose actual costs as the control costs, and planned costs as the target costs, which are calculated based on the preliminary cost estimate of the cost object. You cannot calculate variances on the output side of the cost object, because the valuation of the material in stock is based on the standard cost estimate for the material, which is not taken into account in this target version.
Target cost version 2 (planning variance):
With target cost version 2, the costs in the preliminary order cost estimate are interpreted as control costs. For this version, choose planned costs as control costs, and the current standard cost estimate as target costs. You cannot calculate target-actual-variances.
Target cost version 3 (production variance of the period):
You compare the planned costs of the period, calculated on the basis of an alternative material cost estimate (such as a modified standard cost estimate), with the actual costs of the period on the basis of the yield delivered to inventory in the period. The base quantity for the variance calculation is the yield. For this version, choose actual costs as the control costs, and the alternative material cost estimate as the target costs.
Note
The definition of target version 0 is fixed, the variances calculated in these target versions relates to the valuation of material in stock. Besides target version 3, you can define more target versions like target version 3 for comparison of alternative production opportunities. Although target version 0 is named "total variances", it does not mean that the sum of variances calculated with target version 1 and target version 2 are in total the variances calculated with target version 0. The name of target version 0 defines the comparison of Material Cost Estimate against the actual costs of the cost object.
In the Product Cost by Period scenario, work in process (WIP) and the scrap variances are always deducted from the actual costs.
The scrap variation is calculated by valuating the unplanned scrap quantities with the target costs minus the planned scrap costs. The unplanned scrap quantity is the difference between the actual scrap quantity of the operation and its target scrap quantity. In the variance calculation, target cost versions are mainly used to control the type of variance (total variance, production variance, or planning variance). They can also be used to valuate the scrap variances.
Variance Calculation – Variance Categories
The following are examples of variance categories:
Input price variances:
Raw material 1 was valuated at a price of 10 in the standard cost estimate. When the material is withdrawn from inventory, the goods movement is valuated at 11. Price control specifies that valuation is carried out at the moving average price. This results in a price variance of 1.
Input quantity variance:
A machine time of 15 minutes was planned but 17 minutes were confirmed. The activity price for the machine time is 5 per minute. This results in a quantity variance of 10.
Resource-usage variance:
Raw material 2 is used instead of raw material 1. The costs for both raw materials are reported as resource-usage variances.
Remaining input variance:
The material overhead is higher than planned as the price for material 1 is changed. The difference between the planned and actual material overhead expense is reported as a remaining input variance.
Mixed-price variance:
If the standard price of a material was calculated using multiple procurement alternatives (mixed cost estimate), subsequent production without variances will still have a difference to the standard price. This is the mixed-price variance.
Lot size variance:
If another quantity was used for production than previously generated in the product costing, the fixed costs are adjusted proportionally with another quantity, that is, the fixed costs per piece change. This is the lot size variance.
Output price variance:
The material is transferred to inventory at a price other than the standard price (such as a moving average price). The difference is determined as an output price variance.
Remaining variance:
If the system cannot determine the target costs, it will determine only remaining variances. This might cause anomalies by rounding up or down the costs.
Addendum – Assembly Scrap and Operation Scrap
A distinction is made between the following types of scrap:
Assembly Scrap:
Assembly scrap is the percentage of an assembly that does not meet defined quality standards. For example, if the assembly scrap rate is 25% and the required yield is 100 units, production must start with 125 units.
Operation Scrap:
Operation scrap is the percentage output of an operation that does not meet defined quality standards. For example, if the operation scrap rate is 20% and the operation quantity is 125 units, 20% or 25 units will be scrap.
Addendum – Planned Scrap
The planned scrap rate reflects the planned material requirements and the planned internal activities, and is included in the standard cost estimate of the material.
The characteristics of different types of scrap are as follows:
- Component scrap refers to materials that are defaulted before they enter the production process. Component scrap increases the quantity of input materials. Planned component scrap is taken into account in the standard cost estimate and, therefore, affects the standard price. Actual variances are considered as the input quantity variances.
- Planned operation scrap is the scrap that is expected to be incurred in an operation.
- Assembly scrap can be calculated by the system on the basis of operation scrap. Assembly scrap increases the planned order quantity and the quantity of the input materials. For example, if the assembly scrap for a material is 56.25% and you create a production order for the material with a planned order quantity of 100 units, the system increases the planned order quantity to 156.25 units. If you do not want the assembly scrap to affect the input quantities of certain input materials, set the Net indicator in the bill of material (BOM) for these materials and enter the operation scrap in the BOM.
Variance Calculation – Scrap Variance (1)
The features of the scrap variance are as follows:
- The scrap variance is the value of the scrap variance quantity.
- The scrap variance quantity is the difference between the target scrap quantity (planned scrap quantity converted to yield) and the actual scrap quantity (confirmed scrap quantity).
- The scrap variance quantity is valuated at target cost reduced by the planned scrap cost.
- The formula for calculating the target scrap quantity is 850 units = 80% (yield), 20% scrap = x. Therefore, (850 x 0.2) / 0.8 = 212.5.
Variance Calculation – Scrap Variance (2)
Variance Calculation – Lot Size Variance
Lot size variances can be calculated for all the target cost versions that report variances on the output side.
Lot size variances are calculated as follows: lot size variance = lot-size-independent target costs x (1 - control quantity / planned quantity).
Lot size variances are only calculated if the planned quantity is not equal to the confirmed quantity (the delivered quantity).
In the example provided in the figure, the costs that are independent of the lot size (such as the setup and teardown costs) are 40.00 per unit.
The standard price for a finished product as calculated in the standard cost estimate is 120.00. The costs for 10 units of finished product delivered to inventory in the period were updated to the product cost collector. The actual cost is 840.00. The goods receipts are valuated at 1200.00 (quantity delivered to inventory multiplied by the standard price as calculated in the standard cost estimate). The target costs, however, are 10 x 40.00 for materials, 10x 40.00 for internal activities, and 1 x 40.00 for setup, which is equal to 840.00. The difference between the target costs and credit is the lot size variance.
Variance Calculation – Mixed-Price Variance
If you want to perform mixed costing in Product Cost Planning, you must create a procurement alternative for each production version and then define a mixing ratio. The mixed cost estimate calculates a mixed price. This price can be written to the material master as the standard price.
Mixed-price variances arise when the system updates the mixed price as the standard price in the material master, and valuates the stock with it. The mixed-price variance results from the difference between the target credit (actual quantity x standard cost of procurement alternative) determined in the variance calculation process, and the actual credit posted at the time of the goods receipt (actual quantity x standard price). If you do not activate the mixed-price variance field in the variance variant, mixed-price variances are reported as output price variances.
