Evaluating Production Variances in Margin Analysis

Objectives

After completing this lesson, you will be able to:

  • Evaluate Production Variances in Margin Analysis

Production Variance Calculation

To understand the origin of production variances, we first start with an overview of the underlying production process for discrete manufacturing industries and the variance categories.

The image describes the production process and cost accounting related to a production order. When a production order is created, planned costs are calculated based on the planned quantity. As the process progresses, actual costs are recorded, including material costs from goods issues, production costs from work processes, and additional individual costs. The actual yield quantities produced are posted as goods receipt, resulting in a cost credit for the production order. Once the last final confirmation is made and the actual yield quantity is posted, the order is considered complete. Finally, the system calculates target costs and determines target-actual variances across different categories, such as quantity and price variances for materials and cost center activities.

The figure above gives you an overview of the production process.

  1. The production order type controls whether the order is also a cost object and is therefore used for the cost object invoice. In this example, this is true. When the production order is created, the planned costs are calculated based on the planned production quantity in the order.
  2. The material withdrawal is booked. Multiplying the quantities of raw materials posted as goods issue by their prices leads to actual material costs.
  3. The result of the completed production steps is recorded in the confirmation of the production order. The actual times recorded for the work processes of the production order are multiplied by the cost center services assigned to the work processes, resulting in the production costs.
  4. The recorded actual yield quantities that have been produced are posted as goods receipt. This leads to a cost credit posting for the production order as a cost object.
  5. In addition, further individual costs can be added to the order as a debit entry. For example, if additional third-party services had to be ordered.
  6. In the scenario used here, the so-called order-related product cost controlling, the goods receipt of the last final confirmation for the production order means that the order is completed. The system sets the status DELIVERED in the order when the actual yield quantity has been posted a goods receive to the warehouse.
  7. When the deviation determination is carried out, the system calculates the target costs. These results are calculated by multiplying the total recorded actual yield quantity by the calculated manufacturing costs per piece. Fixed plan costs are equal to fixed target costs, but the variable plan cost per piece is multiplied with the yield quantity.
  8. The target-actual variances between the target costs and the actual costs are calculated according to different variance categories. These include, for example, quantity variances and price variances of the materials used as well as cost center activities.

When the cost object is created, a preliminary cost estimate is performed automatically to calculate the planned costs for the cost object. The following types of costs are incurred at different stages of production and processing:

  • Actual costs are incurred when materials from stock or activity types of cost centers are consumed.
  • Primary costs can be incurred directly from the other system components to the production order.
  • Process costs can be incurred by allocating process quantities using the process template.

Because the related costs are posted to the production order at the same time as the consumption of materials and activity, production order costs can be analyzed and reviewed at any time.

When the produced goods are delivered to stock, the cost object is credited with the value of the delivered quantity, and the goods are capitalized on in the inventory. Depending on the method of price control, this can result in a revaluation of the finished goods inventory. In this example, you use a standard price-controlled material. SAP recommends the valuation of material stock using the material cost estimate for self-finished goods.

With the final confirmation of the production order in a make-to-stock scenario and cost-object method Product Cost by Order, the yield quantity debits the cost object and credits the goods in stock. After finishing the production process or at the end of the period, the variances for the production order are calculated and settled to FI and Margin Analysis.

Production Process in a Make-to-Stock Scenario

Let's now see an example for the production process in a make-to-stock scenario. To calculate the deviations, the production order is not only a logistics object but also a cost object. The order type for which the production order is created controls this. In its capacity as a cost object, all planned and actual costs are assigned to the production order. This can also be used to calculate production deviations.

We create the production order directly without deriving it from production planning.

A production order refers to a material number, plant, and an order type. Here, the material FG1_CP, plant 1010 and order type YBM5. The order type contains the parameters for controlling the processes with the production order, for example, that the production order is also a cost object and therefore bears all planned and actual costs.

The image is showing the Production Order Change app with the order ID 2000020 highlighted.

It is also controlled by the used order type (YBM3) whether Production variances are calculated automatically or by running an app. In our example, the variances are not calculated automatically (event-based posting), but by running an app.

The image shows the section for costing with the option Event-Based Posting highlighted.

A settlement rule for the production order is automatically generated which defines that the confirmed yield quantity multiplied with the released standard price will be automatically credited the cost object production order when the confirmed yield quantity will be posted as goods receipt.

The image is showing a screenshot of the section with the Posting Rule.

When performing the plan-to-product process the posting of the goods issue is or one needed raw material increased by one pc. This leads to a quantity variance when determining variances from the production order.

The image displays the Goods Issue Order app with the order 2000020 selected.

The following figure shows the confirmation for the production order and operation No.  0020. Of the 10 pieces planned for the product FG1_CP, 10 pieces are confirmed as yield quantity and 0 piece as scrap quantity.

The figure shows the confirmation for the production order and operation No.  0020. Of the 10 pieces planned for the product FG1_CP, 10 pieces are confirmed as yield quantity and 0 piece as scrap quantity.

The confirmation to operation 0020 is marked as final confirmation. This means that any remaining actual costs on the production order are calculated as variances and not as work in progress (WIP).

To be able to calculate the variances, you must post the good receipt regarding the confirmed yield quantity in the final confirmation of the production order. With this final delivery of yield quantity, the status of the production order will be set to GLFL (Delivered). Only with status, it is possible to calculate variances. The system will also create automatically the settlement rule, when the variances of the production order will be settled to Financial Accounting.

The image displays the Goods Receipt Order app with the order 2000020 selected.

As the previous figure shows, the reported actual quantity of 10 pieces is posted as a goods receipt. The production order is thus credited by 10 pieces multiplied by the calculated manufacturing costs per piece. An actual balance that remains on the production order is variance. The following figure shows the accounting document with the posting of the goods receipt of the actual yield quantity.

The figure shows the accounting document with the posting of the goods receipt of the actual yield quantity.

Because of the final confirmation and the goods receipt of the actual good quantity, the status DLV (delivered) and the indicator for Delivery Completed are automatically set in the production order. The production order is now completed, and the actual cost balance is interpreted as a variance.

The image displays the Production Order Change app with the field Delivery Completed highlighted.

Now let’s calculate the variances of the production order.

The figure shows that the consolidated variance categories are 52,62 EUR.

The figure above shows that the consolidated variance categories are 52,62 EUR. This is named Price Difference of Self-Production. With a click on the line and the selection of Cost Elements the variance categories could be analyzed.

The image shows the Variancce Calculation app with the list of the cost elements.

You can click on each line of the variance calculation list to analyze, which variance category has been calculated.

The figure shows the variances for the raw material RM2_CP of 1, - EUR is a variance category Quantity Variance.

The figure above shows the variances for the raw material RM2_CP of 1, - EUR is a variance category Quantity Variance. This corresponds to the goods issue posting for the production order, in which a goods issue quantity of 21 pieces was posted for the raw material instead of the planned 20 pieces.

Calculating the price difference of EUR 52.62 relieves the debit on the production order and can be tracked and evaluated on the reports in Margin Analysis.

The figure shows the detail list of settled values.
The figure shows that the price difference from the production order has been settled to Profitability Segment (PSG).

The previous figure shows that the price difference from the production order has been settled to Profitability Segment (PSG).

The debit and credit postings on the production order result in a difference of EUR 52.62, which corresponds to the price difference of the cost object. This can be evaluated on the line-item report in Margin Analysis.

The figure is showing the line items for the margin anaylsis.

The evaluation of the variance categories is presented in the next lesson with the Product Profitability with Variances report.

This report can be used to evaluate the influence production deviations have on the profitability of the products.

Note
Scrap variances are not available in SAP Cloud yet. 

Product Profitability with Variances Report

With this app, you can analyze contribution margins for individual products, along with related product information and available profitability characteristics. The app allows you to drill down on fixed and variable costs, based on your standard cost component split. You can also report on the product variances, the billed quantity, and the margin per unit.

Line items are only included in the calculation if the journal entry is assigned to a profitability segment and the Product Sold field is filled.

Values are displayed in the global currency.

Alternatively, you can also display values in the company code currency for the selected measures. To do this, proceed as follows:

Note
This app only supports production variances with the event-based variance category split. For non-event-based variance category split, please use the production cost report in the Production Cost Analysis app.

You can analyze the different variance categories in Margin Analysis using the report Product Profitability with Production Variances.

The image displays the Product Profitability with Production Variances Report.

The calculation and billing of all deviation categories are still under development in SAP S/4HANA. Profitability accounting will increasingly benefit from the analysis of variances and their impact on results in market areas.

Using this Margin Analysis report, you can analyze the measures in both global currency and company code currency.

The image displays the Product Profitability with Production Variances Report with Measures selected.

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