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https://blogs.sap.com/2012/10/23/understanding-production-order-variance-part-1-performance-evaluvation-through-standard-costs/ 1/18
11/20/2018 Understanding Production Order Variance – Part 1 Performance Evaluvation Through Standard Costs | SAP Blogs
Measuring all these and confirming to the specified range will increase the
effectiveness there by increasing efficiency.
The importance of “STANDARDS“
Many finance managers argues on the point, actual price should only be
followed while valuating finished and semi finished goods, not the standard
price. The starting point of better controlling begins with better “STANDARD“,
let it be for price determination or for employee performance evaluation.
In our daily life we are bound to meet certain standards; the food we eat, the
mobile phone we use, the car we drive, Government standards, organizational
standards are few to be noted. All and everything in our daily life has to meet
certain “STANDARD“.
Difference between Standard Cost and Budget:
Standards and Budgets are essentially the same in concept. Both are
predetermined costs and both contribute significantly to management planning
and control. A Standard is a Unit amount, whereas a budget is a Total amount.
https://blogs.sap.com/2012/10/23/understanding-production-order-variance-part-1-performance-evaluvation-through-standard-costs/ 2/18
11/20/2018 Understanding Production Order Variance – Part 1 Performance Evaluvation Through Standard Costs | SAP Blogs
https://blogs.sap.com/2012/10/23/understanding-production-order-variance-part-1-performance-evaluvation-through-standard-costs/ 3/18
11/20/2018 Understanding Production Order Variance – Part 1 Performance Evaluvation Through Standard Costs | SAP Blogs
Item Quantity
2) Direct Labor
Direct Labor Price Standard
The direct labor price standard is the rate per hour that should be incurred
for direct labor.
Item Price
Item Quantity
https://blogs.sap.com/2012/10/23/understanding-production-order-variance-part-1-performance-evaluvation-through-standard-costs/ 4/18
11/20/2018 Understanding Production Order Variance – Part 1 Performance Evaluvation Through Standard Costs | SAP Blogs
Item Quantity
3) Manufacturing Overhead
For manufacturing overhead, a Standard Predetermined Overhead rate is
used in setting the standard. This overhead rate is determined by dividing
budgetd overhead costs by an expected standard activity index. For example
the index can be standard direct labor hours or standard machine hours.
Hours
Standard
The total standard cost per unit is the sum of the standard costs of Direct
Materials, Direct Labor and Manufacturing Overheads.
Manufacturing Cost Standard Quantity Standard Price = Standard
Elements x Cost
https://blogs.sap.com/2012/10/23/understanding-production-order-variance-part-1-performance-evaluvation-through-standard-costs/ 5/18
11/20/2018 Understanding Production Order Variance – Part 1 Performance Evaluvation Through Standard Costs | SAP Blogs
Elements x Cost
The standard cost provides the basis for determining variances from
standards.
Determining Variances from Standards
One of the major management use of standard cost is the determination of
Variances. Variances are the differences between total actual costs and total
standard cost. The process by which the total difference between standard
and actual results is analysed is known as variance analysis. When actual
results are better than the expected results, we have a favourable variance
(F). If, on the other hand, actual results are worse than expected results, we
have an adverse (A).
The following types of variance can be calculated;
Planning variances
– Resource-usage variance
– Scrap variance
Production variances
– Input price
– variance
– Resource-usage variance
https://blogs.sap.com/2012/10/23/understanding-production-order-variance-part-1-performance-evaluvation-through-standard-costs/ 6/18
11/20/2018 Understanding Production Order Variance – Part 1 Performance Evaluvation Through Standard Costs | SAP Blogs
– Input price
– variance
– Resource-usage variance
– Scrap variance
– Mixed-price variance
Total variance
– Input price
– variance
– Resource-usage variance
– Scrap variance
– Mixed-price variance
– Remaining variance
https://blogs.sap.com/2012/10/23/understanding-production-order-variance-part-1-performance-evaluvation-through-standard-costs/ 7/18
11/20/2018 Understanding Production Order Variance – Part 1 Performance Evaluvation Through Standard Costs | SAP Blogs
* During production, actual costs are collected on the order (product cost
collector or manufacturing order). The actual costs that are compared with the
target costs are reduced by the work in process and scrap variances (the
result is called the net actual cost).
Example: Let us assume that the standard manufacturing cost per ton of
“Material A” is 42.00. Production departement has produced 100 Ton of the
material. So Standard manufacturing cost = 100 * 42 = 42,000.00
In actual the consumption was as follows
Item Amount
Variance Posted
https://blogs.sap.com/2012/10/23/understanding-production-order-variance-part-1-performance-evaluvation-through-standard-costs/ 8/18
11/20/2018 Understanding Production Order Variance – Part 1 Performance Evaluvation Through Standard Costs | SAP Blogs
The total material variance for Comapny A is 1,020 (A) (13,020 – 12,000).
(unfavourable variance)
(4,200 x 3.10) – (4,000 x 3.00) = 1,020.00 (A)
The material price variance is computed from the formula given below
The material price variance for Company A is 420.00 (A) (13,020 – 12,600).
(unfavourable Variance)
(4,200 x 3.10) – (4,200 x 3.00) = 420.00 (A)
The material quantity (usage) variance is determined from the following
formula;
https://blogs.sap.com/2012/10/23/understanding-production-order-variance-part-1-performance-evaluvation-through-standard-costs/ 9/18
11/20/2018 Understanding Production Order Variance – Part 1 Performance Evaluvation Through Standard Costs | SAP Blogs
Item Variance
Variance Matrix
Variance matrix can be used to determine and analyze a variance. When the
matrix is used, the formulas for each cost element ar computed first and
then the variances.
Applying variance martix:
The labor price variance is 420 (F) (20,580 – 21,000). (Favourable Variance)
(2,100 x 9.8) – (2,100 x 10.00) = 420 (F)
The labor quantity (or efficiency) variance is calculated using the formula;
https://blogs.sap.com/2012/10/23/understanding-production-order-variance-part-1-performance-evaluvation-through-standard-costs/ 10/18
11/20/2018 Understanding Production Order Variance – Part 1 Performance Evaluvation Through Standard Costs | SAP Blogs
Note: When idle time occurs the efficiency variance is based on hours
actually worked (not hours paid for) and an idle time variance (hours of
idle time x standard rate per hour) is calculated.
Manufacturing Overhead Variance
The computation of the manufacturing overhead variance is conceptually the
same as the computation of the materials and labor variances.
Total Overhead Variance
The total overhead variance is the difference between actual overhead costs
and overhead costs applied to work done. With standard costs, manufacturing
overhead costs are applied to work in process on the basis of the standard
hours allowed for the work done. Standard hours allowed are the hours that
should have been worked for the units produced. In the example company
A’s standard hours allowed for completing work B is 2,000 and the
predetermined overhead rate is 5 per direct labor hour. Thus overhead applied
is 10,000 (2,000 x 5)
https://blogs.sap.com/2012/10/23/understanding-production-order-variance-part-1-performance-evaluvation-through-standard-costs/ 11/18
11/20/2018 Understanding Production Order Variance – Part 1 Performance Evaluvation Through Standard Costs | SAP Blogs
Note: The actual hours of direct labor are not used in applying manufacturing
overhead.
The formula for the total overhead variance is:
As shown, the budgeted costs for 2,000 standard hours are 10,400 (6,000
variable and 4,400 fixed)
The formula for the overhead controllable variance is;
https://blogs.sap.com/2012/10/23/understanding-production-order-variance-part-1-performance-evaluvation-through-standard-costs/ 12/18
11/20/2018 Understanding Production Order Variance – Part 1 Performance Evaluvation Through Standard Costs | SAP Blogs
Most controllable variance are associated with variable costs which are
controllable costs. Fixed costs are usually at the time the budget is prepared.
Overhead Volume Variance:
The overhead volume variance indicates whether plant facilities were
efficiently used during the period. The formula for calculating overhead volume
variance is as follows;
Both the factors on this formula has been explained above. The overhead
budgeted is the same as the amount used in computing the controllable
variance . Overhead applied is the amount used in determining the totoal
overhead variance.
In example for Company A the pverhead volume variance (unfavourable) is
400
10,400 – 10,000 = 400
The budgeted overhead consist of variable and fixed.
https://blogs.sap.com/2012/10/23/understanding-production-order-variance-part-1-performance-evaluvation-through-standard-costs/ 13/18
11/20/2018 Understanding Production Order Variance – Part 1 Performance Evaluvation Through Standard Costs | SAP Blogs
In example the normal capacity is 26,400 hours for the year or 2,200 hours for
a month (26,400 / 12), and the fixed overhead rate is 2 per hour. Thus, the
volume variance is 400 unfavourable;
2x (2,200 – 2,000) = 400
https://blogs.sap.com/2012/10/23/understanding-production-order-variance-part-1-performance-evaluvation-through-standard-costs/ 14/18