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Production Cost Variances

Tip of the Day: In Microsoft D365 Finance and Supply Change (D365 F&SC), are you getting unexplainable Production Order Cost Variances? If you don’t have a clear understanding of how the variances are determined, you will spend hours trying to figure it out. I’ve already spent the time, so you don’t have too.


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What causes a Production Cost Variance?

Production variances are calculated after you End a production order for a standard cost item. The variances reflect a comparison between the reported production activities and the calculation of standard costs for the production item. The variances do not reflect a comparison to the production order's estimated costs.


**Bottomline: If you're getting Production Variances, the calculated Standard Cost on the item you are producing does not match the current BOM/Route that's being pulled into the Production Order.


The production activities that are reported include the consumption of material and routing operations, together with the associated indirect costs, and the quantity that is reported as finished. The following four types of variances are calculated:

· Lot size variance

Here are some typical sources of a lot size variance:

  • The good quantity for a production order differs from the calculation quantity that is used in the standard cost calculation. The quantity provides the basis for amortizing constant costs.

  • The value of constant costs on the production order differs from the constant costs that are used in the standard cost calculation. The constant costs on the production order can differ for several reasons. For example, the constant costs might reflect the following factors:

    • Manual changes to the production bill of materials (BOM) or route

    • The selection of a different BOM version or route version when you create the production order.

    • Planned engineering changes to the BOM version or route version that is assigned to the item.


· Production quantity variance

Here are some typical sources of a production quantity variance:

  • You over-issue or under-issue a material component.

  • You over-report or under-report the time for a routing operation.

  • You over-receive or under-receive the good quantity of the parent item, relative to the order quantity. However, you issue components and report operations completely, based on the order quantity for the production order.


· Production price variance

Here are some typical sources of a production price variance:

  • The cost category (and cost category price) for the reported consumption of a routing operation differs from the cost category that is used in standard cost calculation.

  • The active cost for the cost category price differs from the cost category price that is used in standard cost calculation.



· Production substitution variance

Here are some typical sources of a production substitution variance:

  • You issue a material component that isn't on the production BOM.

  • You manually add a component to the production BOM and report that component as consumed.

  • You report an item as consumed but don't manually add it to the production BOM.

  • You manually add an operation to the production route and report that operation as consumed.

  • When you create the production order, you select a route version that differs from the route version that is used in the standard cost calculation.

  • When you create the production order, you select a BOM version that differs from the BOM version that is used in the standard cost calculation.

The following diagram identifies the four variances that account for the difference between a production order's actual costs and the calculated costs within the item's cost record when the production order is ended.




Troubleshooting Production Cost Variances


When you End a Production Order and you get variances that you’re not anticipating, the first thing to check are the cost Calculations compared the active standard costs.

To do the comparison, go to Cost Management > Predetermined cost policies setup > Costing Versions > click on the desired costing version > click Calculation.




Select the manufacturing site and set Update/insert calculated prices = Overwrite > click OK.

Note: If you don’t want to run the calculation for all the items, select the desired records on the Records to include) tab.



After the cost calculation is complete, click on Price > Item Price.




The calculated costs will be on the Pending Prices tab.

Export the Pending Costs and Active Costs into Excel and compare the costs. You will then be able to see which costs are incorrect.

Note: To limit the list of costs to the ones you want, you will want to filter on SITE that you used when running the Calculation.






This scenario will give you a Substitution variance: After you END the Production Order, when you look at the Production Variance Details, if the Allowed Quantity and Allowed Cost is blank, that’s means that the active BOM Calculation for the FG that you’re making does not include this item (even though the item is on the active BOM that was used on the Production Order). To fix the problem, run the BOM Calculation on the FG item.




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