Variance analysis decomposes the gap between what something should have cost and what it did cost. The value lies not in the gap existing but in being able to explain it.
Where variance arises
A production order is debited with actual cost and credited with finished goods valued at standard. The difference is the variance.
| Side | Content | Valued at |
|---|---|---|
| Debit (input) | Material issues, activity consumed, overhead applied | Actual quantity ร actual price (activities at plan rate) |
| Credit (output) | Goods receipt of finished product | Actual quantity ร standard cost |
Input variances
Input variances split into using more than expected and paying more than expected.
| Variance | Meaning | Typical cause |
|---|---|---|
| Quantity variance | More or less material or time used than standard | Yield loss, scrap, learning effects |
| Price variance | Material or activity priced differently from standard | Purchase price movement, activity rate out of line with reality |
| Resource-usage variance | A different resource was used | Substitute material, processing at another work centre |
| Lot-size variance | Fixed cost such as setup does not divide evenly into output | Setup cost carried by a small batch |
Output variances
On the output side, the issue is planned versus actual volume.
- Idle capacity variance: fixed cost is incurred regardless of volume. Producing less than planned means each unit is meant to absorb more fixed cost than the standard recovers, and the shortfall is this variance.
- Mix variance: arises when several products share a facility and the mix differs from plan.
- Output-quantity variance: arises when the quantity received differs from what was planned.
Idle capacity variance cannot be fixed on the shop floor. However efficiently equipment runs, too few orders will produce it. Read it as a question about planning and sales, not about production.
Running variance calculation
| Step | Activity | Code | What it does |
|---|---|---|---|
| 1 | Overhead application | KGI2 | Apply production overhead to the order |
| 2 | Work in process | KKAX / KKAO | Recognise cost on unfinished orders as WIP |
| 3 | Variance calculation | KKS1 / KKS2 | Split the difference into variance categories |
| 4 | Settlement | CO88 / KO88 | Post WIP and variances to accounting |
The order matters: without calculating WIP first, cost on incomplete orders would be treated as variance. WIP is excluded, and variance is calculated only on what was finished.
Where variance goes
| Receiver | Rationale |
|---|---|
| Cost of sales | Take it to the current period result; the simplest treatment |
| CO-PA | Reflect it in product profitability, showing which products generated it |
| Inventory (Material Ledger) | Where actual costing runs, adjust the stock valuation itself |
With the Material Ledger active, variances are apportioned at period end between inventory and cost of sales, moving valuation towards actual cost. The Material Ledger is switched on by default in S/4HANA, so this configuration is increasingly the norm.