**1 **Variance calculation in Cost Object Accounting is used for monitoring the financial aspects of day to day business, and enables detailed controlling on product cost collectors,

**manufacturing orders **or** cost object hierarchies.**^{[1]}^{[1]}.

Variance calculation is designed to display variances in target and actual costs. It explains the balance of a cost object, or to be more precise, the balance of actual debits and actual credits by putting this balance into different **variance categories**.

The balance between actual debit and actual credit (total variances) is settled to Financial Accounting (FI) during period-end closing, and the variances that have been categorized can be settled to Profitability Analysis (CO-PA) if required.

Possible variance categories are as follows:

· · **Scrap variance** (difference between planned and unplanned scrap)

· · **Price variance** (arises from price changes to the material components or activities)

· · **Resource-usage variance** (arises from the use of other materials or activities etc.)

· · **Quantity variance** (arises from changed consumption quantities)

· · **Input variance** (miscellaneous, usually changes to overhead rates)

· · **Output price variance** (arises if the finished material is delivered to the warehouse at a different price than the standard price)

· · **Mixed-price variance** (variance between a standard price that was calculated in a mixed calculation for more than one procurement alternative and the costing of a procurement alternative).

· · **Lot**** size variance** (effect of lot-size-independent costs when the lot size is changed)

· · **Remaining variance** (miscellaneous, cannot be assigned to other variance categories)

**2 ****2**** ****Customizing **

The variance calculation calculates the variance categories in the order described above. You can enter settings in the **variance variant** to determine the variance categories that are to be calculated. If a variance category is not to be determined, and is for this reason deactivated in the variance variant, then it flows into one of the subsequent variance categories, and at a minimum into the remaining variance.

To determine the variance categories, variance calculation compares the **costs to be controlled** (reference) with **target costs** (comparison). These costs are specified in the **target version **in Customizing, along with the basis used to calculate them.

Only **target version 0** is relevant for reconciled financial accounting. This version compares the actual costs (costs to be controlled) with target costs, which are calculated using the standard cost estimate^{[2]}^{[2]} for the material to be produced. __You can only settle target version 0.__ All other target versions are for documentational purposes only, and can be used for analyses but cannot be settled^{[3]}^{[3]}.

Target cost calculation is part of variance calculation and scales the standard or plan cost estimate to the output quantity of the cost object (goods receipt).

To enable a cost object to be used in a variance calculation, you need to enter a **variance key** in this cost object. Moreover, in the variance key, you define whether scrap is calculated and line items are updated in the database. The update of line items in the database __should be avoided at all costs __as this has a very negative effect on performance and the database volume.

You can settle cost objects **cumulatively** or **periodically**. This is determined by the settlement rule of the cost object, which has either been set to FUL settlement (full or cumulative) or PER settlement (periodical). Manufacturing orders are normally settled with in full and product cost collectors and cost object hierarchies are always settled periodically.

**3 ****3**** ****Variance Calculation **

Variance is calculated during period-end closing. It only needs to be calculated if you want to analyze a cost object in more detail and variance categories are to be settled to Profitability Analysis. Variance calculation is not required for reconciliation with FI, as it is sufficient to settle the balance between the actual debits and actual credits of a cost object.

Variance is calculated in period-end closing after revaluation at actual prices, distribution, the application of overhead and the determination of work in process (WIP).

The posted actual costs are compared by cost element with the target costs and the difference is assigned to certain variance categories.

There are different variance categories on the input side of a cost object (variance for scrap, price, quantity, resource-usage and input) and on the output side (variance for output price, mixed price, lot size and remaining variance). The first types of variance are determined as the difference between actual debits and target costs, whereas the variance categories on the output side are differences between the actual credits and target credits or are due to changes in the output quantity. __The total of the variance categories must always be the same as the actual cost balance of the cost object.__

The following applies generally:

**Variances = actual debit – actual credit. **

Since WIP is valuated at actual costs for manufacturing orders with FUL settlement, it is only ever possible to have WIP **or** variances. Variances are always calculated if the manufacturing order has been delivered (DLV) or technically completed (TECO). If it has been released (REL) then only WIP is determined. This is a more complicated process for cost objects that have a PER settlement rule because WIP is calculated at target costs and this means that it is possible to have WIP and variances at the same time. The status is irrelevant in this case. The following applies:

**Variances = actual debit - WIP - actual credit.**

The **scrap variance** has a special status in variance calculation. It explains the difference between planned and actual scrap, also called unplanned scrap, valuated at target costs. Since the scrap variance in the variance calculation is determined before all the other variance categories, and is separately displayed, the following applies:

**Variances - scrap = actual debits - WIP - scrap - actual credits**, or more simply:

**Variances = control costs - actual credit**.

If you analyze the variances by cost element, use the following simplified equation:

**Variances = control costs - target costs.**

To determine target costs, the variance calculation looks for the __relevant standard cost estimate__ of the material, from which the material price is determined and from which the goods receipt was valuated. The relevant costing for manufacturing orders with FUL settlement is the one that was __released at the time of the final delivery__ or was __technically closed__. The relevant costing for cost objects with FUL settlement, on the other hand, is the one that has been released at the __end of the period.__

**Scrap variance **is also valuated using target costs. These can be based on the standard cost estimate or another costing. You can also maintain a strategy in the **valuation variant **for this.

Target costs are determined by scaling the relevant costing to the output quantity. If the costing contains components that are lot-independent, for example, setup costs, then these are transferred as target costs without scaling. It is __not recommended that you plan lot-independent (lot-size-independent) costs__ for product cost collectors or cost object hierarchies. The reason for this is that it results in target costs being determined in periods in which no production took place, or in which no actual costs were posted. Moreover, lot-independent costs are proportionalized for WIP and scrap.

**4 ****4**** ****Settlement **

If variances are to be settled to Profitability Analysis, you need to enter a **PA transfer structure **in Customizing. Variances can only be settled to Profitability Analysis with standard price control, but not using the moving average price control for the material.

The cost object balance is always settled to FI. For the recommended method using standard price control, this is a price difference account for the material.

**5 ****5**** ****Special Features**

If the **cost object hierarchy **is being used, then you need to use the **actual cost distribution **method. After this additional step in period-end closing, the variances are only determined and settled on the product cost collector. Despite this, the variance calculation and settlement are started for the cost object hierarchy.

If you have **co-products**, then the variances are settled on the order item, since an order can have more than one item, which each have an output quantity. To do this, you need to make a **preliminary settlement of the co-products** so that the actual costs of the manufacturing order can be distributed to the order items as per the apportionment structure.

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