Options for Calculating and Reporting Variances

There are two methods for calculating and posting efficiency variances:

Option 1.  Variances are calculated and posted only after an order is accounting closed.  The variances are calculated by comparing the actual amounts recorded with standards based on the routing.

Option 2.  Variances are calculated in each period where they are incurred and at order closure.

·     For open orders, variances are determined at each completed operation.  These variances are calculated by comparing actual labor and overhead to  planned labor and overhead costs, less any labor and overhead scraped due to parent scrap.  The planned costs are based on the labor requirements for an individual manufacturing order, which may not be the same as the standard routing.  For example, using an alternate operation could cause the planned requirements to be different from the standard requirements.  Planned, or earned, hours are calculated by multiplying the quantity complete at the operation by the scheduled piece rate, as defined on the labor requirement record.

·     At order closure, "residual" variances are determined.  These variances would reflect any difference between the standard routing for a part and the planned labor requirements for the specific manufacturing order.  In addition, they would reflect reporting inconsistencies.  For example, if either the quantity complete or parent scrap is not recorded accurately, the discrepancies will appear in the closure variances.

Key Considerations

In determining which option is most appropriate for a specific item, consider the following:

·      Ability to Distinguish between Efficiency and Engineering Variances.  Under option 1, there is no distinction between the variance caused because operation A actually takes longer than usual and the variance caused because operation A was used instead of operation B.  Under option 2, the two types of variances are calculated separately and posted to separate general ledger accounts.

·      Ability to Assign Variances to Departments.  Under option 1, each company/ location/warehouse has two accounts for each variance type:  one for MRP parts and one for JIT parts.  Under option 2, a separate account is established for each company/location/warehouse/production type and department.  The account is used for variances incurred at all operations owned by the department.

·      Value of WIP.  The value of work-in-process inventory (WIP) might differ under each option.  Under option 1, WIP contains actual amounts for all open orders.  Under option 2, variances are calculated on open orders for each operation completed in the period.  These as-incurred variances are removed from WIP and posted to the respective variance accounts.  Thus, option 2 provides a WIP valuation that more closely resembles the  accounting standard value of the items.

Specifying Which Option to Use

You must specify which option will be used for each option on the Part Master File record for the item.