Variance Options

The variance option determines when variances will be calculated for material, labor, and overhead.  The variances are removed from work-in-process when they are calculated.  Two options are available for MRP items.

·     No variance until order closure (option 1).  Inventory Accounting will not calculate variances or generate variance journal entries until the manufacturing order is closed.  At that time, variances are calculated and journal entries are generated for the entire order.

·     Calculate variances as they are incurred (option 2).  Inventory Accounting will calculate variances and generate journal entries at the operation where the variance was incurred, and during the period when it was incurred.  This option removes variance expense from work-in-process on a more timely basis when manufacturing orders span multiple periods.  The variances compare actual labor/overhead to planned labor/overhead.  An order closure variance is also calculated to account for variances between the planned labor/overhead and the accounting standard.  The order closure variance also accounts for any errors in entering data.

In general, just-in-time production uses short manufacturing leadtimes and minimal work-in-process inventory.  Consequently, there is no need to calculate as-incurred variances for JIT items.  The variance option for a JIT part must be 1.  The closure variance is calculated based on the quantity of the parent part that was received from production (rather than for a closed manufacturing order).