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Production Costing and Variances

A work order collects the actual cost of making something: the components issued to it, and, where it is routed, the labour and overhead of the operations reported. Finished goods go into stock at the order's standard cost. When the order is closed, the difference between actual and standard is posted as a variance, so you see whether production ran to cost.

Where to find it

Architect Panel → ERP - Operations:

  • Production — the console: each work order's cost figures and Close
  • Stock — the console: the Set-up tab holds the WIP, absorption and variance accounts
  • Stock Accounting — the same per-company accounts as a datastore

Admin Panel → Inventory & Production:

  • Production — work orders, for production staff
  • Stock — the Set-up tab with the stock accounts

The standard cost of a work order

When a work order is created it fixes its standard unit cost, split into material and conversion (labour and overhead):

  • for a standard-costed item, the item's standard cost, with conversion from its cost roll-up;
  • otherwise the rolled-up standard cost of its structure;
  • otherwise the item's standard cost, all as material;
  • otherwise an estimate from its components' costs.

The detail shows it as Standard unit cost beside Material issued, Produced at standard, Actual conversion and Variance.

What each step posts

Postings reach the ledger only when the company's stock posts to the general ledger (see Stock & Inventory).

  • Issuing components: Dr Work in progress, Cr Inventory, at the cost of the layers consumed.
  • Reporting production: Dr Inventory, Cr Work in progress, at the standard unit cost. For a standard-costed item any difference goes to the production variance account. Each good unit also absorbs the standard conversion cost.
  • Reporting an operation: its setup and run minutes are costed at the operation's labour and overhead rates and added to the order's actual conversion. No journal is posted until close.
  • Closing: one journal. Material variance is what was issued less the material in what was produced (Dr Variance / Cr WIP, reversed if favourable). Conversion is absorbed (Dr WIP / Cr Labour and overhead absorbed). If operations were reported, the actual conversion is absorbed instead and the difference from standard posts as conversion variance.

Setting the accounts

  1. Open Stock, go to Set-up and find Stock accounting.
  2. Check Work in progress (group default 1310) and Labour and overhead absorbed (group default 5170, created as "Production labour and overhead absorbed" if missing).
  3. Set Production variance (work orders) to keep production variances apart from purchase price variance. Blank posts them to the purchase price variance account.
  4. Click Save stock accounting (ERP: Finance or ERP: Administration).

Keep the manufacturing WIP account separate from project WIP.

Reading the close

The close message reads, for example, "Material variance …, conversion absorbed … (actual, from operation reports), conversion variance … (journal …). N unused reservation(s) released." On the order, Variance shows the material and conversion split and the journal. A positive variance is an overspend (adverse); a negative one is favourable.

What goes wrong

  • "Not closed - the variance could not be posted: …": usually a closed period or a missing account. Nothing is closed until it posts.
  • A large material variance: components issued but not used (return them before closing), scrap not reported, or a structure that understates quantities.
  • Conversion variance on every order: routing times or work centre rates are wrong; roll up the cost again after correcting them.
  • Nothing posts at all: stock does not post to the ledger for this company, so the variance is recorded on the order only.

Worked example

A work order for 50 pumps has a standard of 61.40 each: 46.90 material and 14.50 conversion. Stores issue components costing 2,410.00. Operations reported take 13.2 hours, costed at 760.00. 49 good pumps are received at standard, 3,008.60. On close, material in production is 49 × 46.90 = 2,298.10, so the material variance is 111.90 adverse; conversion absorbed is the actual 760.00 against a standard of 49 × 14.50 = 710.50, so the conversion variance is 49.50 adverse. Both post in one journal.

Recommendations

  • Set a separate production variance account before the first close.
  • Return unused components before closing, so the variance is real.
  • Report operations on routed items; it is what makes conversion variance meaningful.
  • Review variances by item monthly and correct structures or routings that keep missing.