Work order costing and closing variances

During regular shopfloor events like material issue, handling, assembly process, chemical process and transportation activities, etc., sometimes material losses, as well as gains, do happen. In a not-so-perfect world of manufacturing, these losses and/or gains in the process lead to a deviation called as ‘Variance’.

In a Standard Costing environment, each costed item generally gets a standard cost as part of the item definition and/or annual cost evaluation and update process. The difference between standard cost and actual incurred cost of the output is termed as ‘Variance’. A variance may be favorable (or positive) or unfavorable (or negative) from the business point of view. If the actual incurred cost is less than the standard cost, the variance will be favorable and if the actual incurred cost is more than the standard cost, the variance will be considered unfavorable.

In case of assembly items that are manufactured in-house and have bills of material and routings, the cost is derived from cost roll-up process. On-hand stock is created through work order completion process for these items. This document will guide us in understanding the accounting of a work order or job close process.

This document has been prepared based on a hypothetical use case which covers most of the variances during a work order closing process. Analysis was made for variances for the following scenarios:

Difference in the component usage rates between work definition and rolled up structure.
Difference in the list of components between work definition and rolled up structure.
Components used/issued on the work order not part of work definition and/or rolled up structure.
Standard batch size different from the work order start and completion quantities.

As compared to On-prem, Oracle Fusion has come up with more exhaustive work order closing accounting functionality which encompasses all possible variance sources and categories. This helps to provide businesses a 360-degree visibility of their process anomalies in the manufacturing sphere. This in-turn helps a more efficient way of plugging the dollar holes.