Variances are posted as journal entries.
- Pull up a Production Order with a variance (if you can’t find one in live, create one in your test database)
- Close the PdO itself (change status from “Released” to “Closed”, verify the information and the date that it is being posted to and click “Update”)
- Open the PdO back up and click on the history tab
- There you will see both "Issue" and "Receipt" line items.
- The gold arrow next to the Document Number can be used to drill in to the JE created and you'll see which GLs the variances post to.
1. "Issue" refers to removing inventory, "Receipt" refers to bringing inventory in stock.
2. WIP items use "WIP" and "Semi Finished Goods" accounts to confirm when they are being issued and receipted, respectively.
3. "Wort" is the first step in the beer process, which would equate to "Sweet Tea" in your process. To create Wort, we issue out raw materials and receipt the "wort" item itself; in your case you issue out raw materials and receive "sweet tea" instead.
Production Order (PdO) 10152 is our "control" PdO where no variances are found. We processed this for 30 barrels and consumed exactly what was planned for:
The "Summary" tab confirms the component and product (actual vs planned) costs are identical:
Note: We will get in to the GL transactions in the next example below, but on the above example, $1211.57 worth of raw materials converted in to $1211.57 worth of wort so there was no variance and the WIP account would wash out with the same value.
PdO 10153 was produced with all things being equal except for an additional 100 pounds of 2-Row Bulk malt being consumed. The "Components" tab confirms that 1100 lbs were consumed (6th column) rather than the 1000 that was planned:
The "Summary" tab quickly shows us the item cost (actual) versus product cost (planned). It also confirms a total variance (if there is one) below these on the bottom left side of the "Costs" section. Also worth pointing out, the "Quantities" section confirms that we planned for 30 barrels and produced 30 barrels. In your particular database you'll also notice that all non-inventory costs (labor/overhead) will populate in the "Actual Additional Cost" field of the Costs section. In our example, the extra 100 lbs of malt are listed as a variance of $14.63:
The $14.63 difference comes directly from the 100 additional units consumed, and is calculated as the average current cost of the item (RM2005) in stock. The bottom right corner of this screenshot confirms where the moving average cost is listed for this item:
To show all of this in a spreadsheet format, we can see where the issue vs planned matches on all items except the 2-Row Bulk malt along with the difference in actual vs planned cost:
So this confirms how/why the cost variance appears. Let's take a look at what that means from the GL perspective. On the "History" tab of PdO 10153 you can see the Issue and Receipt transactions that were automatically created when this PdO was processed:
By drilling in to each (clicking the gold arrow next to "10186" and "10149" we're able to see the documents that were created, as well as right click and select the "Journal Entry" that was created for each of those documents:
When we issued out the raw materials, we credited the Inventory - Raw Materials account for $1226.19 (the actual cost of the raw materials including the additional 100 lbs of malt) and we offset this to a WIP - Wort GL.
When we receipted the Wort, this WIP - Wort account is credited, and a Semi Finished Good - Wort account is debited:
Because we spent additional funds (from malt) to create this wort and did not receive more wort than planned, the system sees this variance of $14.63. It cost us 10% more in malt to produce 0% more in wort, so there is a discrepancy/variance there.
Importance of Closing PdOs
Since $1226.19 was debited and only $1211.56 was credited, the $14.63 will remain in the WIP - Wort account until the PdO is Closed (literally changed from "Released" to "Closed" status). When a PdO is closed, the variances will then be posted as the JE below shows:
The PdO will now reflect the total cost of production:
Over time we will need to monitor the WIP and Semi Finished Good GLs to ensure two things:
1. No abnormally large transactions post to it. The definition of "abnormal" differs between clients and their allowable thresholds. This could be $50 in your case, $100, or $500 (depending on the "normal" size/cost of batches). If a $50,000 discrepancy posts on one transaction, this is a RED FLAG that someone is processing production incorrectly (e.g. planning to produce 1 unit but receiving 100 instead). All mistakes like this can be corrected but it is important to find/fix these ASAP to ensure bad/incorrect habits aren't formed. It is much easier to fix this on one or two PdOs at the beginning rather than the same issue accumulating over months and multiple PdOs/JEs needing to be corrected.
2. The variances are indicators that either the BOM is incorrectly populated or there is an issue with production spillage or over/under consumption of some sort. For example, if 1100 lbs is used from now on, we need to increase the BOM to 1100 lbs rather than posting $14.63 variances over and over to this account. If it should only be 1000 lbs, we need to take action to determine why 1100 keeps being consumed on subsequent PdOs.
As a side note: the variance itself is showing a discrepancy between what we should have consumed/received and what we actually received. Had we instead received a 10% increase in wort AND all issued components consumed an additional 10%, then there would be no variance once again:
The 10% increase in issued components and the 10% increase in receipted material (33 BBLs) equates to no variance. Cost us 10% more to produce 10% more, so no difference.
It cannot be over exaggerated when stated that EVERYTHING stems from the Bill of Materials and the PdOs created from them. If the BOMs are inaccurate and production processes actual/different numbers, the system will keep reporting variances. A certain amount of variances are to be expected/acceptable in Orchestrated, but we must be diligent in the creation/updating of BOMs to ensure these variances are minimized.
I know that's a lot to digest so feel free to read over that a few times and practice, practice, practice in your test database!