Material Usage Variance: Summary
Material usage variance is generated when there is a difference between the actual quantity of components issued/backflushed and the standard quantity required.
This variance is calculated at Work Order Accounting Close (16.21). This variance is calculated as:
{Actual Qty Issued - [Qty Per * (Qty Completed + Qty Rejected)]} * Frozen Std Unit Cost
Alternate structures and issues of non-standard components will also create material usage variances, and if the costs differ from standard, a method change variance will be charged for that difference.
Method Variance: Work Orders
After Work Order Accounting Close (16.21), no value should be left in WIP for the order accounting closed. If any value is left in WIP after the Work Order Accounting Close has processed variances and floor stock, then this value will be relieved from WIP and posted to the Method Variance account of the parent item.
Causes of Method Variance
Some causes of method variance are:
• Changes to the bill of material or routing without recalculating new costs
• Use of alternate structures and/or routings or item substitutions
• Order quantity (non-standard)
• Floor stock (non-standard quantity issued)
• Manually changing the Yield% in the Item Planning screen for manufactured items so that the planning yield does not equal the rolled-up routing and product structure yield
• Batch quantity in Formula Maintenance (15.5) not the same as order quantity in Item Planning Maintenance (1.4.7) or Item Site Planning Maintenance (1.4.17)
• Wrong Quantity Per on work order BOM (Work Order Bill Maintenance (16.13.1))
If setup cost is calculated as part of standard labor and burden, a method variance occurs for the difference between the standard order quantity on the item planning record and work order quantity.
Work Order Accounting Close: GL Effect
The calculations and GL transactions created by the Work Order Accounting Close are listed below.
• Floor stock is calculated as:
[(Qty Rcvd + Qty Rejected) * Qty Per] * Std Cost Per Unit
This quantity is posted at standard cost to WIP (debit) and Floor Stock (credit).
• Material Usage Variance is calculated. If unfavorable, WIP is decreased (credit) by this amount and the variance is posted to the Material Usage Variance account (debit). The amount is equal to:
Actual Qty Issued - [(Qty Completed + Qty Rejected) * Qty Per] * Frozen Std Unit Cost
• Subcontract Usage Variance is calculated in the same way as Material Usage Variance, comparing the number of subcontract items received to the number that should be required. It is calculated as:
[Qty Received on PO - (Op Qty Completed + Op Qty Rejected)] * Subcontract Frozen WO BOM Unit Cost
• WIP is now set to zero. Any outstanding WIP amount is removed from WIP (credit) and posted to the Method Variance account (debit).
Note: The GL transaction is WO-CLOSE wo#. Transaction type is IC or WO, as indicated.
