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SAP Controlling Variance Analysis

SAP Controlling variance analysis deals regarding the money management of a business in a effective way.

Cost Center Balance


As soon as all periodic allocations are executed (accrual allocations, periodic repostings, distributions, assessments, indirect activity allocations, target=actual activity allocations) you can carry out the closing analyses for your areas of responsibility. The functionality you have in the R/3 Controlling depends on the functions you have used during the period and which cost accounting system you implement.The information system plays a crucial role here.You can analyze the balance of the cost center in its plan/actual comparison (in column Under/Over Absorption Actual Costs):

ŸThis provides the cost center relevant debits and credits , whose sum should result in zero if the cost center has assessed all its costs.For cost centers that execute activity related allocations using plan prices, the balance is usually transferred into the results per assessment. For activity types/cost centers and constant period prices , the allocated costs are in line with the target credits as opposed to the actual activity.A negative balance hows that less actual costs were incurred than activity costs were imposed on the receiver .

Plan/Actual Comparison: Credit Side

The plan/actual variance of the credit side provides information on how much costs were allocated compared to the planned allocation for the cost center.To judge the cost effectiveness of a cost center, you can use the standard costing of the plan/actual comparison from the debit side . Actual cost values are compared with planned costs here.The report referenced shows actual costs that are larger than planned costs (+30.000 UNI). That is,more costs were actually incurred than planned.The report does not consider cost center performance, making satisfactory judgements in this are impossible.

The system calculates the target costs directly, making it possible to obtain an actual/target comparison before period-end. Target and plan costs differentiate themselves only when an activity dependent plan has taken place. Increases in target costs and actual activities of an activity type are correlated for the cost center.Target costs that appear in the standard report "target/actual comparison" are calculated as follows:

Debit Side:
Ÿ
activity-independent planned costs
Ÿplan costs = (fixed) target costs
Ÿactivity-dependent planned costs
Ÿfixed planned costs = fixed target costs Ÿ variable planned costs * operating rate = variable target costs
Ÿ (secondary costs are calculated using fixed or variable quantities)

Credit Side:
Ÿ
target credit = allocated quantity * iterative plan price (full costs basis)

The target/actual variances from the target cost analysis are used to check the economic variances of the debit side . Here, the incurred cost center costs are compared with those that should have been incurred.The above report shows that the cost center incurred less costs than it should have at the same level of operation, even though more actual costs are shown than plan costs. The cost center had a favorable (negative) target/actual variance for the debit side.This stems from a higher level of activities than planned. The target/actual comparison report shows the operating level for each activity type of the cost center individually. 

Actual costs in cost center accounting are normally booked to the cost center, and not to the combination 'cost center/activity type'.In order to carry out the variance calculation or the actual activity price calculation, therefore, the actual costs must be apportioned to the activity types performed by the cost center. In the actual, these activity independent costs must be apportioned to the activity types before the variance analysis.The goal of the actual cost splitting is to calculate the total cost for the activity types. This is required for the variance calculation, which can be executed per cost center and activity/cost center. Furthermore, the actual cost splitting is executed to facilitate the comparison of target/actual using the separated fixed and variable costs.Actual costs are automatically split into two steps.

First splitting step:

In the first step, the actual cost center costs are apportioned to the respective activity types according to the target costs . This step occurs for each cost element. Thus: primary costs are apportioned according to target costs.secondary costs are apportioned according to target quantities, if these already exist. If not, they are apportioned according to the target costs.If target costs do not exist for a cost element, splitting takes place according to the target costs of the assigned cost element group (in the customizing of the target version). All target costs of cost elements in this group are drawn upon as a basis for splitting. If no target costs exist in the entire group, the costs are split in the second step.If dependent and independent planned costs for a cost element already exist, then these are split among the activity type/cost center and cost center according to the way they were planned. The actual costs split to the cost center remain there for the second step.The distribution of the actual costs (planned as activity dependent) into fixed and variable portions occurs based on the planning.

A second splitting step is necessary if:

No target costs or quantities exist for the cost element or cost element group. In this case, the reference used for the splitting is missing (for example, no planning for the cost element exists). Activity-independent target costs or quantities exist. In this case, the portion of actual costs remains on the cost center; this part corresponds to the portion of activit y independent target costs (target quantities) of the entire target costs (target quantities).In the second step, the actual costs that remain in the cost centers are apportioned according to splitting rules, that can be set, to the activity types. If no rules are defined, the cost center costs are divided according to equivalence numbers (similar process as with the plan cost splitting).

Variance Calculation: Categories

Variance calculation is a tool that helps you analyze problematic variances. It enables you to compare actual costs and allocated actual costs with the target costs. Shown are:

Variances of the input side (actual costs - target costs)
Variances of the output side (target costs - allocated actual costs)
The sum of these variances corresponds to the total variance and therefore the balance of the cost center. This total arises when the debits to the cost center and the credits from the activity allocation are not the same amount (actual cost - allocated actual costs).System requirements for the variance calculation 

ŸCreating Target Versions
- Determine the version from which the plan and actual data is read or in which the split actual costs and the variances are booked (in CO-OM only with version 0!).
- As an option, determine the cost element group, after the actual cost splitting is made in the first step, as well as the variance variant after the variances are calculated.

Create variance variant and assign to the target version in the variance variant, determine which variance categories are to be calculated. Variances belonging on the variance categories that are not activated flow into the remaining variance. 

Variances: Input side

Input price variance indicates changes in costs due to price fluctuations. The input price variance is the discrepancy between target and actual costs due to differences in the plan and actual prices of materials or services.Input quantity variance indicates under- and over-consumption for cost elements. It is the difference between target and actual costs; that is, it stems from the difference between the planned and the defacto quantity consumed.

Variances caused by price and quantity differences are also assigned to input price variances. Resource-usage variance indicates changes in the plan consumption of cost elements. It occurs if you post an unplanned cost element in actual, or if no actual data exists for a plan cost element.The input variance is the discrepancies between target and actual costs which cannot be assigned to any of the above categories. You get input side variances if you deactivate one of the above variance categories in the variance variant.

For many organizations, remaining input variance is often the classic consumption variance (input quantity variance). Cost elements that react quickly to price changes are recorded by quantity, which ensures an exact calculation of input price and input quantity variances for these cost elements. For cost elements underlying minimal price flows, the difference between actual and target can be traced to increased consumption. This procedure reduces the requirements for entering plan and actual data, but lets you display results for individual cost elements. 

Variances: Output Side

An output price variance occurs if you use a price that differs from the plan price, which is calculated iteratively each month, based on pla n activity. The target credit (= plan activity price X actual activity) varies from the actual credit (= allocated price X actual activity) of the affected cost center. Output price variance can be due to several causes:

- if average prices are used instead of period-based prices
- if the capacity of the activity type underlies the price calculation
- if a manual price is used

The output quantity variance is the discrepancy between target costs and allocated actual costs due to the use of allocated activity quantities which are not measured on the sender cost center. The measured quantity can be entered on the sender cost center and than be compared with the allocated quantity. A difference results in a output quantity variance.Fixed cost variances occur when the actual operating rate varies from the plan operating rate and some of the planned fixed costs are either under absorbed or over absorbed due to the credit postings .

The system only determines the fixed cost variance if the operating rate varies from 100%.The remaining variance includes discrepancies between target and actual costs which cannot be assigned to any of the above categories. You get remaining variances if you deactivate one of the output side variances or the input variance in the variance variant. 


Variance Analysis: Procedure

To do variance analysis, you must first create a target version in customizing that refers to a variance variant (determination and implementation of variance categories). Furthermore, the target version must be entered in the plan version 0, where variances are booked for the overhead cost controlling. To determine quantity and price variances precisely, you should activate the indicator Record quantity for the corresponding cost elements and cost centers (or in the scope of the planning). 

After executing the planning, bookings and activity variances in the actual, you can carry out the variance calculation. This automatically performs an actual cost split in order to bring all costs to the activity types.You can execute the variance analysis in the application, or after bookings are made in the information system for individual and also cumulated cost centers (for cost center groups).The variances are not allocated further, but rather booked to the profitability analysis per assessment. If you want to perform subsequent adjustments of your variances to the receiver, then you must consider the actual price calculation. 

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