Analyzing Manufacturing Cost Variances

You planned for the chair to cost you SAR 73, and it cost you SAR 79. Where did the six go?

That is what variance analysis in Wafeq answers. After a Production Order is executed, the system compares what you planned in the Bill of Materials with what actually happened on the shop floor, and shows you the difference broken down rather than lumped together.

And the breakdown is the whole point, because a difference has two entirely separate causes: either you paid more for the component than you estimated, or production consumed more of it than you planned. The total figure alone does not distinguish between them.

Each cause calls for a different response. If the difference is in prices, the problem is with your supplier or with BOM estimates that no longer track the market. If it is in quantities, the problem is on the production line itself — scrap or an execution error. Once you know where the problem lies, you know what to do about it.

This guide covers the types of variances and how to read them, where to find them in Wafeq, and how to get from a variance to the cause behind it so you know how to address it.

Where does a variance come from?

Types of material variance

Wafeq splits material variance into two types, because their causes — and their remedies — are entirely different:

• Material price difference: you consumed the planned quantity, but the unit cost in your inventory differs from what you set in the BOM. The problem is in pricing, not in production.
• Material usage difference: the cost was as you expected, but production consumed more or less than what was allowed for. The problem is in production, not in pricing.

Both types can occur on the same order, and each column measures its own dimension independently.

Example: On the order shown, for 5 chairs, the total cost difference in the material requirements table came to SAR 18.20. To see how much of it came from price and how much from usage, compare each component's consumed quantity against its standard quantity, and its unit cost against its standard cost

A usage difference appears only on the screw, the one component whose consumed quantity differed from its standard: (50 − 40) × SAR 1 = SAR 10.

The price difference spreads across all three components: SAR 6.25 from the wood panel, SAR 3.09 from the chair leg, and SAR −1.13 from the screw — whose actual cost came in below standard, so it saved rather than overran — for SAR 8.21 in total.

Together (10 + 8.21) the two figures make up the SAR 18.20 shown in the material requirements table.

Labor and overhead variance

Labor and overhead enter the Bill of Materials as total amounts: you enter, say, SAR 15 of labor per chair, so the expected figure on an order for 5 chairs becomes SAR 75. Then, when you record each completion, you can adjust that amount to what you actually charged to that batch. The difference between what was frozen as the expected standard at release and what you actually entered on the completions is the labor variance, and likewise the overhead variance.

Example: On the order shown, standard labor is SAR 75 — SAR 15 per chair across five chairs. If only SAR 15 had been charged to the completion, the labor difference would show as SAR −60, meaning actual cost came in sixty riyals below plan. You will find this difference in the Manufacturing Cost Variance report rather than on the order screen itself.

Variances are never posted to your books

Wafeq creates no accounting entry for a variance, and there is no account in your chart of accounts where differences accumulate.

The entries record actuals only: the assembly item enters your inventory at its actual cost, however far that is from the expected standard, and that cost then moves to cost of goods sold when you sell it.

The expected standard and the variance are analytical figures for review and monitoring. They appear on screens and in reports, not in your books and entries.

Where to read variances

On the Production Order screen you read the variance of a single order: the cards show Completed at standard, Completed cost and Total cost variance, and the material requirements table shows the difference beneath each value.


 

In the Manufacturing Cost Variance report you read the variances of all your orders together, and work from them back to the cause.

The Manufacturing Cost Variance report

While the order screen shows one order's variance, the report gathers the variances of all your orders in one place and sorts them by the largest cost overrun first. So the first row you see is the order that exceeded its plan by the largest amount, and the last row is the one that saved the most against it.

To open it, click "Reports" in the main menu, then choose "Manufacturing Cost Variance" under the inventory reports.

Getting from the report to the cause

The report shows reference columns (standard materials, materials cost, standard total cost, total cost) alongside the difference columns: material price difference, material usage difference, labor difference, overhead difference, and total cost difference.

The Group by bar offers three ways to view the data, and their order maps a complete journey from a figure to its cause:

By item: one row per assembly item you manufactured in the selected period. The row starts with the item name, then four columns showing each type of difference separately — material price, material usage, labor, and overhead. At the end of the row, total cost difference adds them up.

Each of these columns has a different cause, and each deserves its own decision:

• Material price difference comes from the gap between your actual moving average cost in inventory — as formed by purchase invoices and inventory adjustments — and the expected standard cost in the BOM. The remedy is either reviewing your prices with your supplier, or updating the expected standard cost in the BOM to bring it closer to reality.
• Material usage difference comes from the production line: workers consumed more or less than what was allowed for. The remedy is on the floor — reviewing scrap, training workers, or reconsidering a yield percentage that is not realistic.
• Labor and overhead differences come from recording completions: what you charged to the completion differed from what was planned. The remedy is either tightening your future estimates, or investigating why actual cost differed.

By component: one row per component within each assembly item. The row starts with the component name, then the assembly item it goes into, then the number of manufacturing transactions it was used in, then material price difference and material usage difference.

You will not find labor or overhead differences in this grouping, since neither can be attributed to a specific component, they belong to the order as a whole.

By document: one row per actual manufacturing transaction (each recorded completion), not per order or per item. The row starts with the build number and the Production Order number, then the assembly item and its quantity, then the same difference columns you saw in the previous groupings.

This grouping differs from the other two in that it links you to the document itself: the build number and the order number appear as links, so you can click through to open the document and review its components and actual quantities.

It is the final step in the analysis: by item told you the type of problem, by component told you its material source, and by document takes you to the transaction it happened in, so you can review or correct it.

When is a variance zero?

If you leave a component's standard cost empty in the BOM, and you have not set a unit cost on the component's own item card either, the system uses the same actual moving average cost on both sides — standard and actual — so the price difference is zero for that component. And it stays zero across every completion on the order, because both figures are frozen together at release.

So if you want to measure price differences, set the standard cost yourself, to give the system a benchmark to compare the actual against. The usage difference, however, is still calculated either way, since it depends on quantities rather than costs.

What does not show up as a variance

Planned scrap arising from the yield percentage does not appear as a usage difference, because the system builds it into the standard quantity from the outset. If you set an 80% yield on the wood panel, the standard allowance already covers the loss, and a difference appears only if consumption exceeds that allowance.

To track the scrap itself, see the Production Material Consumption report, which breaks it down into planned scrap, unplanned scrap, and total loss.

The effect of closing an order short, and of reverting it

Closing an order short and reverting it to planned affect variances in two entirely different ways.

Closing short erases phantom variances without touching real ones

When you close an order below its planned quantity — say you planned 5 chairs, produced 3, then stopped production — the system scales the standard down to match what was actually produced. Without that scaling, the system would compare 3 actual chairs against a standard for 5, showing you a phantom "saving" in material usage whose real source is simply that you never built the last two chairs.

Completions recorded before the close, however, keep their variances exactly as posted, because they were correct at the time they were recorded, and the system does not rewrite the past. Closing short fixes the benchmark for what remains, not for what has already happened.

Reverting to planned erases every trace of the order from the reports

When you revert an order to planned, all its completions and their records are deleted, so its variances disappear from every report: Manufacturing Cost Variance, Production Register, Cost of Goods Manufactured, and Production Material Consumption. No trace of the order remains in any of them.

Use this when correcting genuine execution errors — a wrong item entered, or an incorrect warehouse — where there is no point in keeping a variance built on wrong inputs. Avoid it when the recorded variances carry analytical value you want to refer back to, because they cannot be recovered after the revert.