Improve Your Variance Analysis by Planning Assembly Scrap

  • by John Jordan, ERP Corp
  • January 15, 2007
Find out how planned assembly scrap in material master views affects cost estimates in Product Cost Planning. Planning and posting assembly scrap removes the value of scrap from the total variance. Only the difference between planned and actual scrap posts as a scrap variance. This improves variance analysis by reducing the variance by the value of scrap that is predictable based on past production statistics.
Key Concept
Assembly scrap is the percentage of assembly quantity that does not meet required production quality standards. For example, planned assembly scrap of 25% means that to deliver 100 pieces of an assembly, you plan to produce 125.
All releases of R/3 and mySAP ERP Central Component (ECC) have standard functionality that allows you to plan, post, and analyze assembly scrap. Assembly scrap includes the entire cost of faulty or lost assemblies in the cost of sales via the cost estimate.

When you enter assembly scrap percentages in the material master, the assembly standard cost estimates increase the standard cost by the planned percentage in Product Cost Planning. The system posts actual assembly scrap during activity confirmations in Cost Object Controlling. You then analyze scrap variance — the difference between planned and actual scrap — following variance calculation or in detailed analysis reports in Cost Object Controlling.

Planning and posting assembly scrap results in more accurate variance analysis because you reduce total variance by the value of scrap. If assembly scrap is not planned, all scrap costs post as a variance. Although you can include variance at a higher level in profitability reporting, planned assembly scrap is included at the material level. This results in more accurate analysis of profitability at the product level.

Planned assembly scrap also improves the Material Requirements Planning (MRP) process by ensuring you start with an increased quantity to achieve the required product yield. Assembly scrap is an output scrap because it affects the planned output quantity of items in the production process.

How assembly scrap affects cost estimates and the benefits of planning and posting assembly scrap to variance analysis generally are not well understood. I present the overall flow of costs from cost estimates to activity confirmations and variance reporting in a summary format not found in standard documentation. I’ll explain the effect of assembly scrap on quantities. Then I’ll discuss how you can plan assembly scrap in MRP master data. I’ll describe how to determine planned and actual assembly scrap costs. Finally, I’ll show you how you can calculate and analyze the variance.

John Jordan

John Jordan is a freelance consultant specializing in product costing and assisting companies gain transparency of production costs resulting in increased efficiency and profitability. John has authored bestselling SAP PRESS books Product Cost Controlling with SAP and Production Variance Analysis in SAP Controlling.

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