Summary of Costs and Variances per work order

Scrap Variances

When scrap is discovered at the end of an operation of routing, it is assumed that all the materials and parts of the bill of materials are lost (i.e. are included in the scrap). The material cost of scrap is therefore equal to the number of rejected parts (or scrap) multiplied by the standard material cost of the item.

It is worth noting that the other variance measures are estimated for the good parts only or for a work order restricted to parts with a satisfying quality (i.e. without taking scrap into account a second time).

Execution Variances

The execution variances come from the difference between the machine and labor times and the theoretical times defined in the production routings used at the shop floor level. For example, variances can occur with respect to manufacturing routings, because some specific operations can be added or some real-life operation times can be different from theoretical ones.

These technical variances are generated by the production processes (taken in a broad sense).

Budget Variances

The budget variances arise from a possible difference between the production routing used at the shop floor level and the budget routing defined for the item. Clearly, if these two routings are different, the costs estimated will be different.

The budget cost of the work order can be obtained by multiplying the number of good parts by the machine costs (variable workshop costs + depreciation + fixed machine costs) and labor costs (variable direct labor costs + fixed costs for labor) of the budget routing for the item.

These variances are the responsibility of the Production engineering department that progressively changes (and improves) the production process along time. Such variances can also originate from decisions of the Planning department that could release work orders with a batch size different from the standard batch.