For a manufacturer, to achieve a business goal of increasing the company’s revenue and improving profit margins, you need to understand your manufacturing costs and how to effectively manage and improve those costs. Often it occurs that finance and manufacturing personnel lack sufficient understanding of the ERP system’s integrated points between manufacturing and finance, the cause and effect of costing and related processes, and how manufacturing variances occur in detail.
If your company is manufacturing a product, you’re creating manufacturing variances. These variances tell the manager where the company is not performing to the standards that were created and agreed to by those responsible in the Engineering or Production Department. There is almost a 100% chance you are creating either favourable or unfavourable manufacturing variances and, quite frankly, none of the variances will ever be favourable because the company is either over-costing or under-costing the production parts.
If your company has several production departments, you might have a set of these variances for each department. Companies with better business practices go further to define the variances into Rate and Usage to determine if they are incurring actual costs higher (or lower) than the standard cost. These companies will also benefit from the variances telling them if they are using more (or less) of the labor or raw material than specified.
The “norm” might be in a $/rupee value amount of Raw Material variance not-to-exceed +/- Rs 300 to the Standard Material Cost. This app will filter for those variances falling outside the Standard’s values and allow management to review production results more quickly and make the changes to minimize future manufacturing variances.
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