It’s not just about spotting the variance—it’s about knowing what to do with it.
Welcome back, spreadsheet superheroes and variance vigilantes. In Part 1 of this series, we covered when accountants should investigate production order variances in Dynamics 365 F&O. If you missed it, pause here and go read it—trust me, it sets the stage.
Now in Part 2, we’re shifting gears from when to how. How D365 calculates variances, what kinds exist, where to find them, and most importantly—how to use them to tell a story that drives action.
Let’s just jump into it.
What Are the Different Types of Production Variance in D365?
When you complete and financially close a production order in D365, the system evaluates what you planned to spend versus what you actually spent.
Here’s a breakdown of the most common variance categories you’ll encounter:
1. Price Variance
Occurs when the actual purchase price of a material differs from the standard cost or planned price in the system.
Example: You planned for $10 per unit of steel, but your vendor raised prices to $12. That $2 difference shows up as a price variance.
2. Quantity Variance
Triggered when more or fewer materials were used than expected based on the bill of materials (BOM).
Example: Your BOM calls for 100 screws, but the production floor used 120. That's a quantity variance—and maybe a conversation with the floor supervisor.
3. Routing Variance
Results from deviations in labor time or machine usage compared to the routing setup.
Example: You planned 5 hours of assembly labor, but it took 7 hours. The labor cost for the additional 2 hours is your routing variance.
4. Lot Size Variance
Happens when producing in different batch sizes than what was expected, affecting fixed setup costs or cost allocations.
Example: A setup cost of $500 spread over 100 units = $5/unit. But if you only make 50 units, that’s $10/unit. That shift shows up as a lot size variance.
5. Subcontracting Variance
Appears when the actual cost for subcontracted services differs from what was planned in the route or production setup.
Example: You expected to pay $1,000 for outsourced painting, but the invoice came in at $1,300. That extra $300 is your variance.
Where to Find Variance in D365
After a production order is completed and financially closed, navigate to:
Cost Management > Inquiries and Reports > Production Variance Report
From here, you’ll see a line-by-line breakdown of:
BOM vs actual materials
Routing vs actual hours
Expected vs actual costs per category
You can also drill down into voucher transactions for the variance entries—each line links back to its source. Think of it like forensic accounting with fewer trench coats.
How to Investigate Variance: A Practical Workflow
Accountants often ask: “Where do I start if I see a large variance?” Here’s a smart, repeatable approach:
Classify the variance: Which category is it? Price? Quantity? Routing? Each has its own root causes.
Check for master data issues
Was the correct BOM version used?
Was the routing outdated?
Was the standard cost version active?
Talk to production or procurement: Sometimes, variances reveal deeper process issues like:
Excess scrap or rework
Untrained operators
Unexpected vendor price increases
Compare against tolerance levels: Not all variances require action. Use your company’s defined thresholds to prioritize investigations.
Document the cause: Keeping a log or tagging the production order with notes helps your team track trends and respond faster next time.
Tools in D365 to Help You Win the Variance Game
D365 doesn’t just throw numbers at you—it gives you tools to understand and manage variance like a pro:
✅ Standard Costing Setup
Your best friend for consistent variance calculation. Lock in a baseline cost and let D365 track deviations.
✅ Cost Accounting Workspace
Analyze cost elements, cost objects, and cost behaviors across dimensions—department, product, site, etc.
✅ Drill-Down Reporting
From the variance report, jump into individual transactions to trace the issue to a material journal, labor posting, or vendor invoice.
✅ Power BI Integration
For those who want visual insights, connect your cost management data to Power BI for dashboards that make variance trends easy to spot and act on.
Pro Tips for Managing Production Variance
Here’s some wisdom from the trenches:
Audit BOMs and Routings quarterly. Small changes on the shop floor often go undocumented.
Avoid overly optimistic standard costs. Unrealistic expectations only create more “variance noise.”
Train production leads on variance. If they understand how their actions affect costs, they can help minimize issues upstream.
Use reason codes or tagging. Categorize variance causes to track recurring issues and drive continuous improvement.
A Dad Joke for the Road
Why did the production variance bring a ladder to work?
Because it wanted to level out!
Final Word
Variance isn’t the enemy—it’s the early warning system that your production costs aren’t matching your expectations. When used right, it becomes a compass that guides smarter decisions, tighter operations, and stronger financials.
So whether you’re reconciling a production order or explaining a $10K variance to your CFO, remember: in D365, variance isn’t just a number—it’s a story.
And the best stories always come with a strong ending... even if it takes a Part 2 to get there.
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