Timing is everything when it comes to uncovering the real story behind production costs in D365.
If there's one thing I’ve learned from years of working with manufacturers in Dynamics 365 Finance & Operations (and also from assembling more than a few bicycles on Christmas Eve), it’s this: things rarely go exactly as planned.
In the world of manufacturing accounting, we call that variance. In the world of dads building toys late at night, we call it “where did I put that extra screw?” Same idea.
This first blog in our two-part series on production order variance is all about timing—when accountants should assess variances and why. In Part 2, we’ll tackle the how: interpreting reports, understanding the variance types, and using D365 tools to your advantage.
What Is Production Variance?
Production variance refers to the difference between what we planned to spend on a production order and what we actually spent. That difference can show up in materials, labor, overhead, or a combination of all three.
Some variance is normal—it’s not about chasing perfection, it’s about surfacing the real story behind your numbers. Because every variance has a story.
When Should Accountants Care About Production Variance?
You don’t need to analyze every production variance in real-time, but there are some key moments when accountants should take a hard look. Here’s when it really matters:
1. After Production Orders Are Completed and Closed
This is your first and best opportunity. D365 calculates variances automatically at this stage, so the data is clean and final. Your actual material, labor, and overhead costs have been posted, and the system compares those against your standard or planned costs.
If there’s a variance, you’ll see it immediately—no need to guess. This is the “post-game film review” of accounting. Everything is visible, and it’s time to see what went right… or wrong.
2. During Period-End Close (Monthly or Quarterly)
Variance analysis plays a big role in your month-end or quarter-end close. Production variances affect:
Cost of Goods Sold (COGS)
Inventory valuation
Profit margins
You want to catch unexpected variances before they skew your financial statements. If your COGS suddenly spikes and no one’s checked production variances, it’s like showing up to a cookout and realizing you brought a salad to a barbecue.
3. During Cost Reconciliation
When you’re reconciling your ledger with actual production costs, variance tells you where and why things don’t match up. Think of it as the GPS pointing out where you took a wrong turn in your cost assumptions.
4. When Comparing Budget to Actual Performance
Budgeting isn’t just for finance. In manufacturing, your budgeted costs are your baseline. Comparing them to actuals and diving into variances helps reveal operational inefficiencies, supplier pricing issues, or inaccurate bill of materials (BOMs).
5. When Tolerances Are Breached
Many organizations define tolerance thresholds—like “any variance above 5% needs to be reviewed.” When a variance crosses that line, it’s a red flag. But instead of panicking, accountants can step in, assess the data in D365, and start peeling back the layers.
Why Timing Matters
It’s tempting to defer variance analysis to a once-a-year task. But here’s the problem: delayed variance analysis leads to delayed corrective action.
You might miss:
A supplier consistently overcharging
An operator skipping steps in the routing
A BOM that’s out of date and misrepresenting true material consumption
By reviewing variances at the right time, you can address root causes faster and keep your cost model accurate. And yes, sometimes that means having a tough conversation with production. But hey, somebody’s gotta be the grown-up at the table.
A Quick Dad Analogy
Let’s say I plan to build a backyard shed. I budget $1,500 for lumber, screws, shingles, and maybe one or two power tools I swear I’ll use again.
I finish the project, and the final bill is $2,200. Where did I go over?
Did the cost of wood go up? (Price variance)
Did I miscalculate how many boards I needed? (Quantity variance)
Did I hire someone to help after realizing I was in over my head? (Labor variance)
In D365, your production order acts like my shed budget. And the variance analysis? That’s your spouse asking why the credit card looks like we built a guesthouse.
Coming Up in Part 2:We’ll dive deeper into the actual variance categories tracked in D365, how the system calculates them, and what tools accountants can use to investigate and explain the numbers—without needing a detective hat.
Until then, remember: variance is inevitable, but being surprised by it is optional.
DynamicsDad
I've found the biggest cost variances for my home projects pop up when the kids start helping.