April 18, 2024
The management of inventory costing includes the reporting of manufacturing costs and inventory costs, which determines the value of items. Some of the fundamentals to understand are that standard costing methods define the ways items are valued or measured when they leave inventory. Additionally, cost adjustment updates the cost of products sold with related purchase costs post sale. Also, the inventory manager must post inventory values to designated General Ledger accounts regularly.
Basics of Inventory Costing in Business Central
Costing Methods in Business Central
Microsoft Dynamics 365 Business Central is an inventive and extensively orchestrated application for businesses seeking greater visibility and better financial controls. The ERP solution with Oracle NetSuite for IT and ITES industry comes equipped with an array of modules. This helps users get greater insights into company data as it pertains to financial.
Average Costing Method in Business Central help to figure out whether an actual or a budgeted value is capitalized and utilizing in the cost calculation. Also, it has an impact on the way cost flow in recorded.
Business Central Supports These Costing Methods
FIFO
Cost Accounting in Business Central assumes that the first items placed in inventory needs to be sold first. This method defines a product’s unit cost as the actual value of any receipt of the product. Businesses with stable product costs and selling products with a limited shelf life can make the best of this method.
LIFO
This method of inventory costing in Dynamics 365 Business Central assumes that the last items placed in inventory needs to be sold first. It defines a product’s unit cost as the actual value of any receipt of the product. However, businesses refrain from using it aids companies in depressing profit.
Average
Average Costing Method in Business Central assumes that all inventories or products need to be sold simultaneously. By applying this method, one can define an inventory’s unit cost by calculating the average unit cost at each point after a purchase. Businesses with unstable product costs, or those running in environments where inventories are mixed together can drive maximum business outcomes with this method.
For instance, businesses dealing in chemicals where inventories cannot be differentiated can steer maximum business benefit out of it.
Specific
Under this method, a product’s unit cost is defined as the exact cost at which the particular product was received. Businesses in the production of easily identifiable items that come with higher unit costs, subject to regulation and products with serial numbers can make the most of this costing method.
Standard
Using estimation, a product’s unit cost is predefined. When the actual cost is checked later, the standard cost needs to be adjusted to the actual cost using variance values. Business environments, where cost control is critical, popularly use this method. Repetitive manufacturing units also use this method to value the costs of direct material, direct labor, and manufacturing overhead.
Dynamics 365 Business Central explains and outlines the different costing methods to select the right inventory costing method, optimize profits, and improve their accuracy in financial reporting.
Cost Adjustment Possibilities in Business Central
The primary objective in cost adjustment is to divert cost changes from cost sources to cost recipients, according to a product’s inventory valuation and deliver the correct inventory valuation.
Business Central offers two methods to adjust the cost of a product issue based on the purchases with which it is being settled.
Automatic
While generating and registering a sales issue or a production issue, the system automatically calculates the unit cost of that issue. It is executed from the ‘inventory settings’ under inventory costing in Business Central.
It can be calculated two ways.
- Item wise : Item cost will be calculated globally. Entity or location will not matter in Item cost Calculation.
- Item+variant+location : Item cost can be calculated entity/ location wise + variant wise with a little change in configuration.
Manual
You can manually calculate the adjustment for deviations through the process Valuate stock – Movements of Product’. It updates the cost of all products. Experts recommend to launch it unattended during non-working hours.
Product Journals in Business Central
Inventory Adjustments
It checks additions or withdrawals of unregistered inventory through purchase, sale, manufacturing, or transfer processes between warehouses.
Physical Inventory
Businesses can make the most of these journals to calculate the physical inventory in Dynamics 365 Business Central to help them report recorded differences from the actual count.
Reclassification
You can use these journals to change inventory locations, lot, or serial numbers.
Revaluation
Cost Accounting in Business Centralcalculates the inventory value at a date. It can perform inventory costing through value changes reported in these journals, and recording the adjustments or deviations.
Case Study
Company Structure: – Trading Company with global presence.
In the dynamic world of trading, effective cost management is crucial for maintaining profitability and making informed business decisions. Microsoft Dynamics 365 Business Central offers robust features to help trading businesses regulate their costs efficiently.
The Problem: – Our client, a trading company operating globally, faced the challenge of accurately determining item costs based on both the location and variant of the item. They needed a solution that would enable them to analyze costs in a granular manner, taking into account different storage locations and item variants, such as color.
The Solution: – To address the client’s requirements, we recommended the use of the “Average” costing method in Business Central, combined with the appropriate Average Cost Calculation Type.
Here’s how this solution helps streamline cost management:
- Average Costing Method: The “Average” costing method calculates item costs based on the average cost of all purchases or production activities. This method provides a balanced approach by considering costs over a period of time, allowing for a more accurate representation of the item’s cost.
- Average Cost Calculation Type: In Business Central, the “Average Cost Calculation Type” feature allows businesses to define how average costs are calculated for items. For the client’s specific needs, we suggested using the “Item & Location & Variant wise” calculation type. This means that the average cost of an item is dependent on its storage location and variant attributes, such as color.
Conclusion: In conclusion, Microsoft Dynamics 365 Business Central provides a powerful solution for trading businesses looking to streamline their cost management processes.
With Business Central’s comprehensive cost management capabilities, trading companies can enhance their overall efficiency and profitability. By eliminating manual processes and leveraging the system’s built-in features, businesses can effectively regulate costs on a daily basis and ensure accurate cost calculations. These results in better control over expenses, improved decision-making, and strengthened financial performance.
At NavisionIndia, our Business Central consultants are adept and skilled with the implementation of inventive business solutions. We understand the importance of maintaining accurate and up-to-date inventory and warehouse management more than any other service provider as we have tackled these scenarios and helped businesses come out of such critical issues hassle-free. Moreover, we recognize that business inefficiency manual processes can bring and hence, leverage the core capabilities of cloud-based solutions to help growing business adopt digital transformation.
For more details on Inventory Costing and Management in Business Central, write to us at info@navisionindia.in Or Schedule A Demo