Are you struggling to align your actual costs with your estimates? It’s a common challenge in manufacturing, but Business Central can help.
In manufacturing, it’s crucial to monitor when the actual cost of production surpasses the estimated cost. These costs can arise from labour, raw materials, assembly parts, or transportation. The key to staying profitable while remaining competitive lies in accurately tracking and managing these costs.
Dynamics 365 Business Central: Analysing Actuals Versus Estimates – Manufacturing Costs
Microsoft Dynamics 365 Business Central provides various mechanisms for manufacturing businesses to analyse performance and profitability through different costing methods. These methods allow businesses to choose the one that best suits their operations and financial goals:
- Standard Costing
- Average Costing
- Specific Costing
- FIFO (First-In, First-Out) Costing
What’s the Difference – Manufacturing Costs?
Standard costing is often chosen by manufacturing companies, including those involved in light manufacturing like assembly and kitting. This method determines inventory unit costs based on historical or expected cost data. These costs remain fixed until management decides to update them.
1. Standard Costing
- Benefits: Standard costing simplifies variance analysis by comparing actual costs against predefined standard costs. Variances—whether favorable or unfavorable—are posted to a price variance account, providing clear insights into cost discrepancies.
- Use Case: Ideal for businesses with stable cost structures looking for straightforward cost analysis.
2. Average Costing
Average costing blends the costs of materials to provide a mean cost for finished items. This method is particularly useful when the Bill of Materials (BOM) consists of materials with frequently fluctuating costs.
- Benefits: It reduces the need to constantly adjust raw material costs, especially in volatile markets. However, it can complicate the analysis if specific material costs deviate significantly from the average.
- Use Case: Suitable for businesses dealing with volatile material prices where cost fluctuations are common.
3. Specific Costing
Specific costing assigns the exact cost of each unit based on its receipt cost, often used by businesses that implement lot numbers and serial tracking.
- Benefits: This method offers precise cost tracking, particularly valuable for inventory items requiring exact cost tracing.
- Use Case: Best for businesses needing detailed cost tracking at the unit level, such as those with serialised or lot-tracked inventory.
4. FIFO Costing
FIFO assumes that the first items placed in inventory are the first to be sold or used. The unit cost is based on the actual value of the item received, following the FIFO rule.
- Benefits: This method is optimal for businesses with stable costs and those dealing with products that have a specific shelf life.
- Use Case: Ideal for businesses with stable costs and those in industries where inventory rotation (based on purchase order or production date) is critical.
Implementing Landed Costs
Microsoft Dynamics 365 Business Central provides tools to manage and assign landed costs effectively, whichever costing model you are using. The costs of freight, duty and taxes are as important to making your profit margin viable as the cost of your raw materials or assembly parts.
These tools allow you to:
- Assign Costs to Receipts: Easily allocate additional costs to specific receipts or return shipments, ensuring accurate inventory valuation.
- Automate Cost Calculation: Use Business Central’s automated features to calculate and apply landed costs across your inventory.
- Track and Report: Generate reports that provide insight into how landed costs impact your overall inventory value and profitability.
Choosing the Right Costing Method for Manufacturing Costs
Selecting the appropriate costing method requires careful consideration of your business’s unique circumstances:
- Data Accuracy: Ensure your cost data is reliable and up-to-date.
- Business Maturity: Established businesses with historical data may prefer standard or FIFO costing, while newer businesses might benefit from specific or average costing methods.
- Operational Needs: Consider your product lifecycle, market volatility, and the complexity of your inventory management.
How an ERP saves you money
Business Central automates processes, reducing manual work and errors, which saves time and resources
Partnering with Qi for Success
With over 25 years of experience working with manufacturers across various industries, Qi Ltd can help you implement the right costing method tailored to your business needs. Our expertise ensures that you not only choose the best approach but also fully leverage the capabilities of Dynamics 365 Business Central to enhance your operational efficiency and profitability. Contact us for help, advice and support for either your existing Business Central environment or to help plan your implementation approach.
Thought for the Day
Ready to improve your manufacturing cost management? Contact us today for a demo of Business Central and see how we can help streamline your operations.