Dynamics 365 Supply Chain BOM Calculations and Absorption Costing

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Dynamics 365 Supply Chain: How to Set up

BOM Calculations and Absorption Costing

Microsoft Dynamics 365 Supply Chain streamlines absorption costing and Bill of Material (BOM) calculations improving cost management and operational efficiency, resulting in accurate product costs and inventory valuation. In addition, businesses can effectively track and control costs throughout the manufacturing process with the help of features like cost groups, costing versions, and interaction with production orders.

BOM calculations and absorption costing are essential tools for accurately estimating manufacturing product prices and inventory values. These procedures are well supported by Microsoft Dynamics 365 Supply Chain, allowing companies to incorporate indirect costs into product costs efficiently. This blog explains how BOM calculations and absorption costs are made possible with Dynamics 365 Supply Chain (formerly known as Dynamics 365 for Operations).

Production Costing

The Value of Cost Absorption

Indirect expenses associated with producing finished items are recognized and included in product costs thanks to absorption costing. Accurate absorption costing is essential for precise product pricing and inventory valuation in businesses where indirect costs are a sizable component of total costs.

Cost Groups and Costing Versions

Dynamics 365 Supply Chain uses cost groups and costing versions to simplify absorption costing. The fundamental unit of cost composition, cost groups classify resources into various categories, including direct material, direct manufacturing, indirect cost, and direct outsourcing. On the other hand, costing versions help with BOM estimates by identifying current active costs and acting as repositories for cost records for goods and cost categories.

Costing Sheets

Dynamics 365 Supply Chain's costing sheet is crucial for displaying cost data and accounting for overhead costs. It comprises nodes that indicate totals and subtotals and is organized according to the cost group list. Numerous types of nodes, such as price nodes, total nodes, and cost group nodes, allow for efficient cost grouping and calculation. In addition, surcharges, rates, output unit-based and input unit-based nodes, among others, are indirect cost sub-nodes that enable accurate calculation of indirect costs.

Steps for Applying Absorption Costing and BOM Calculations

Implementing absorption costing and BOM calculations with Microsoft Dynamics 365 Supply Chain entails the following  steps:

  1. Setting up cost groups - Create and configure groups that categorize items or resources based on similar cost structures for better cost tracking and analysis.
  2. Assigning cost groups to items and cost categories - Associate the defined cost groups with specific items and cost categories to establish the relationship between cost structures and elements within your organization.
  3. Configuring costing versions - Define different sets of cost standards or rules, such as standard or actual costing, by configuring costing versions to determine how costs are calculated and assigned to items or resources.
  4. Defining the costing sheet format - Specify the sequence and structure of cost calculations by setting up the costing sheet format and determining how costs are accumulated, rolled up, and assigned based on defined cost groups, cost categories, and costing versions.

Calculating BOM with Single-level and Multi-level Explosions

Lower-level components or subassemblies are disregarded to focus on the immediate subcomponents in a single-level explosion. It starts with the top-level product, identifies its direct components, and includes quantities. The process repeats if subcomponents have their own BOMs.

Multi-level explosion expands the BOM to include all levels of subcomponents and subassemblies. The same techniques are applied repeatedly, guaranteeing a comprehensive breakdown of components. Finally, the required total calculates by aggregating the quantities based on the desired level of complexity and detail needed for the BOM.

Setting up Indirect Costs and Costing Sheet

The costing process must consider various indirect expenses in addition to single-level and multi-level BOM calculations. The four categories of indirect expenses are surcharge, rate, output unit-based, and input unit-based.

You must set up a costing sheet defining the cost structure to determine indirect expenses. The costing sheet includes nodes and subnodes representing different cost groups and their calculations.  Let's examine the setup of some of the indirect cost nodes:

Surcharge Node

The surcharge is an indirect cost added to operational processes or raw materials and computed as a percentage. To create a surcharge node, follow these steps:

  1. Open the Costing Sheet Setup page
  2. Select the sub-node under the Material Overhead node, such as "Internal logistics - % of cost"
  3. Set the subtype (Level, Sublevel, or Total) based on your calculation requirements
  4. Configure the absorption basis, such as selecting the material nodes for applying the surcharge
  5. Add formulas to calculate the surcharge, specifying the costing version, site, percentage, and effective date
  6. Define ledger postings and financial dimensions for the indirect cost

Rate Node

The rate is an indirect cost calculated as a constant amount added to the operational process. Follow these steps to set up a rate node:

  1. Select the sub-node under the Labor Overhead node, such as "Indirect labor cost - Rate per process time."
  2. Set the subtype (Process, Setup, or Quantity) based on the cost allocation method.
  3. Configure the absorption basis by selecting the manufacturing nodes to apply the rate.
  4. Add formulas to calculate the rate, specifying the costing version, site, amount, and effective date.
  5. Define ledger postings and financial dimensions for the indirect cost.

Output Unit-based Node

The output unit-based indirect cost is applied for each unit produced based on quantity, weight, or volume. Follow these steps to set up an output unit-based node:

  1. Select the sub-node under the Plant Overhead node, such as "Machine depreciation - Output unit based."
  2. Set the subtype (Quantity, Weight, or Volume) depending on the measurement basis.
  3. Configure the absorption basis, if applicable.
  4. Add formulas to calculate the rate, specifying the costing version, site, amount, and effective date.
  5. Define ledger postings and financial dimensions for the indirect cost.

Input Unit-based Node

The input unit-based indirect cost is applied for each unit of income material (raw material) based on weight or volume. Follow these steps to set up an input unit-based node:

  1. Create a new node under the Plant Overhead node with the Input unit-based type.
  2. Define the subtype (Weight or Volume) based on the measurement basis.
  3. Configure the absorption basis, such as selecting the manufacturing nodes to which the cost applies.
  4. Add formulas to calculate the rate, specifying the costing version, site, amount, and effective date.
  5. Define ledger postings and financial dimensions for the indirect cost.

Including these indirect cost nodes in the costing sheet reveals an effective method for calculating and allocating costs across numerous cost groups and subgroups, providing a thorough picture of the cost structure.

The Impact of Subtype Field Value on Surcharge Calculation

Results

On the Costing Sheet Setup page, various subtypes of surcharge, rate, output unit-based, and input unit-based calculations act differently. Here is a list of their actions:

Surcharge Subtype Behavior
  • Total Subtype: The surcharge is cumulated per level and applied to the total cost of the level.
  • Level Subtype: The surcharge is applied individually for each level, applying to the corresponding amount at each level.
  • Sublevel Subtype: The surcharge is added only at the first level and applied to the value of that level, including any levels below it.
Rate Subtype Behavior
  • Process Subtype: The rate is added per unit of process time (run time) for each level.
  • Setup Subtype: The rate is added per unit of setup time for each level.
  • Quantity Subtype: The rate is added per unit of processed quantity for each level.
Output-based Subtype Behavior
  • Quantity Subtype: An amount is added per unit of produced quantity for each level.
  • Weight Subtype: An amount is added per unit of produced weight for each level.
  • Volume Subtype: An amount is added per unit of produced volume for each level.
Input Unit-based Subtype Behavior

Volume Subtype: An amount is added per unit of income volume for each level.
Weight Subtype: An amount is added per unit of income weight for each level.

Businesses can easily and accurately calculate costs and assign them based on overall cost, level-wise cost, process time, setup time, quantity, weight, or volume by unlocking the secrets behind these subtypes' behavior. This information plays a crucial role in analyzing cost structures and making informed decisions regarding pricing and profitability.

Indirect Cost Calculation from a Production Order

To calculate indirect costs from a production order, follow these steps:

  1. Activate a Price for the Main BOM:
    • Open the Released products page and select BOM_1.
    • On the Manage Costs tab of the Action Pane, click Item Price.
    • Delete any pending prices.
    • Run item calculation using a single explosion.
    • Click Activate pending price(s).

2. Add Stock for the Raw Material:

    • Open the Inventory adjustment journal page.
    • Create a journal header for site 1 and warehouse 11.
    • Add three journal lines with the following items and quantities:
      ITEM_A: 10
      ITEM_B: 10
      BOM_2: 10
    • Click Post when finished.

3. Create and Process a Production Order:

    • Open the All production orders page.
    • Click New production order.
    • Enter the item to produce (BOM_1), quantity (1), site (1), and warehouse (11).
    • When asked to insert the active BOM and route, click Yes.
    • Click Create when finished.
    • On the Production order tab of the Action Pane, click Estimate, then click OK.

4. View the Results of a Bom Calculation from a Production Order:

    • Select the estimated production order.
    • On the Manage Costs tab of the Action Pane, click View calculation details.
    • The Price calculation page displays the structure based on the costing sheet but at the production order level.
    • The Overview estimation tab shows estimated costs based on the costing sheet structure and active costs, calculated at a single level.
    • Switch to the Overview costing tab to view actual and estimated costs as the production order progresses.
    • Use the Costing sheet tab to examine the data within the costing sheet structure.
    • Apply filters in the Level, Per, and Mode fields to customize the view of costs.

5. View Indirect Cost Transactions of a Production Order:

  • Go back to the production order.
  • On the Manage Costs tab of the Action Pane, click Production Posting.
  • On the Production posting page, click Indirect cost transactions.
  • The Indirect cost transactions page displays the indirect costs posted for the production order.
  • At this stage, only work-in-progress (WIP) postings have been performed.
  • Financial values and vouchers will appear once the production order is completed.

For accurate product cost determination and inventory value in manufacturing, Microsoft Dynamics 365 Supply Chain offers strong support for BOM calculation and absorption costing. In addition, the software enables effortless allocation of indirect costs into product costs through cost groups, costing versions, and the costing sheet.

Various indirect cost nodes, including surcharge, rate, output unit-based, and input unit-based, ensure precise cost calculation and allocation across cost groups. Integration with production orders allows for tracking and analysis of costs at each manufacturing stage, facilitating pricing and profitability decisions.

You Can Rely on Our Microsoft Experts

Clients First consultants have direct experience in the industries we support. The Clients First Texas office is known for its vertical expertise in manufacturing, job shops, maintenance, repair, and overhaul (MRO) for aviation or heavy equipment organizations. We support ProMRO with the leading Cloud ERP solution Microsoft Dynamics 365 Supply Chain. We also have customers in other industries, including make-to-order/engineering job shops, project manufacturing, field services, and wholesale distribution.  We also support Dynamics 365 Business Central and have a deep knowledge of legacy ERP solutions like Dynamics AX (formerly Axapta) and Dynamics NAV (formerly Navision).

Nothing replaces a live presentation so please contact us to schedule a demonstration for your business. Please email our Dallas/Fort Worth, Texas office or call  800.331.8382. We're based in Dallas, Texas and service companies worldwide.

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