Ensuring Effective Cost Management with Dynamics 365 Finance and Operations

For any organization, cost management is a critical aspect of successfully running a business. By planning and controlling the budget of a project or business, it allows you to plan, estimate, budget, fund, manage, and control costs so that all of your expenses stay within the approved budget. Cost management helps in recording and monitoring costs as well as in predicting expenditures, enabling you to minimize the chances of going over budget. You can then compare and analyze the predicted costs and actual costs, and drive future cost management predictions and budgets with increased efficiency.

Cost Management in Dynamics 365

Cost management in Dynamics 365 for Finance and Operations enables you to define, manage, report, and valuate costing for raw materials, semi-finished goods, finished goods, as well as work-in-progress assets. It allows you to set up accounting policies across inventory accounting and manufacturing accounting, including pre-determined costs, indirect cost accounting, and ledger integration. Using cost administration and cost analysis workspaces, you can access inventory accounting and manufacturing accounting; these workspaces provide a comprehensive overview of the current cost status, key performance indicators (KPIs), and detect any deviations.

Costing Sheets

A costing sheet displays cost information of goods that are sold for a manufactured item or a production order. When you set up a costing sheet, you need to define the format for the information and the basis for calculating indirect costs. Setting up the costing sheet in Dynamics 365 involves two objectives:

  • Defining the format for the costing sheet which involves displaying cost of goods sold information about a manufactured item or production order.
  • Defining the basis for calculating indirect costs which involves specifying the formula used for establishing the manufacturing overhead associated with the production of a manufactured item. This formula can be expressed as either a surcharge (a percentage of value) or a rate (an amount per hour for a routing operation).

Costing Versions

A costing version displays cost records of items, cost categories, and calculation formulas for indirect costs. A costing version can either contain a set of standard cost records or a set of planned cost records based on the costing type assigned with the costing version. It also reflects the setups required to calculate costs for different items through different configurations. Here are two main costing versions in Dynamics 365:

Standard Costs

A costing version for standard costs comprises a collection of standard costs about items and manufacturing processes where process cost is expressed in terms of cost categories for routing operations and calculation formulas for manufacturing overheads.

Planned Costs

A costing version can also contain a set of planned cost records about items; this version is used to assess the effect of cost changes on purchased materials or the effect of manufacturing processes on calculated costs of manufactured items. Planned costs can also provide initial values of item costs for an actual cost inventory model; these values include the calculation of planned costs for manufactured items.


Following are the different setups required to incorporate cost management to calculate different item costs in Dynamics 365:

Inventory Dimension

The first thing to understand when it comes to managing costs is how to use inventory dimensions and how they affect costing. The setups configured here affect the item costing wherever the same is attached with an individual item.

The dimension setups configured would be used to calculate the final item value at the time of inventory closing.

Costing Sheet

The costing sheet determines the different cost categories under which a company calculates its cost-of-goods-sold (COGS) for manufactured products. Only one costing sheet can be defined per legal entity.

The costing sheet mainly defines four types of node types:

  • Total – Display the total of an entire node like direct costing
  • Cost groups – Classifying the different types of costs under a particular node
  • Surcharge – Defining percentage of surcharge on a particular cost group
  • Unit-based – Configuring the unit-based amount to be charged as an additional cost for a particular cost group

BOM Calculations

The actual calculation of COGS for a manufactured product is done through the BOM; the BOM is used to calculate the estimated cost of a specific production order. The screenshot below displays the BOM calculation from a particular production order with estimated and realized cost with the cost group.

The screenshot below displays the cost calculated from the costing sheets.

Efficiently Manage Costs

A cost management structure can help businesses keep their overall budgets under control. By continuously recording, monitoring, and controlling costs, you can ensure better efficiency and increase profitability. The cost management function in Dynamics 365 for Finance and Operations allows you to effectively plan and control costs involved with your business as well as predict future expenditures; by continuously collecting, analyzing, evaluating, and reporting cost statistics, it allows you to drive effective cost management and control the overall budget.

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About the Author - Hasmukh Thacker

Hasmukh Thacker is a Senior Project Manager having close to 15 years of IT experience, which includes more than 7 years of ERP experience in HR, Manufacturing, Trade and Logistics, Project Management, and Inventory Management.


Contributing Author: Malavika Nityanandam

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