It may sound obvious, but knowledge about the cost of production is just as important in manufacturing as the knowledge of how to produce a product. In Dynamics 365 Supply Chain Management, the process of calculating such a cost refers as a Production Cost Rollup.
Curious how the system calculates the price of the finished goods? Well then, this article will explain it to you. Lets discuss the way cost rollups calculation in the Supply Chain Management module of D365. Also why it is crucial to learn how to perform them.
Basic Principles of a Rollup: The Foundation
To calculate the cost of production, the system should have three basic elements:
Bill of Materials (BOM): Tell the physical item requirement for product production.
Route: tells the system which operations (man-hours and machine-time) are necessary for assembly of the product.
Costing Version: a container where your actual material, labour, and overhead rates are stored.
Whenever you perform a cost rollup (in D365 it is officially called BOM calculation). The system multiplies the quantities in your BOM and Route by the rates in your Costing Version.
The Working of the Rollup Engine
Not only does D365 assume the order of operations but it has its own hierarchy. If you produce a bicycle, you cannot cost the bike unless you have determined the cost of the pre-assembled wheel.
Therefore, D365 assigns a level to each item. The raw materials level is Level 0. Sub-assemblies could be at Levels 1 or 2 while the finished product would be at the top level. When you perform a rollup cost for the bicycle, the engine starts from the bottom, calculates the costs of raw materials and rolls it to the level of wheels, then to the cost of wheels to the final cost of the bike.
Pending Versus Active Costing Versions
There is one of the most important concepts that you need to know, it is the distinction between Pending and Active costing versions.
Whenever you start working on your next fiscal year or just checking a new pricing of a supplier, you do it within the Pending version. It allows you to test what the impact of the new prices will be without touching your live inventory.
Upon the approval of the new costs, you activate the Pending version, and the new rolled up costs will be pushed to the Active version to automatically update your standard costs for inventory, purchasing, and production.
Don’t Forget About the Indirect Costs: Overhead
It is often assumed that in the process of rollup only direct material and direct labour cost is collected. In D365 rollups are supposed to automatically incorporate the cost of manufacturing overhead.
The use of cost groups allows defining surcharges. For example, you can make a rule that includes 15% overhead cost to each dollar of direct labour costs for the provision of electricity in the factory and the salary of the supervisors. D365 automatically determines all these costs in the process of rollup.
The Bottom Line
A production cost rollup is not just math, but the bedrock for your pricing approach, inventory valuation, and profitability margins analysis. If you keep your Bills of Materials (BOM’s), routing, and costing version data updated and accurate, then your rollup engine on Dynamics 365 Supply Chain Management will function properly, giving you all the information necessary for your manufacturing business.
If you find that your costs after rollup do not equal your shop floor costs, then our manufacturing experts at D365 can help you with an audit and optimization of your BOM rollup process. Contact us for more information today!
