Bills of Materials

Correct costing of production is vital for making money in the manufacturing business. However, many manufacturers that use the D365 Finance & Operations ERP application suffer from distorted margins and cost variances that make no sense. In case you see that the results you get don’t correlate with what your system says, it doesn’t mean that something went wrong with your ERP, probably there is an issue with your master data. Here is the list of the top ten reasons why the production costs in D365 F&O are calculated incorrectly.  1. Inaccurate Bills of Materials  As it has already been mentioned, costing of production depends on the quality of components used. Inaccurate data about quantity, phantom items and inactive materials will make the cost roll-up impossible.  2. Incorrect Routes Information  The route information defines the amount of labour and machine time required to manufacture the product. Inaccuracies in setup times, run times, and operation quantities lead to incorrect calculations of routing cost that will result in wrong conversion costs.  3. Inactive Cost Version  D365 uses active costing version to determine the cost of inventories. When the price of raw materials or labour rate is pending, the system automatically calculates the cost based on the old information.  4. Incorrect Cost Group Mapping  Cost groups are responsible for determining the cost elements (such as direct material, direct labour, manufacturing overhead). In case you are mapping these cost groups wrongly in your BOM and Route line, you are going to produce inaccurate cost analysis. Even worse, incorrect configuration of cost group will ensure that your D365 skips manufacturing overheads altogether in calculating cost roll up.  5. Incorrect Cost Category of Work Centres  Every work centre has certain cost category (such as set up, run, overhead, quantity). When you configure the wrong cost category in your operation or fail to include the cost price of a cost category, D365 will miss the cost or use the default value of zero for that cost category.  6. Forgetting to Consider Scrap and Wasted Material Rates  Any manufacturing is never one hundred percent efficient. Should you not factor into your BOM and Route your scrap rates, then the system assumes that all your material will come out without scrap. This will leave you to eat the cost of the wasted material yourself at the end of the period.  7. Using Different Vendors’ Purchase Prices in Subcontracting  In case your manufacturing is outsourced to a vendor, D365 will use the purchase price of the service item in respect to that vendor. Should your vendor’s purchase price according to the trade agreement be lower than what the current price, your manufacturing will be under costed.  8. Forgetting About the Costing Per Site  The D365 F&O system calculates the cost per site. When you have an item being manufactured in different sites using the same BOM/Routes but different costs such as labour and machine rate, then one of those sites’ cost will be distorted.  9. Unanalysed Cost Variance in the Standard Cost Method  In the standard cost approach, the system generates price variance, quantity variance, and substitution variance. Not properly analysing, understanding, and closing these variances at the end of the period leaves your true production costs incomplete with money lying in suspense accounts.  10. Early Production Costs Calculation  Production costs should only be determined when the production order is put on “ended” state. Any earlier calculations, before the material issue entries, hour entries, and route cards journals have been fully posted, will lead to incomplete and inaccurate production cost postings.  The Takeaway  Determining production costs in D365 F&O is not about adjusting your system settings but rather sticking to strict master data policies. This will allow you to keep your ERP up to date.  Having trouble controlling your manufacturing costs? Reach out to our D365 F&O consultants now and get a cost audit done.