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10 Reasons Your Production Costs Are Incorrect in Dynamics 365 Finance & Operations
07
Sep

10 Reasons Your Production Costs Are Incorrect in Dynamics 365 Finance & Operations

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. 
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Demystifying Production Cost Rollups in Dynamics 365 Supply Chain Management
31
Aug

Demystifying Production Cost Rollups in Dynamics 365 Supply Chain Management  

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! 
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The Hidden Profit Killer: How to Track Material Consumption in Production Orders
10
Aug

The Hidden Profit Killer: How to Track Material Consumption in Production Orders 

Your raw materials are everything when it comes to manufacturing. However, there exists an unknown profit-drainer on many factory floors, incorrect tracking of material consumption.  While you might have designed a product, which requires ten pounds of steel to produce, your operators consume eleven pounds due to waste or defects. Consequently, your inventory levels will be incorrect, cost of goods sold will be off, and your company’s profitability will only be a guess.  For the sake of precision and efficiency in operations and accounting, correct tracking of what materials go out of your warehouse and into the production is essential. This is how it is done in modern manufacturing companies.  But Why Else Does This Matter?  Recording material consumption goes far beyond reconciling the materials in your inventory. Every time you consume materials during production, you’re setting in motion the financial mechanisms of your company. The value of that raw material moves from your Balance Sheet (Inventory Asset) to your Income Statement (Cost of Goods Sold). Lazy or inaccurate consumption recording will result in your financial statements reflecting inflated profits that you did not make.  The Three Approaches to Material Consumption Recording  Most ERPs, like Microsoft Dynamics 365 Business Central, have three different ways to record material consumption. Knowing when to apply each approach is crucial.  1. Manual Consumption Recording  The most accurate approach to consumption recording. Operators record every item, lot, and amount of material consumed by hand in the consumption journal.  For: Expensive items, materials with mandatory traceability (such as aerospace or pharmaceuticals), or customized production, when you need to keep track of every scrap produced.  The drawback: it slows down production with data input on the shop floor.  2. Forward Flushing (Auto-Consumption)  Forward Flushing involves the automatic subtraction of the expected number of materials from inventory the moment the production order status becomes either “Released” or “In Process.”  Ideal For: Products that are high in volume but low in value, such as nuts, bolts, or packaging materials where the cost of administrating them manually outweighs the cost of the materials themselves.  3. Backward Flushing  This method entails the system waiting for the production order to finish first. Once the completed product is posted, the system then automatically calculates the expected raw materials using the Bill of Material (BOM).  Ideal For: Lean manufacturing plants with predictable and repetitive processes.  The Risk: If the machine breaks down in the middle of processing and spoils the whole batch of raw plastic, backward flushing will not be able to detect it. It will just assume that all the materials were processed correctly.  The Importance of Scrap and Variance  No production system is absolutely accurate. Even if your BOM states that 5 gallons of paint are required, spilling 1 gallon of the same paint means that the gallon is gone despite not being used for any output.  To be able to measure the real situation, the consumption process must incorporate reporting of Scrap. Your operators should have an easy method of stating the fact that they used material without producing anything valuable out of it. Also, production managers must frequently analyse Consumption Variance Reports that show how close you are to the expectations of your BOM.  Best Practices for Success  Don’t adopt a one-size-fits-all solution. Employ manual tracking for high-value and traceable materials and flushing for cheap materials.  Empower the shop floor. Enable operators to employ barcode readers or tablet-based systems that allow them to enter consumption and scrap information without returning to a desktop computer.  Update BOM’s in real time. When a design or dimensional change happens for a component or material, update the BOM immediately. Any inaccuracy in the baseline data translates to inaccurate consumption tracking.  Effective material consumption tracking serves as a bridge between the physical shop floor and the finance team. With the proper tracking tools applied to the proper materials, you safeguard your material inventory, minimize your profit margin risks, and increase visibility over manufacturing costs. 
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From Chaos to Clarity: How Business Central Cleans Up Your Master Data (If You Let It)
08
Dec

From Chaos to Clarity: How Business Central Cleans Up Your Master Data (If You Let It) 

Master data is the backbone of your ERP: your items, customers, vendors, G/L accounts, BOM’s, dimensions. But in many organizations, it quickly turns into a tangled mess: duplicated items, inconsistent naming, missing dimensions, incorrect posting groups, outdated pricing, and unused vendors collecting dust.  The good news?  Business Central is built with powerful master data hygiene tools. But here’s the catch: BC can only clean up your data if you let it. In this blog, we will explore how Business Central transforms master data chaos into clarity, reliability, and automation.  Where the Chaos Begins: The Cost of Bad Master Data  Before we delve into the clean-up, let’s acknowledge the pain. Bad master data creates:  Most ERP issues don’t come from the system; they come from inconsistent or incomplete master data. Business Central solves this with built-in intelligence, validations, templates, and automation.  Templates-Standardization of Master Data to Standardized, Repeatable Setup  One of the most underrated strengths of BC is its Templates. You can create templates for:  Each template can pre-fill:  No more users manually guessing configuration. No more inconsistent setup. BC enforces consistency at the source.  Configuration Packages: Bulk Clean-Ups Without Chaos  Need to clean thousands of items or vendors? Realistically, you cannot change one field at a time. Enter Configuration Packages, BC’s master data Excel engine. You can export, clean, and re-import:  It’s the easiest way to do controlled mass updates while preserving data integrity.  Dimensions: How to Eliminate Reporting Chaos at Source   Dimensions are the secret weapon of Business Central against dirty financial reporting. They provide structure for:  BC lets you:  This ensures your financials, budgets, and Power BI reports are clean and meaningful.  Posting Groups: Preventing Financial Errors Before They Occur  Posting groups are assigned to each item, customer, and vendor that specify the G/L accounts affected when transactions take place.  If these are wrong → your financials break.  If these are right → your financials stay flawless.  BC uses:  This keeps your financial structure consistent, clean, and reliable.  Data Archiving & Deactivation: Cleaning Up Old Clutter  BC supports methods to keep your master data list clean:  Your lists remain accurate without losing historic data.  The Outcome: Clean Data → Clean Operations → Clean Decisions  When Business Central maintains master data integrity, every function benefits from this:  Your whole business becomes smoother, quicker, and more consistent.  Concluding Remarks:   Allow BC to do the cleaning, it was designed for this purpose. Business Central has one mission when it comes to master data: Prevent bad data from entering. Correct what is inside already. Keep going, be consistent. But the system can only do this if you use:  When you let Business Central enforce the structure, chaos turns into clarity. 
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