Dynamics 365 Business Central: Item Costing Part 14, Standard Cost

Dynamics 365 Business Central: Item Costing Part 14, Standard Cost:

All right, we're going to keep going with item costing. Now we're switching from average over to standard. Standard is usually used in manufacturing or production. It can be used, however, for anything, if you like standard costing better than other costing, for some reason or another. There are some situations that warrant that. You can definitely use that.

Let me explain to you how standard works. We're going to create the standard coffee mug. You will see that in the system. When you actually create this coffee mug, you set up the costing method – oops – [other] cost method as standard. Then you have to put the cost, or the standard cost, at something. You type it in. You actually put it on the card at a value. In this case, we're going to put that at $5. This means that every single piece of that coffee mug is going to cost $5. It doesn't matter what you bought it for. The system will assign it $5.

If we go ahead and create a purchase order, and we're going to do that in the system, and we buy, let's say, ten at the until cost of $4, total 40, total cost, then the system is fine with that, books it, goes into inventory. The ILE that gets created, the item ledger entry, is ten $5 for cost, unit cost. If you drill into the unit cost of this, you get value entries. You here get the $4, which is coming from that purchase, and then you get $1, which is actually posting into our variance account.  That's a GL account. It [accrues] this to the [side].

You see on your GL account, your inventory goes up by $5 because that's the cost. The cost of the item is $5, but $4 goes to pay the vendor because you don't owe them $5, you bought it for four, right here. However, $1 goes into a purchase variance account. There, you can take a look at that account and see if you're actually on track with your $5 or not. Let's say this was an estimate of what you usually buy it for, and then these $1s get pushed aside.

There are many reasons why you would want to do this. Let's say, for example, you want the cost to be slightly higher than you know what you buy it for because there's going to be freight. You want to post the freight against the variance account and use that as an accrual. This is not a production environment.

The reason why in production they use standard cost is because the cost is fluctuating a lot. It's hard for you or for sales to know what cost to base their profit on, or their markups on. Someone has to draw a line in the sand and say it's going to be at $5. Then production is just going to try to beat that and try to come lower than that, so you're winning on both sides. You basically are creating it cheaper than the line, and you're marking it up from the line to make profit [off] that. You have both the production side and the sales side working to create margins.

Anyways, we'll get more into the standard costing. This is the first video. As you know, we usually do more than one on each method. Let's take a look at the system.

Okay, let's set up a standard coffee mug. I'm just going to go ahead and create a new one, with no sales tax. We don't need sales tax for this one. It's going to be the standard coffee mug. In the costing, I'm going to set it up as standard. Doing that, standard cost lights up. I'm going to say that the cost of this is $5. It gives me this warning here. I'll just override that.

I'm basically, ahead of time, saying that the cost of this coffee mug is going to be $5, no matter what I buy it for. Let's take a look at a purchase order. If I put this on a purchase order and receive it in – so I'll just go here and create a new one. Do it to the [05:09]. Standard coffee mug to the main location. Let's get ten. The unit cost here, so I put it at $5, but I'm going to say – we actually did pay four. Got it a little cheaper. I'll put in the invoice number, and go ahead and post this. Receive an invoice.

Okay, this is pretty interesting. You might get this in your demo database. It's basically telling me the purchase variance account must have a value in the general posting setup. Domestic: no tax. Okay, let's get into the general posting setup. This is giving you an indication of where things are going to post the difference.

If I go into domestic no tax, which is right here, we want to get into the purchase variance account. If I scroll here to the right, we get purchase variance right here. I'm going to just put that into the same one as overhead applied account. In this case: 703, for now. Now I'll just close this out, and go ahead and see if I can post it now. Post. Receive an invoice. Yep, it went through.

If I just close this out, and go into the standard coffee mug. Where did that end up going? Right here. Take a look at the entries. I have a purchase for ten. The cost is $50. I paid $40 dollars for this, so why isn't it $40? If I click on here, I can see that there is a purchase variance posted. It actually puts in the direct cost as four, which is what we paid the vendor, and then it adds a dollar because it's a standard cost item for $5. It needs to add one more dollar to make it five.

The posting of this entry, or this variance, is put into that purchase variance account that I just entered in the general ledger setup, or the general posting setup. Standard basically forces a certain cost on the item, no matter what you buy it for. You can account for the difference [off/of] that in that GL account. You can see whether you're on or off by looking at that GL account as you're receiving invoices for this item.