Microsoft Business solutions–Navision Advanced Costing White Paper

This white paper informs the reader about the advanced costing in Microsoft Navision.

Executive Summary

If you are a customer with a requirement for advanced costing, the Navision costing solution will meet your needs. Microsoft Navision includes major advantages in costing and makes the costing structure compliant with your real life scenarios. This paper is for you if you have questions such as:

Do I have to freeze inventory changes in my solution when I revalue or count it?

Do I have to post inventory transactions immediately or can they be posted at the pace the different departments work?

How do I go back and see costs frozen at a particular point in time?

How do I post additional costs on receipts and post them to the value of inventory as well?

This paper describes how you can use Microsoft Navision as a tool to manage and track costs of inventory to the level you need to run your business. Too much control wastes your time, and too little control doesn’t give you the operational information that you need to make good decisions. You must decide where that point is for your organization.

The puzzle to find out the value of your inventory once an item is sold : What exactly was the cost of the goods sold? Navision does this for you. Moreover, the solution works for you whether you use actual or standard costing. As market requirements increase, you cannot afford to sit and wait for data to be collected before you make your decisions. Nor can you afford not to finalize month-end, quarterly or year-end postings, or store data forever in your ERP system.

With exceptional handling of cost and the ability to post it in the correct periods, even though your company moved into a new period, Microsoft Navision gives you the ability to manage your costs. Microsoft Navision now includes postings and tracking of postings in the correct period, and tracks those postings so that you can explain what actually happened to your cost and inventory value in earlier periods.

What’s Good About Costing in Microsoft Navision?

The list below describes the basic features of costing in Microsoft Navision . We can discuss them in five categories:

Cost structures and components.
This area describes Navision’s documented costing components in the inventory valuation system.
Item charges.
Item charges are a way to post landed costs but also allow companies to post the cost of receiving goods to the value of the items received.
Cost traceability and rollback.
How does the costing engine work, and how can you use it? We believe that our costing system is unique, both in traceability of the costs and in managing those costs regardless of the pace at which you post the inventory throughout the different departments in your organization.
Cost allocations.
What costs can be allocated in Microsoft Navision and how is this done? We describe this briefly..

Cost revaluation.
Microsoft Navision now directly supports the ability to revalue your costs, independently of the time that revaluation happens, or what type of costing method you might want to use.

Microsoft Navision supports both actual costs (defined as either FIFO, LIFO or specific costs), average costing and standard costing.

Cost Structures and Components

To get a better overview of what makes up the cost of the product, the solution now comes with cost components. Cost components could be either:

Direct cost

Direct costs of material and manufacturing related to those materials. For manufacturing purposes, direct cost is further divided into material and labor cost share. Direct costs can further be split-up into what we call item charges: including freight and insurance or any type of costs related to receiving the item.

Indirect cost

Indirect costs of material – being overheads both on the material and labor side – can be entered for standard costing purposes, posted and analyzed.

Variances

Variance between standard costs and actual costs can be analyzed both on direct and indirect costs (when it comes to overhead costs). You only use variance when you use standard costing on materials.

Differences between actual costs (including cost charges) and standard costs are posted to variance accounts, while standard costs change the value of COGS and inventory for the item.

Revaluation Postings

Cost changes as a cause of revaluation are posted in the system with separate cost types. This makes it easier to review the effect of revaluation for analysis purposes. These postings are traceable for later auditing.

Rounding Postings

Whenever the solution finds a need to record rounding residuals, these are also posted automatically. Rounding problems in Microsoft Navision have been eliminated and postings are traceable for later auditing.

Item Charges

The cost of receipts of goods and products, used for either reselling or manufacturing, constitutes an increasing share of the overall costs of the goods. In 1997, it was already said that the cost of distributing and receiving goods was bigger than the cost of manufacturing. Those costs – which we call item charge costs – need to be managed as well. Item charges can be insurance, freight or any costs from suppliers delivering services to transport your goods.

Microsoft Navision provides the ability to directly post these costs of receipts to the products received, independently of the time that you received those invoices. Post the shipment and accept the invoice from the supplier of your goods. Then later – when the transporter arrives with his invoice – allocate those costs to the receipts or transfers that you have already posted. Microsoft Navision then rolls those goods into the total costs of the goods.

Even if these costs originate from a different period, you still have the ability to allocate the costs to the inventory. Date transactions will automatically manage the issue of posting the changes of the costs to the cost of goods sold in a later period, but provide you with an overview of the product costs as well.

Cost Traceability and Rollback

The costing structure in Microsoft Navision is designed to accurately track cost changes. The system uses the date of the posting for the costing and no longer uses the time of the posting. This means that achieving accurate costs is not tied to a fixed workflow. The agility of the costing system lets you operate the way that is best for your business. You are no longer forced to post costs in sequence. Instead, post them when you’re ready and the system will automatically roll the cost structure back to the right cost.

In many systems, there are two types of problems in the cost rollback:

Either you lose the cost traceability or you lose the ability to see changes of costs through time.
Alternatively, you will have to post the cost at the right time.

Microsoft Navision is unique in its ability to eliminate both of those problems for you. You can see how costs have changed with direct drilldown capability on the average cost field in the item card. An item value entry carefully logs and records every change in the cost of the individual entries. This goes for both purchase with later freight costs, revaluation back in time, roll-up of manufacturing costs through the bills of materials and adjusting the Cost of goods sold even though you already sold the item to a customer.

Cost Allocations on Purchase, Transfers and Sales

Microsoft Navision now includes the ability to allocate a purchase invoice to a purchase receipt, transfer or return. When you receive a purchase invoice from a freight company, you can allocate it to both purchase receipts, transfers or returns. Item charges can be posted to customers using the sales invoice system and allocating to the sales shipments.

Functionality supports allocating the cost of these charges based on quantity and amount. Your reseller can easily add more sophisticated allocation methods, such as weight or volume, through customization.

Cost Revaluation

With Microsoft Navision, you can revalue every cost type, whether you do actual costing, average or standard costing. The revaluation journal suggests the items and their current costs and allows you to change those costs directly. After posting and cost adjustment, the system records the revaluation entries for document purposes.

The revaluation includes work-in-process. Even though it’s January 20, and need to adjust the inventory from January 1, you can do so. And that is without stopping the company from making transactions in your solution. Everyone can work on, consuming and distributing goods, even though you make your back-in-time revaluation.

Communication for Existing Resellers

Any reseller who has made customizations to the costing system should realize that the impact of the changes in the solution is great. It resolves most of the problems we have heard of so far – problems with average and actual costing – and it resolves the hard workflow that Navision Financials 2.60 had. It should make things easier for you, including the task of explaining the secrets of the Navision costing system to the customer.

The solution has grown since the 3.00 costing restructuring: opportunities have been pursued; each release offers more to our customers. But all the solutions provide a good foundation for costing and allow our cutomers to move into the more sophisticated costing that customers working in the supply chain require.

Where to Read More

The costing system is documented through two technical costing white papers, one for versions 3.01B and 3.10A, and another for versions 3.60, 3.70, and 4.00. The costing white papers describe in detail what the technical outlook of the Attain looks like and provides sample for how the solution calculates the cost.

Missing Things and Areas for Improvement

Below is a brief list of issues that might become an issue with 3.00 in special cases. There currently is no resolution for these issues, however, they are already being worked on:

Sales charges
Some deliveries like FOB, FOC also includes costs that the supplier has to pay for. These are also landed costs (cost of delivery at or closer to the customer). The present functionality does not support the ability to post these costs. This would require the ability to post purchase freight invoices directly to a sales shipment. The same goes for purchase credit memos.

The system does not have the ability to post these charges to sales shipments. This might become an issue for customers using FOB delivery methods and in need of managing costs of shipments.
Limited scope for item charges
The item charge system now only works if those charges related to the product are outsourced. Any internal costs associated with the item are not currently handled. Of course, many inventory costs would naturally be associated with internal company costs and the customer should be able to post those as well.

This might become an issue for customers (manufacturers or wholesalers) wanting to better control their own operations. For example, through distribution of costs related to managing their own transportation, cost of direct labor and so on.
Standard costing and charges
At present, there is no way to anticipate standard costs if you want to include item charges. While actual costing is supported, standard costing including expected costs of handling the item, including freight. Item charges are regarded as variance. This might become an issue with customers looking for a standard costing system that is more advanced.