Costing for Navision 4.0 Technical White Paper

Published: May 2004

This paper is intended for people who are involved in the implementation of costing functionality at a customer site and for those who need to advise customers or make modifications within the area. It gives an overview of the principles used within the costing area of Microsoft Business Solutions–Navision 4.00. Several in-depth examples are provided.

Table of Contents

Introduction

Inventory Posting

Inventory Adjustment and Reconciliation with General Ledger

Automatic Cost Posting

Post Inventory Cost to G/L

Adjust Cost – Item Entries

Expected Cost Posting

Account Types

Cost Components

Costing Method

The Effect of Costing Method on Valuing Inventory Increases

The Effect of Costing Method When Assigning Value to Inventory Decreases

Average Cost Calculation

Setting the Valuation Date

Adjusting the Average Cost

Calculating Revaluable Quantity

Determining Whether an Inventory Decrease Is Affected by a Revaluation

Variance Calculation

Determining Standard Cost

Rounding

Glossary

Appendix 1 – Controlling Accounts Posted to in General Ledger

Calculating the Amount to Post to General Ledger

Appendix 2 – Variance Calculation for Manufactured Items

Appendix 3 – Capacity Ledger Entry Diagram

Introduction

This paper gives an overview of the principles used within the costing area of Microsoft Business Solutions–Navision 4.00 and provides several in-depth examples. Here is a summary of the questions that are addressed in each section:

Inventory Posting

What kinds of entries are created during inventory posting?

What is the relationship between these entries?

Inventory Adjustment and Reconciliation with General Ledger

How and when is the inventory reconciled with the general ledger?

How are the posting dates for general ledger and value entries controlled?

How does the expected cost influence the inventory valuation?

What is the purpose of the cost adjustment batch job?

Which accounts are posted to during reconciliation?

Cost Components

To what level of detail can cost be broken down?

Costing Method

How does the costing method influence inventory valuation?

Average Cost Calculation

How is the average cost updated if:

Items are sales invoiced before they are purchase invoiced?

Postings are backdated?

The user needs to recover from an incorrect posting?

Application Type

How can a fixed application be used to reverse cost exactly?

How is an item valued when it is transferred from one location to another?

Revaluation

What kinds of valuation bases are supported?

Is it possible to backdate a revaluation and have the COGS updated correctly for the items already sold?

How is the revaluable quantity calculated?

Variance Calculation

How are variances calculated?

When is the standard cost determined?

Rounding

How are rounding residuals handled?

Appendix 1 – Controlling Accounts Posted to in General Ledger

What is the relationship between different types of value entries and the accounts posted to in general ledger?

Appendix 2 – Variance Calculation for Manufactured Items

How are the standard cost shares and variances calculated for a manufactured item?

Appendix 3 – Capacity Ledger Entry Diagram

What are the relationships between the production order and the ledger entries that it posts to?

Inventory Posting

Inventory transactions result in two kinds of postings—quantity and value. Quantity posting describes the change in quantity on inventory. The program stores this information in item ledger entries. Value posting describes the change in inventory value. This information is stored in value entries. One or more value entries can exist per item ledger entry.

For WIP inventory, there is a special kind of quantity posting that accounts for capacity, which is measured in either time or units. This information is stored in capacity ledger entries. The related value entries describe the added value of the conversion cost. One or more value entries can exist per capacity ledger entry.

Item ledger entries are applied against each other. To apply means to link an inventory increase with an inventory decrease so that it is possible to say exactly which increase was used for which decrease and vice versa. The program stores this information in item application entries.

Item ledger, capacity ledger, value, and item application entries are created when the user posts an item journal line. The item journal line can either be posted directly, for example, from the item journal, or it can be posted indirectly, for example, from a purchase line. When a purchase line is posted, it is first transferred to an item journal line, and then the journal line is posted as if the transaction had been entered directly.

Note that the entry type indicates which G/L account to post to—not whether it is an inventory increase or decrease. That is determined either by the sign of the quantity on the item ledger entry or the valued quantity on the value entry (as they always have the same sign). For example, a sales entry with a positive quantity describes an inventory decrease caused by a sale, and a sales entry with a negative quantity describes an inventory increase caused by a sales return.
Example

The user posts a purchase order as received and invoiced, for 10 items with a direct unit cost of LCY 7 and an overhead rate of LCY 1. The posting date is 01-01-03. The program creates the following entries:

Item Ledger Entries
Posting Date		Entry Type	Quantity		Entry No.
01-01-03		Purchase	10		1
Value Entries
Posting Date	Entry Type			Cost Amount (Actual)		Cost Posted to G/L	Item Ledger Entry No.	Entry No.
01-01-03	Direct Cost			70		0	1	1
01-01-03	Indirect Cost			10		0	1	2

Item Application Entries
Entry No.	Item Ledger Entry No.	Inbound Item Entry No.	Outbound Item Entry No.	Quantity
1	1	1	0	10

Item Ledger Entries

Posting Date	Entry Type	Quantity	Entry No.
01-15-03	Sale	-10	2

Value Entries

Posting Date	Entry Type	Cost Amount (Actual)	Cost Posted to G/L	Item Ledger Entry No.	Entry No.
01-15-03	Direct Cost	-80	0	2	3

Item Application Entries

Entry No.	Item Ledger Entry No.	Inbound Item Entry No.	Outbound Item Entry No.	Quantity
2	2	1	2	-10

At the end of the month, the user can reconcile these straightforward inventory transactions – which do not need cost adjustment - with the general ledger by running the Post Inventory Cost to G/L batch job. The posting date is 01-31-03. The program updates the Cost Posted to G/L and creates the following G/L entries:

Value Entries

Posting Date	Entry Type	Cost Amount (Actual)	Cost Posted to G/L	Item Ledger Entry No.	Entry No.
01-01-03	Direct Cost	70	70	1	1
01-01-03	Indirect Cost	10	10	1	2
01-15-03	Direct Cost	-80	-80	2	3

G/L Entries

Posting Date	G/L Account No.	Amount	Entry No.
01-31-03	<Inventory Account>	70	1
01-31-03	<Direct Cost Applied Account>	-70	2
01-31-03	<Inventory Account>	10	3
01-31-03	<Overhead Applied Account>	-10	4
01-31-03	<Inventory Account>	-80	5
01-31-03	<COGS Account>	80	6

Inventory Adjustment and Reconciliation with General Ledger

There are two ways to reconcile the inventory ledger with the general ledger:

Activate the automatic cost posting option

Use the Post Inventory Cost to G/L batch job

Automatic Cost Posting

When the user has activated this option, the program automatically posts to the general ledger every time the user posts to the inventory ledger. The posting date of the G/L entry will be equal to the posting date of the item journal line.

Post Inventory Cost to G/L

When the user runs this batch job, the program creates G/L entries on the basis of value entries. The entries can be summarized per posting group. The user sets the posting date of the G/L entry on the request form for the batch job.

The Post Inventory Cost to G/L batch job allows the user to post adjustments, which were recognized after the accounting period was closed, to an open accounting period. The advantage is that these adjustments can be posted without reopening a closed accounting period.

However, if the batch job request form is not filled in carefully, it is possible to end up in a situation where inventory ledger and general ledger balances are out of sync. The Posting Date field on the Options tab and the filter on the Posting Date field on the Value Entry tab are the most important settings.

Adjust Cost – Item Entries

Before running the Post Inventory Cost to G/L batch job, it is important to run the Adjust Cost – Item Entries batch job. The main purpose of this batch job is to update COGS for sales entries, as this is not always possible to calculate at the time of posting. An item can, for example, be sales invoiced before it has been purchase invoiced. In order to make a correct inventory valuation while allowing this flexibility, it is necessary to make a cost adjustment some time later by running the Adjust Cost – Item Entries batch job.

Another key purpose of this batch job is to update the unit cost on the item card. Because of this, we recommend running the Adjust Cost – Item Entries batch job as often as possible, during non-working hours. This ensures that the unit cost is updated for items on a daily basis.

The Adjust Cost – Item Entries batch job creates value entries for rounding and adjustment. The new adjustment and rounding value entries have the posting dates of the original value entries, unless those value entries fall within a closed accounting period, meaning that the posting date is earlier than the date in the Allow Posting From field in the general ledger setup. In this case, the batch job assigns the posting date that the user entered in the request form in the Closed Period Entry Posting Date field.

Example

The user posts a purchased item as received and invoiced on 01-01-03. The user later posts the sold item as shipped and invoiced on 01-15-03. The user runs the Adjust Cost – Item Entries and Post Inventory to G/L batch jobs with the posting date set to 01-31-03. The following entries are created:

Value Entries

Posting Date	Item Ledger Entry Type	Cost Amount (Actual)	Cost Posted to G/L	Invoiced Quantity	G/L Entry No. (Account)	G/L Entry No. (Bal. Account)	Entry No.
01-01-03	Purchase	10.00	10.00	1	1	2	1
01-15-03	Sale	-10.00	-10.00	-1	3	4	2

G/L Entries

Posting Date	G/L Account No.	Description	Amount	Entry No.
01-31-03	2130	Inventory Account	10.00	1
01-31-03	7291	Direct Cost Applied Account	-10.00	2
01-31-03	2130	Inventory Account	-10.00	3
01-31-03	7290	COGS Account	10.00	4

Later, the user posts a related purchase item charge for 2.00 LCY as invoiced on 02-10-03. The user runs the Adjust Cost – Item Entries batch job and then runs the Post Inventory to G/L batch job with the posting date set to 02-28-03. The final result is as follows. Note that the adjustment of COGS is now recognized in February for the G/L entries.

Value Entries

Posting Date	Item Ledger Entry Type	Cost Amount (Actual)	Cost Posted to G/L	Invoiced Quantity	G/L Entry No. (Account)	G/L Entry No. (Bal. Account)	Adjustment	Entry No.
02-10-03	Purchase	2.00	2.00	0	5	6	No	3
01-15-03	Sale	-2.00	-2.00	0	7	8	Yes	4

G/L Entries

Posting Date	G/L Account No.	Description	Amount	Entry No.
02-28-03	2130	Inventory Account	2.00	5
02-28-03	7791	Direct Cost Applied Account	-2.00	6
02-28-03	2130	Inventory Account	-2.00	7
02-28-03	7290	COGS Account	2.00	8

Expected Cost Posting

When only the quantity part of an inventory increase has been posted, the inventory value will not change unless the user has activated the expected cost posting to general ledger option. In this case, the expected cost is posted to interim accounts at the time of receipt. Once the receipt has been completely invoiced, the interim accounts are then balanced and the actual cost is posted to the inventory account.

Starting in version 4.00, for reconciliation and traceability purposes, the invoiced value entry shows the expected cost amount that has been posted to balance the interim accounts.

Example

In the following example, the user has activated automatic cost posting and expected cost posting to general ledger.

The user posts a purchase order as received. The expected cost is LCY 95.

Value Entries

Posting Date	Entry Type	Cost Amount (Expected)	Expected Cost Posted to G/L	Expected Cost	G/L Entry No. (Interim Acc.)	G/L Entry No. (Int. Bal. Acc.)	Item Ledger Entry No.	Entry No.
01-01-03	Direct Cost	95	95	Yes	1	2	1	1

G/L Entries

Posting Date	G/L Account No.	Amount	Entry No.
01-01-03	<Invt. Accrual Acc. (Interim)>	-95	2
01-01-03	<Inventory Account (Interim)>	95	1

At a later date, the user posts the purchase order as invoiced. The invoiced cost is LCY 100.

Value Entries

Posting Date	Cost Amount (Actual)	Cost Amount (Ex-pected)	Cost Posted to G/L	Ex-pected Cost	G/L Entry No. (Account)	G/L Entry No. (Bal. Account)	G/L Entry No. (Interim Acc.)	G/L Entry No. (Int. Bal. Acc.)	Item Ledger Entry No.	Entry No.
01-15-03	100	-95	100	No	5	6	3	4	1	2

The invoice posting clears the interim account and posts the invoiced amount to the inventory account.

G/L Entries

Posting Date	G/L Account No.	Amount	Entry No.
01-15-03	<Invt. Accrual Acc. (Interim)>	95	4
01-15-03	<Inventory Account (Interim)>	-95	3
01-15-03	<Direct Cost Applied Account>	-100	6
01-15-03	<Inventory Account>	100	5

Account Types

During reconciliation, inventory values are posted to the inventory account in the balance sheet, and the same amount, but with the reverse sign, is posted to the relevant balancing account. The balancing account is, in most cases, an income statement account. However, when posting direct cost related to consumption or output, it is a balance sheet account. The type of the item ledger entry and value entry determines which G/L account to post to.

Example

This example, which describes a chain that is manufactured from purchased links, gives an overview of the various account types that are used in a typical scenario. The user has activated the expected cost posting option. The details are as follows:

Link: Costing method = Standard

Standard cost = LCY 1

Overhead rate = LCY 0.02

Chain: Costing method = Standard

Standard cost = LCY 150

Overhead rate = LCY 25

Work center: Direct cost per minute = LCY 2

Indirect cost % = 10%

Purchase

The user purchases 150 links and posts the purchase order as received.
The user posts the purchase order as invoiced. This results in an overhead amount of LCY 3 to be allocated and a variance amount of LCY 18.

2a. The interim accounts are cleared.

2b. The direct cost is posted.

2c. The indirect cost is calculated and posted.

2d. The purchase variance is calculated and posted (only for standard-cost items).

Inventory (Interim)

Inventory Accrual (Interim)

2a.

150

Inventory

Direct Cost

Indirect Cost

Purchase Variance

2b.

2c.

2d.

165

Sale

The user sells 1 chain and posts the sales order as shipped.
The user posts the sales order as invoiced.

4a. The interim accounts are cleared.

4b. COGS is posted.

Inventory (Interim)

COGS (Interim)

Inventory

COGS

4a.

4b.

150

Consumption

The user posts consumption of 150 links used to produce 1 chain.

Material:

	Inventory			WIP
5.		150		150

The work center used 60 minutes to produce the chain. The user posts conversion cost.

6a. The direct costs are posted.

6b. The indirect costs are calculated and posted.

Capacity:

Direct Cost

WIP

Indirect Cost

6a.

6b.

120

Output

The user posts expected cost of 1 chain.
The user finishes the production order and runs the Adjust Cost – Item Entries batch job.

8a. The interim accounts are cleared.

8b. The direct cost is transferred from the WIP account to the inventory account.

8c. The indirect cost (overhead) is transferred from the indirect cost account to the inventory account.

8d. This results in a variance amount of LCY 157 (variances are only calculated for standard-cost items).

WIP

Inventory (Interim)

8a.

150

WIP

Inventory

Indirect Cost

Variance

8b.

8c.

8d.

282

157

For the sake of simplicity, only one variance account is shown. In reality, five different accounts exist: Material, Capacity, Capacity Overhead, Subcontracting and Manufacturing Overhead variance.

Adjustment/Revaluation/Rounding/Transfer

The user revalues the chain from LCY 150 to LCY 140.

	Inventory			Inventory Adjustment
9.		10		10

The exact relationship between the above-mentioned account types and the different types of value entries is shown in Appendix 1 – Controlling Accounts Posted to in General Ledger.

Cost Components

Cost components are different types of costs that comprise the value of an inventory increase or decrease. They can be grouped into the following general types:

Direct cost—cost that can be traced directly to a cost object

Indirect cost—cost that is allocated without direct traceability to a cost object

Variance—the difference between actual and standard costs, which is only posted for items using the standard costing method

Revaluation—a depreciation or appreciation of the current inventory value

Rounding—residuals caused by the way in which valuation of inventory decreases are calculated

Some of these costs can be broken down further. The direct cost of an item, for example, can consist of the following cost components:

Item cost (= direct purchase price)

Freight cost

Insurance cost

Freight and insurance costs are item charges that can be added to an item’s cost at any time. When the user runs the Adjust Cost – Item Entries batch job, the program updates the value of any related inventory decreases accordingly.

The different types of variance are listed below. These are described more thoroughly in the section on Variance Calculation.

Purchase

Material

Capacity

Subcontracted

Capacity Overhead

Manufacturing Overhead

Costing Method

Microsoft Business Solutions–Navision supports the following costing methods:

FIFO (First In First Out)

LIFO (Last In First Out)

Average

Specific

Standard

They all have one thing in common—when the quantity on inventory is zero, the inventory value must also be zero. However, the costing methods differ in the way that they value inventory decreases and whether they use actual cost or standard cost as the valuation base.

Example

The following sequence of inventory increases and decreases is used below to show the effects of different costing methods. Note that the resulting quantity on inventory is zero, and consequently the inventory value must also be zero, regardless of the costing method.

Posting Date	Quantity	Entry No.
01-01-03	1	1
01-01-03	1	2
01-01-03	1	3
02-01-03	-1	4
03-01-03	-1	5
04-01-03	-1	6

The Effect of Costing Method on Valuing Inventory Increases

If the costing method uses actual cost (FIFO, LIFO, Average or Specific costing method) as the valuation base, then the inventory increases are valued as shown below.

Posting Date	Quantity	Cost Amount (Actual)	Entry No.
01-01-03	1	12	1
01-01-03	1	14	2
01-01-03	1	16	3

If the costing method uses standard cost as the valuation base, then the inventory increases are valued as shown below.

Posting Date	Quantity	Cost Amount (Actual)	Entry No.
01-01-03	1	15	1
01-01-03	1	15	2
01-01-03	1	15	3

The Effect of Costing Method When Assigning Value to Inventory Decreases

FIFO

The FIFO costing method assigns the value of the first increases on inventory (entry no. 1, 2, 3). COGS is calculated using the value of the first inventory acquisitions.

Posting Date	Quantity	Cost Amount (Actual)	Entry No.
02-01-03	-1	-12	4
03-01-03	-1	-14	5
04-01-03	-1	-16	6

LIFO

The LIFO costing method assigns the value of the last increases on inventory (entry no. 3, 2, 1). COGS is calculated using the value of the most recent inventory acquisitions.

Posting Date	Quantity	Cost Amount (Actual)	Entry No.
02-01-03	-1	-16	4
03-01-03	-1	-14	5
04-01-03	-1	-12	6

Average

The average costing method calculates a weighted average of the remaining inventory on the valuation date of the inventory decrease. (This calculation is described in detail in the section Average Cost Calculation.)

Posting Date	Quantity	Cost Amount (Actual)	Entry No.
02-01-03	-1	-14	4
03-01-03	-1	-14	5
04-01-03	-1	-14	6

Standard

The standard costing method works similarly to FIFO. The difference is that the inventory increases are valued at standard cost (rather than actual cost), which affects the value of the inventory decreases.

Posting Date	Quantity	Cost Amount (Actual)	Entry No.
02-01-03	-1	-15	4
03-01-03	-1	-15	5
04-01-03	-1	-15	6

Specific

The costing method makes an assumption about how cost flows from inventory increase to inventory decrease. However, if more accurate information about the cost flow exists, a user can override this assumption by creating a fixed application between entries. A fixed application creates a link between an inventory decrease and a specific inventory increase and will direct the cost flow accordingly. In Microsoft Navision, a fixed application has the same effect as