Item costing in Microsoft Dynamics 365 Business Central – using indirect cost

I am a frequent contributor to the Dynamics 365 Community. For those of you how does not know what it is – it is a website run by Microsoft offering a lot of content around the Dynamics products. There are also user forums where you can ask questions around the use of your Microsoft Dynamics product and discuss with other users and experts. A lot of users find this a very useful and helpful places to raise questions and discussions. Business Central got its own corner in this community and you should really check that out if you have never visited it. I found the inspiration for this blog post from a question that was raised by one of the forum users.

For companies working with trade it is essential to implement good practices for handling cost of items both for inventory value purposes but also for reporting the correct profit for goods sold.

Business Central offers a wide range of functionality for handling this. But sometimes it can be hard to determine the best approach for each individual business case. And although a lot of trade businesses have a lot of similarities they also have their different needs and ways of working.

The cost mechanism i will discuss in this article is the use of indirect cost. People can use different terminology for things but for the purpose of this article i will define landed cost as the sum of the direct cost we pay to our vendor and indirect cost that can be shipping and handling etc.

Item charges can be one way to handle indirect cost in Business Central. I will not discuss the uses of item charges in this article instead i will focus on the indirect cost that can be defined on the item card in Business Central. We will have a look at how it is set up, how it works when we post and the effect is has on our reporting of sales profit.

Item card

Let us start by taking a look at our item card.

In the cost and posting section of the item card we have the field “Indirect Cost %”. And as you can see here i have set that to 20% for my item.

I have also indicated that the “Unit cost” for the item is 10 – this should mean that my landed cost for this item should end up as 10 + 20% = 12.

What will happen is that Business Central will post an amount equal to the percentage i have defined as indirect cost for every purchase i do on this particular item.

General posting setup

As we can see in the item card shown above the item I am working on have the “Gen Prod. Posting Group” set to “Retail”. So in order to decide where my indirect cost will be posted i need to check the general posting setup for this posting group.

The account used for posting the indirect cost is defined in the column called “Overhead Applied Account” and as you can see i have set that account to the G/L account 20250 – that account is a part of my balance sheet.

Purchase invoice

The next we will do is to register a purchase invoice for our item and post that.

As you can see there is nothing on the purchase invoice that indicates that there is any indirect cost defined on this item. The direct unit cost is set to 10 – corresponding to the direct cost indicated on the item card. So then let’s just post the invoice.

The general ledger entries

As a result of posting the purchase invoice we ended up with these general ledger entries and i have also shown the net change on our trail balance.

Our inventory value is 12, account payable is -10 and we have -2 on our account for expected indirect cost.

How to handle the actual invoices we receive for indirect cost?

One option we have now can be to post the invoices we receive for costs that we have defined as indirect cost to the balance account (20250) we used to offset our calculated indirect cost. Doing so we can easily control if the indirect cost % defined on our item card is sufficient to cover the actual cost. And we can use that result to evaluate if we need to increase or decrease the percentage for indirect cost.

What happens when we sell our item?

After posting a sales invoice for the qty. of 1 of our items for a sales price of 15. Our trail balance will look like shown below.

Sales income is 15, our cost of goods sold is 12 and our net profit is 3. And we still have a liability for the indirect cost because we have not yet posted any incoming invoice regarding that cost.
And the same data can be read out of our item ledger entries.
In that way we can know that all our sales reporting will also show the same profit as our trail balance.

3 thoughts on “Item costing in Microsoft Dynamics 365 Business Central – using indirect cost”

  1. Hi Inge,
    Thanks for the insightful post.

    In the case where indirect cost percentage is used to have a rough/estimated landed cost, how do you see the landed cost being adjusted when the customer then receives the freight invoice and wants to use item charges to adjust the landed cost?

    Will that require that the customer then looks at the indirect cost percentage and calculates based on the received freight invoice how much they miscalculated and then correct it manually? or?

    1. Hi and thank you for your comment. I think i would only use indirect cost where i had actual indirect cost that i wanted to be a part of my landed cost. Freight should be considered direct cost and handled through item charges. The alternative would be to post freight not as item charges but as a balancing transactions towards the indirect cost. But then you would have to use item revaluation to adjust the landed cost to be correct. Sounds a bit complicated in my eyes. Then i think it would be easier to use standard cost and then adjust the standard cost if you see that your product calculation is not matching actual cost. But maybe none of those options are ideal. Personally i am a fan of using item charges for as much as possible if you actually know what shipment your cost is linked to. I am not sure if this answered your questions?

  2. In the case where the customer wants to use Item Charges for Freight that eg. comes 1 month later than the purchase order is posted, what do you suggest if the customer also wants to have an estimated landed cost? eg. for calculating sales prices, and they want to start selling before the “correct” freight cost comes.

Leave a Reply