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Dynamics 365 Community / Forums / Microsoft Dynamics AX (Archived) / Project Management and...
Microsoft Dynamics AX (Archived)

Project Management and Accounting - Labor Cost and Overhead

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Posted on by Ahmad_Safadi 373

Our hour journals are imported from an external system, although, the unit cost of the hour consists of the direct labor cost and a percentage of overhead (indirect cost)

Shall we accept the hour journals with the "overhead " factor, considering the fact that the indirect administrative expenses are already recorded on the ERP system ( General & Administrative Expenses ) ? Or we should import the hour journals with the direct unit cost only excluding the overhead ?

What is the best practice in that regards ?

Thanks in Advance

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  • Verified answer
    Ludwig Reinhard Profile Picture
    Ludwig Reinhard Microsoft Employee on at

    Hi,

    If the unit costs that you import already include indirect costs I wouldn't include another indirect cost element in AX. Otherwise, you have a double counting of those costs.

    Please also discuss this with your accounting team to ensure that they fully understand this and are fine with the way it is handled.

    Best regards

    Ludwig

  • Ahmad_Safadi Profile Picture
    Ahmad_Safadi 373 on at

    Hello Dr. Ludwig

    I highly appreciate your answer. I have seen your post on the cost accounting for projects and I highly appreciate it

    The general and administrative expenses are recorded on the ERP system such as:

    1- Actual electricity bills

    2- Actual Water Bills

    3- Actual Hospitality expenses

    Just like in your example below on your blog post 

    en_5F00_82_5F00_0030.png

    You have mentioned in your screen shot above that there is indirect cost ( overhead ) of 5 per hour.

    Lets suppose that this is for electricity overhead, Now when the hour is posted, here is the actual GL Journal for the ( Indirect Cost ) part 

    Account                         Debit             Credit 

    Project Cost                   100             0

    Allocation           0                100 

    The above is much like "applied electricity cost". When the actual electricity bill is received for the previous month, we will record AP Invoice

    Account                      Debit                     Credit

    AP                               150                           0

    Electricity Expense       0                             150 

    My question is, can we use such "applied cost" concept to associate indirect cost with the hours as applied cost ? When the actual cost is perceived, actual cost deducts the applied cost accordingly  ?

    Thanks in Advance, 

  • Ahmad_Safadi Profile Picture
    Ahmad_Safadi 373 on at

    Any feedback ? I highly appreciate it

  • Suggested answer
    Ludwig Reinhard Profile Picture
    Ludwig Reinhard Microsoft Employee on at

    Hi,

    I would say that you can use the indirect project cost functionality if you are able to establish a relationship between your indirect costs, such as electricity, water, hospitality, etc. and your hour related costs that you post on a project.

    If you can establish this relationship in the form of a relatively stable % figure then you can go ahead.

    However, if you do not see a straightforward and pretty much stable relationship between those expenses and the hours you post on a project then the indirect cost functionality that the standard application supports is probably not the feature to go for.

    Best regards,

    Ludwig

  • guk1964 Profile Picture
    guk1964 10,888 on at

    Did you cost and budget the project on this basis?

    Is there already an overhead element built into the hourly rate? If so then will that be reversed out and be replaced by actuals?

    If you want to do this (which I wouldn't) then it  is probably easier to allocate based on cogs.

    Maybe pass a statistical journal for the project hours against a project dimension at period end and allocate against that.

  • Ahmad_Safadi Profile Picture
    Ahmad_Safadi 373 on at

    Thank you very much for the sufficient answer.

    Although, I just have one last question question ...

    [quote user="Ludwig Reinhard"]

    I would say that you can use the indirect project cost functionality if you are able to establish a relationship between your indirect costs, such as electricity, water, hospitality, etc. and your hour related costs that you post on a project.

    If you can establish this relationship in the form of a relatively stable % figure then you can go ahead.

    [/quote]

    Yes, the company has a direct percentage applied on the hour rate, and calculated as an overhead. In that essence, just to confirm with you .. If I considered the "Indirect Cost" functionality to apply overhead for water, electricity ... etc. Then, when the actual is recorded , there will be no duplication since applied cost will be deducted from the actual cost .... Just like in the example of you have mentioned in your blog post, Right ?

  • Ahmad_Safadi Profile Picture
    Ahmad_Safadi 373 on at

    Would you please elaborate why I would need to reverse out the applied indirect cost ?

    It's an applied cost, when the actual is recorded , it will be deducted from it ...  see the example above mentioned on Ludwig Reinhard blog post.

  • Verified answer
    Ludwig Reinhard Profile Picture
    Ludwig Reinhard Microsoft Employee on at

    Hi A. Saf,

    What you write about the reversal of the actual costs through the payroll allocation account is correct.

    What I do, however, question is whether an additional hour of working time can be related to electricity costs, water bills and alike. If you can then you are fine and what AX can do for you is the following:

    1. Post costs as usual (e.g. electricity)

    DR: Electricity expense

    CR: Accounts Payable

    2. Post project hour costs

    DR: Project costs

    CR: Payroll allocation

    It is the payroll allocation account that consumes a part of your total electricity expense. So let's say you have $1000 electricity expense and post costs for $500 with a indirect cost percentage of 10% for electricity. This mean the total project costs are $550 and the payroll allocation is -$550. -50$ from the payroll allocation relates to the elecricity expense. That is, from your $1000 electricity expense $50 have been allocated to your projects and the rest has to be covered e.g. by your administrative departments/cost centers.

    Hope this example makes things clear.

    Best regards,

    Ludwig

  • Ahmad_Safadi Profile Picture
    Ahmad_Safadi 373 on at

    Thanks for the prompt feedback, just wanted to add that I am willing to create multiple "applied cost" accounts for every Overhead account rather than "Payroll Allocation"

    Thanks a million, you've made my day

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