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Hi,
Where can I find the information why do we need the Direct Cost applied account and if there is a way to switch it off?
Currrently if we purchase Inventory the system does
Dr Purchases Account Cr Direct Cost Applied Account
Dr Inventory Account Cr Accounts Payable
Why do we have the first journal? How to get rid of it?
Hi Tom,
Thank you very much for your explanation, highly appreciated.
Regards,
Julia
Hi Julia,
The functionality has been around since initial Navision version.
The Business Central Posting flow for Purchase is as follows:
DR – Purchase
CR – Accounts Payable
DR – Inventory
CR – Direct Cost Applied
The Purchase and Direct Cost Applied are offsets. The original design, as it was communicated to me many years back in my early Navision days, was that Denmark designed the Purchase/Direct Cost Applied offset posting flow to allow for reporting on the Income Statement supporting schedule for the Cost of Goods Sold supplemental schedule, which has the basic structure below:
Beginning Inventory $ XXX.XX
Add: Purchases $ XXXX.XX
Other Capitalized cost $ XXX.XX (overhead applied etc.)
--------------
Total Goods Available $XXXXX.XX
Less Ending Inventory ($XXX.XX)
---------------
Cost of Goods Sold $XXXXXX.XX
The COGS supplemental Schedule then can be built by creating an Account Schedule and add the Purchase Debits for the AP posting. This is why standard NAV does not post directly to Inventory on the Purchase Invoicing. It flows through Purchase and then offsetting Direct Cost Applied to Inventory Balance Sheet with the Post Inventory Cost to G/L Batch process or through setting Automatic Cost Posting to TRUE in Inventory Setup so the G/L Inventory Posting is automatically updated.
Note, if you had Indirect Cost % or Overhead Rate on an Item Card, the system would post the Purchase Invoice as follows:
DR – Purchase
CR – Accounts Payable
DR – Inventory
CR – Direct Cost Applied
CR – Indirect Cost Applied for OH Rate ($ Amount) or Indirect Cost % (Add % of Direct Cost as indirect overhead applied)
The Indirect Cost Applied allocates expensed cost and capitalizes the cost into Inventory.
I hope this helps add some additional clarification.
Thanks
Tom
Hi Julia,
I originally come from a Dynamics GP background so when I started using Business Central I also wondered what "Direct Costs Applied" GL postings were for? After using BC for a little while I came to the conclusion that its there to support the "Automatic Cost Posting" setting in Inventory Setup. This gives you the option to switch off Inventory postings to the GL. I wrote about it in more detail on my blog. You can read the full article hrere http://thedynamicsexplorer.com/2019/05/22/dynamics-nav-business-central-thoughts-on-the-direct-costs-applied-and-purchases-accounts/
I'd be interested to see if anyone else agrees with my thoughts.
Thanks
Gavin
Thank you very much, Gulshan! From the accounting point of view, these entries do not have any sense, I wonder why this topic is even debatable...
Anyway, is like is I probably will link both Purchase and Direct Cost applied to a clearing account in P&L
Thank you very much!
Hi Julia,
You can refer to the below link also. It has some good discussion on the topic. This is quite a debatable topic.
Please check this
www.archerpoint.com/.../purchases-and-direct-cost-applied-accounts-microsoft-dynamics-nav
You cannot just get rid of them.
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