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When you use an ERP system built for manufacturing like Microsoft Dynamics 365 Business Central or Dynamics NAV, your production orders play a crucial role in balancing your general ledger accounts. But how does the costing you put into your production orders affect your bottom line?
To help production managers and finance leaders get on the same page, both parties must understand the cost components of a production order. Doing so minimizes surprises and empowers both sides of the business to communicate effectively within the ERP system.
Not sure how to get started? Read this blog to learn:
Actual costs are posted to the production order and can be compared to the production order's expected cost to see any variances. You can analyze these variances to determine if there are any issues in the production process. If you use standard cost, any variances will post to the general ledger when the production order finishes.
The actual cost of a production order consists of the following components:
Let's review each cost component and how it posts.
Consumption is posted to a production order from either the consumption or production journal. If you use backward or forward flushing methods, consumption can be automatically posted.
When consumption posts, the following transactions occur:
Labor is posted to a production order from either the output or production journal. Expected labor can also post automatically when utilizing backward or forward flushing methods.
When labor is posted, the following transactions occur:
Credit Direct Cost Applied
Credit Overhead Applied
When you create a purchase order from the subcontracting worksheet, subcontracting costs are posted to a production order.
When the purchase order is posted as invoiced, the following transactions occur:
Credit Direct Cost Applied – Subcontracting
Manufacturing Overhead is posted to a production order when an output transaction is posted from either the output or production journal.
When output is posted, the following manufacturing overhead transactions occur:
Credit Overhead Applied
Output is posted to a production order from either the output or production journal.
When an output is posted, the following transactions occur:
Debit Inventory - Interim
When production output and all cost component transactions are complete, the production order status must change to "Finished" to post "actual" cost for the output transaction and post variances to the G/L if you use standard cost as the costing method.
When the output is posted, the following transactions occur:
Debit/Credit Material Variance
Debit/Credit Capacity Variance
Debit/Credit Cap. Overhead Variance
Debit/Credit Subcontracting Variance
Debit/Credit Mfg. Overhead Variance
Have you been following along but want to follow some practical examples and a step-by-step tutorial? In that case, you'll want to register for the upcoming webinar I will be hosting with my colleague John Grant where we will dive deep into how production order costing works.
(Are you reading this after the webinar? No problem! You can watch on-demand by following the same link above!)
You can also browse our extensive collection of on-demand webinars about manufacturing topics that might interest.
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