Manufacturing Postings Pt. 3- Financial Postings with Overheads


Hi Readers,

In this part we look at overheads in Business Central.

You can access Pt.1 here - Link to Pt.1  and Part.2 here - Link to Pt. 2

Overheads includes all costs that help keep the business running - whether or not they are related to manufacturing e.g Marketing expenses help promote the business and sell products but aren’t linked to manufacturing, Rent for office space (not factory space) because it supports the business but isn’t tied to manufacturing activities.

Indirect Costs are a subset of overheads that specifically support the production process but aren’t tied to a specific product. e.g the salary of a maintenance worker who keeps machines running, but their salary is not directly tied to making the product as a direct cost.

Once the cost accountants have identified the overhead costs, they can find a way to calculate an overhead rate.

For our case we can say we have an overhead rate of 20 per hour per work center. For large organizations, they may be different because some work center may consume more power, water factory space etc than others.

In the work center card, add the Overhead rate in the field shown below.

 

Because the cost of the routing will increase we have to re-calculate our product standard cost.

 

 

Our table finished good now has a standard cost of 9,774 (9,720 + 54). The 20 overhead rate is also multiplied by the number of routing hours hence why we dont have 80 (20 * 4)  but 54 (20 * 0.5 + 20 * 0.5 + 20 * 0.7 + 20 * 1).

So now lets produce with excess consumption.

Lets see which accounts are affected.

 

Type Qty Cost Total GL Account Source
Material - RM0001 1 4000 4000    
Material - RM0002 4 800 3200    
Material - RM0003 2 200 400    
Material - RM0004 2 800 1600    
Total Material     9200 Credit to Inventory Account Inventory Posting Setup - Inventory Posting Group of the BOM items - Inventory Account
    Cost of routing is from the work center card      
Work Center - R0001 0.5 500 250    
Work Center - R0002 0.5 400 200    
Work Center - R0003 0.7 600 420    
Work Center - R0004 2 450 900    
Total Routing     1770 Credit to Direct Cost Applied General Posting Setup - Gen. Prod Posting Group of the routing - Direct Cost Applied Acc
           
    Cost of overhead is from the work center card      
Work Center - R0001 0.5 20 10    
Work Center - R0002 0.5 20 10    
Work Center - R0003 0.7 20 14    
Work Center - R0004 2 20 40    
Total Routing     74 Credit to Overhead Applied General Posting Setup - Gen. Prod Posting Group of the routing - Overhead Applied Acc

We can now change the status of the production  from Released to Finished and see what happens.

An analysis is done by the document number of the finished production order.

 

The transactions would be summarised as below

GL Account Debit Credit Source

On posting the production journal
WIP 11.044    
Raw Material Inventory   9,200  
Direct Cost Applied   1,770  
Overhead Applied, Capacity   74  

On changing status of the production order to finished.
Finished Goods Inventory Account 9,774   Inventory Posting Setup - Inventory Posting Group of the produced item - Inventory Account
Material Variance 800   Inventory Posting Setup - Inventory Posting Group of the produced item - Material Variance Account
Capacity Variance 450   Inventory Posting Setup - Inventory Posting Group of the produced item - Capacity Variance Account
Capacity Overhead Variance 20   Inventory Posting Setup - Inventory Posting Group of the produced item - Capacity Overhead Variance Account
WIP   11.044 Inventory Posting Setup - Inventory Posting Group of the produced item - WIP Account

 

When changing status from released to finished, the system checks the standard cost of the finished good ( remember when we calculated the std cost and checked the cost shares) - 9,774.

Upon checking it will always post the standard cost only in the Finished Goods Inventory Account. The difference between the WIP and standard cost of the item are transferred to relevant variance accounts in the income statement accounts.

Our capacity overhead variance is 20 because we had 2 hours in Work Center - R0004 which has a standard production time of 1 hour (extra 1 hour * 20 is the overhead variance).

 

If no variance is available, no variance accounts will be posted to.

If less is consumed in production, the variances posting would be in the credit side.

 

The credit treatment of the Overhead Applied, Capacity is similar to Direct Cost Applied, Labour - to negate the expenses e.g rent, water, salary, power that have been capitalized as part of the finished item standard cost and will drop to the income statement as COGs.

 

NB

The system also offers another option to register the overhead as an Indirect Cost % on the item card of the finished good. I will add 10% for testing purposes and remove the overheads on the routing.

Recalculate my standard cost.

My new standard cost is 9720 + 972 ( 9720 * 10%) = 10,692

 

Lets produce.

 

Lets see which accounts are affected.

 

Type Qty Cost Total GL Account Source
Material - RM0001 1 4000 4000    
Material - RM0002 4 800 3200    
Material - RM0003 2 200 400    
Material - RM0004 2 800 1600    
Total Material     9200 Credit to Inventory Account Inventory Posting Setup - Inventory Posting Group of the BOM items - Inventory Account
    Cost of routing is from the work center card      
Work Center - R0001 0.5 500 250    
Work Center - R0002 0.5 400 200    
Work Center - R0003 0.7 600 420    
Work Center - R0004 2 450 900    
Total Routing     1770 Credit to Direct Cost Applied General Posting Setup - Gen. Prod Posting Group of the routing - Direct Cost Applied Acc

We can now change the status of the production  from Released to Finished and see what happens.

An analysis is done by the document number of the finished production order.

 

The transactions would be summarised as below

GL Account Debit Credit Source

On posting the production journal
WIP 10,970    
Raw Material Inventory   9,200  
Direct Cost Applied   1,770  

On changing status of the production order to finished.
Finished Goods Inventory Account 10,692   Inventory Posting Setup - Inventory Posting Group of the produced item - Inventory Account
Material Variance 800   Inventory Posting Setup - Inventory Posting Group of the produced item - Material Variance Account
Capacity Variance 450   Inventory Posting Setup - Inventory Posting Group of the produced item - Capacity Variance Account
Manufacturing Overhead Variance 125   Inventory Posting Setup - Inventory Posting Group of the produced item - Manufacturing Overhead Variance Account
WIP   10,970 Inventory Posting Setup - Inventory Posting Group of the produced item - WIP Account
Overhead Applied , Retail   1,097 General Posting Setup - Gen. Prod Posting Group of the produced item - Overhead Applied Acc

 

A manufacturing overhead variance will be posted which will be be (Material variance + Capacity variance) Indirect Cost % = (800 + 450)  * 10% = 125

Overhead Applied Retails is 10% of the total WIP ( actual direct production cost) - 10,970 * 10% = 1097

The credit treatment of the Overhead Applied, Mfg Overhead is similar to Direct Cost Applied, Labour - to negate the expenses e.g rent, water, salary, power that have been capitalized as part of the finished item standard cost and will drop to the income statement as COGs.

Thats marks the end of overheads. In the final post we look at subcontracting.

Link to Part 4