Some advantages of using the standard costing method in Manufacturing in Microsoft Dynamics NAV


Microsoft Business Solutions-Navision 4.0 and Microsoft Navision 4.0 are now part of Microsoft Dynamics NAV 4.0. All references to Microsoft Business Solutions-Navision or to Microsoft Navision 4.0 pertain to Microsoft Dynamics NAV.

INTRODUCTION


This article describes some advantages of using the standard costing method instead of using one of the other costing methods in Manufacturing in Microsoft Dynamics NAV.


Notes
  • If the government accounting authorities and rules that govern the financial report for the country support the standard costing method, the standard costing method is the preferred method.
  • Some countries do not support the standard costing method. In these countries, laws and accounting requirements prevent a business from using the standard costing method. For example, the average costing method is required in Germany. In those countries, the standard costing method is unavailable.
  • The article describes a general recommendation that is based on historical support issues.
  • This information in this article is not accounting advice.

More Information


Some advantages of the standard costing method are as follows:
  • Value entries do not increase in the standard costing method.


    If you use the standard costing method, the standard cost is known at the time of posting. Therefore, the system does not adjust the component cost that is used for consumption in Manufacturing.

    However, if you use a different costing method, the actual cost may change many times. These changes occur because the final invoice posting shows a cost that differs from the original receipt cost, freight, and other landed cost. These costs are invoiced and added to the purchase cost. Other system adjustments for the actual cost may also cause the changes. For example, in the first-in-first-out (FIFO) method, the system may adjust the cost to reflect the layered cost. Every adjustment must flow up all levels of the bill of materials (BOM). Therefore, Microsoft Dynamics NAV creates many value entries and general ledger (G/L) entries for each output entry of the manufactured items.
  • Using the standard costing method does not decrease system performance.


    If you use any actual costing method instead of the standard costing method, the amount of data increases. Multiple levels of calculations are required in Manufacturing. The calculations become more resource intensive. As the amount of data increases, system performance decreases. However, the standard costing method does not require additional value entries and general ledger postings.
  • You can see costing changes and anomalies if you use the standard costing method.


    The standard costing method produces variance postings that expose issues. These variance postings help you see and analyze costing changes and anomalies. An actual costing method only provides an average or layered cost that is based on historical purchase or on positive entry value.
  • Data is easy to maintain and to repair in a standard cost database.


    If data errors are based on data design, data modifications, or data input, you must fix the data in the database. It is much easier to repair a standard cost database than an average cost database. It is also much easier to determine the cause of an error in a standard cost database than in an average cost database or in a FIFO cost database.
  • When you have purchased component usage that has not been invoiced, you can force the consumption of this usage to be coded as invoiced if you use the standard costing method. In versions that are earlier than Microsoft Dynamics NAV 4.0 Service Pack 1, you can set the Output Completely Invoiced flag to TRUE on consumption entry postings if you use the standard costing method. You can safely make this change in codeunit 22.

    After you set the Output Completely Invoiced flag to TRUE, you can eliminate one of the three primary requirements for posting the final actual cost amount for finished goods output. The primary requirement that you can eliminate is the requirement that the purchased component be fully invoiced. (See the "Notes" section for the three requirements.)

    When you set the Output Completely Invoiced flag to TRUE, the work in process (WIP) of finished items is relieved after you do the following:
    • You change the released production order to finished status.
    • The Adjust Cost Item Entries processes are completed.
    Therefore, production variances are posted immediately. If you use actual costing methods, all components must be invoiced before the final costing is known and before the actual cost amount is established for the output entry.

Notes

  • There are three primary requirements for posting final costs for finished goods:
    • All component entries must be fully invoiced.
    • The released production order must be finished. 
    • The adjustment of cost item entries must be run. 
    Starting with Microsoft Dynamics NAV 4.0 Service Pack 1, these three requirements are not needed because automatic adjustments are turned on. Therefore, this advantage is for the versions that are earlier than Microsoft Dynamics NAV 4.0 Service Pack 1.
  • If you use the standard costing method, the requirement that all component entries must be fully invoiced is eliminated. Microsoft Dynamics NAV assumes that standard cost components are fully invoiced at the time of posting consumption.