Understanding Expected Cost for Microsoft Dynamics 365 Business Central and  NAV™

Choosing the appropriate costing method is a key factor in successfully managing costing information. Each costing method has different peculiarities inherent to the costing method. We are not speaking of peculiarities in Dynamics Business Central but of the costing method itself. The important part is that once you have selected a costing method for an Inventory Item, and have posted the first transaction, it is not easy to change the costing method.

It is worth the effort to make sure you start out on the right foot when deciding on costing methods.

Costing Method choices

Your choices of costing methods  are

  • No costing
  • Weighted Average costing
  • Standard Costing
  • FIFO
  • Specific (only if you work with serialized inventory)
  • LIFO (Not acceptable in most accounting environments).


In addition, you may want to use different costing methods for different types of inventory, which is a story for another day.

Besides selecting correct costing methods, Dynamics Business Central or NAV offers related functional configurations, which requires diligent attention.

If you find yourself using the wrong costing method and settings, the implications could be that you interpret information from your chart of accounts incorrectly, or find it difficult to reconcile.

What is Expected Cost Posting?

Expected Cost Posting is an option you can turn on in NAV. It may look very attractive and even logical to turn on. It is advisable to think twice though. Turning the option on, result in a considerable increase in ledger entries being posted in the system.

It not only posts expected cost on inbound inventory but also on outbound inventory.

Unfortunately, you cannot turn the option on or off per item or group of items. It is a global setting that affects all inventory or none.

A challenge of any inventory system is what the accounting consequences should be for inventory received if Vendor invoices will be received only later. Even worse, what should happen with WIP if you would utilize such an item in production while awaiting the Purchase Invoice, or how should Cost of Goods Sold (COGS) be affected if selling such an item? And what’s more, what should happen when we do receive that invoice. Not to forget the need to make fair cost decision when making manual positive adjustments, or posting sales Credit Memos. It is not all about vendor invoices.

The first price approach would be to manage your supply chain to get your vendors to always supply an invoice together with delivery. This could alleviate considerable complications. If that is how you operate, you have no need for utilizing expected cost posting and can turn it off.  However, the option is not always available to receive invoices with delivery. For example, it may be undesirable for transport operators to know the value of goods in transit.

When you use FIFO as a costing method, the system for practical purposes achieves the same as Expected cost posting. A FIFO cost inbound transaction posts an initial cost, e.g. using cost from the purchase order and if the actual cost is different on posting the Vendor Invoice, it reverses the variance out. I never could find a valid reason why you would want to use expected cost posting if you use FIFO as your only costing method.

Expected Cost Posting resolve challenges present primarily in manufacturing environments. The issue involves the inability to accurately determine the WIP cost of subassemblies until the assembly or product is finally complete. As to counter this problem, Expected Cost Posting involves two types of Value Entries being posted to the G/L.

Let’s have a look at posting

The two types of Value Entries that get posted into the G/L when Expected Cost is active are:

  • Initially when a purchase order has been received but not yet invoiced.
  • A second entry when the purchase order is finally invoiced.

Dynamics NAV™ automatically assigns an expected cost with the first Value Entry, which is then adjusted when the purchase is invoiced. The second Value Entry adjusts the first entry providing the actual cost.

Purchase Order Received, but not invoiced:

  • Dr. Interim Inventory (Expected Amount
  • Cr Received but not invoiced Accounts Payable Accrual (Expected Amount)

When the Purchase Receipt is invoiced:

  • Dr. Received but not invoiced Accounts Payable Accrual (Expected Amount)
  • Cr Interim Inventory (Expected Amount)
  • Dr. Inventory (Actual Amount)
  • Cr Accounts Payable (Actual Amount)

Sales Shipped but not Invoiced:

  • Dr. COGS Interim (Unit Cost)
  • Cr Interim Inventory (Unit Cost)

Sale Invoicing for Sales Shipment:

  • Dr. Interim Inventory (Unit Cost)
  • Cr COGS Interim (Unit Cost)
  • Dr. COGS (Actual Cost)
  • Cr Inventory (Actual Cost)

Reconciling

From the above, you can see that we have both purchase receipts and sales shipments coming out of the same Interim Inventory Account, which may be complex to reconcile to the Inventory subsidiary ledger.

We have a very informative report in Dynamics Business Central / NAV available, the “Inventory to G/L Reconciliation Report”. In this report, we find “Received but not Invoiced” and “Shipped but not Invoiced” detail. The Shipped but not Invoiced detail on the report should tie to the COGS Interim account. If you subtract the COGS Interim amount from the Interim Inventory Account, it should tie to the Received but not Invoiced Amount on the report.

Assembly and Kitting

Assembly Order cost posting only occurs once and hence does not generate work-in-process inventory. The concept of WIP does not apply to assembly order posting. Expected Cost is not posted for Assembly Orders, only actual costs.

Cost Adjustments caused after consumption of inventory, resulting from capturing the Vendor Invoice, and subsequently running the Adjust Cost – Item Entries batch job,  do get forwarded to output Cost. The batch job may run automatically or manually.

The moral is that if your business revolves around Assembly Orders primarily, you will not get any business value out of turning Expected Cost Posting on. That is not for Assembled items at least.

If you need assistance with inventory setups or are uncertain if you need Expected Costs to be set up in your Business Central or NAV implementation, we can help. Please do Contact us!

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