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Topic: Costing -and the inclusion of duty and freight in stand cost of material

1.  Costing -and the inclusion of duty and freight in stand cost of material

Posted 12 days ago
Hello,

We are requirements gathering and deciding how to setup raw material costs in system.  Has anyone included the cost of duty and freight in their standard cost for a raw material?

Maggie

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Maggie Dominguez
Inolex Chemical Co.
Philadelphia PA
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2.  RE: Costing -and the inclusion of duty and freight in stand cost of material

Posted 11 days ago
If I understand correctly, the idea of standard cost is using a fixed, calculated periodically cost for the item, regardless to purchase order specific costs (such as freight, duty).

If you want to burden your inventory cost with "incidental" costs, than you would not be using standard cost, right?

Ofcourse, you can include freight and duty charges on a purchase order when using standard cost, but then this additional cost does not directly post into inventory value, but into STD cost differences account.

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Zvika Rimalt
Functional Consultant
Vancouver BC Canada
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3.  RE: Costing -and the inclusion of duty and freight in stand cost of material

Posted 11 days ago
​Hi Maggie,
I understand standard costs similar to Zvika.
Either you calculate and activate a standard cost price that already incorporates your freight/transportation/... costs or you will get variances posted.
Have you thought about using an alternative 'actual' costing method, such as weighted average or FIFO instead?
Best regards,
Ludwig

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Ludwig Reinhard
SYCOR GmbH
Goettingen
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4.  RE: Costing -and the inclusion of duty and freight in stand cost of material

Posted 11 days ago

A few things to be aware of that we wished we'd known during our implementation:

With many of the costing methods, you must perform an inventory closing procedure to finalize the costs. Until that is done, your product costs can (and probably will) be off vs. your expectations. AX breaks down postings into Physical (based on the cost shown on the PO, posted upon receipt) and Financial (posted upon invoicing). So, if your PO doesn't include freight cost, or at least a good estimate for it, this can cause costing issues - especially if the invoice isn't posted in the same month as the physical receipt. Standard cost avoids this by using a fixed cost and posting difference to a variance account, so it may be a good choice for ease of use, but as the others have said - it's not going to include anything you don't build into that standard and it's not going to ever reflect actual costs.

We came from an ERP system where we were using a rolling weighted average for costs. During all of our discussions with our partner during implementation, we referred to it as "Weighted Average" - that's just how we knew it - and our partner did not do anything to educate us on the various costing methods in AX and how they worked, nor dig into what our method was truly doing. Consequently, we went live AX's Weighted Average method and spent months trying to figure out how the hell AX was calculating our costs. We've adjusted to it now, but probably should have used the "weighted average dated" method, or perhaps "moving average". In short, we suffered from both a failure to communicate and not knowing what we didn't know.

Here are a couple of things which may help you avoid some of that:
Inventory Costing methods in MS Dynamics Ax 2012

Inventory valuation report and cost price not producing expected result - Microsoft Dynamics AX Community Forum


The first link provides a quick, and understandable, overview of the various costing options in AX. The second is a question I asked on the Microsoft AX forum and the community responses finally helped me understand what was going on inside AX's engine.

I'm off topic from your standard cost question, I know, but we are also a process manufacturer and I cannot overemphasize the need to educate yourself on AX's inventory costing methods during the implementation so that you can successfully communicate your goals to your partner's team.

I highly recommend you start a new thread if you have more general costing questions so that this one doesn't go further afield. Just based on your question, it doesn't sound like standard cost is going to give you the results you are looking for.





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Steve Latta
Accountant
Ortec, Inc.
Easley SC
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5.  RE: Costing -and the inclusion of duty and freight in stand cost of material

Posted 11 days ago
​As an aside, in both our previous ERP system and our current one, one of the things we've had to do to accommodate adding freight costs to the raw material when we get separate bills from the supplier for the material and the carrier for the freight is include the freight cost on the material line item on the PO. When the invoice for the material is received from the vendor, we invoice the material line for the full amount including the freight and then have a second line for "Freight Back-Off" where we deduct the freight to arrive at the actual invoice amount.

Example:

We buy material for $1000 and get a freight quote from a common carrier to deliver it to us for $100.

PO Receipt:
Material = $1100
Total Cost on Material Line on PO= $1100 (goes to Raw Material Inventory)

So, the PO is received at $1100. When the vendor invoice for the material arrives, we add a line for the freight back-off of -$100.

Vendor Invoice Receipt:
PO Amount = $1100
Freight Back Off = -$100 (credit goes to our Freight In Expense account)
Invoice Paid to Material Vendor = $1000

When the Freight Bill comes in from the carrier, we don't invoice it against the PO. It is just an invoice journal line and posts to our Freight In Expense. This offsets the earlier credit:

Freight Bill Receipt:
Freight Invoice = $100
Freight Back Off = -$100
Net Freight In Expense = 0

That ensures our freight in is captured as part of the material cost instead of going to an expense account, even if the freight bill is from a third party freight carrier. Obviously, we can avoid this step by having the vendor sell the material freight prepaid or prepaid & add, but not all are willing to do that.


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Steve Latta
Accountant
Ortec, Inc.
Easley SC
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6.  RE: Costing -and the inclusion of duty and freight in stand cost of material

Posted 11 days ago
Steve,
instead of the method you described in your message - did you look into using purchase order charges functionality in Dynamics AX?

PO Charges can be configured to post in a way that the debit side goes into the inventory value account (hence burdening inventory cost), while the credit side is not added to the purchase order total, but instead set up to offset the debit posted by the 3rd party freight vendor.

So to take your example: 

We buy material for $1000 and get a freight quote from a common carrier to deliver it to us for $100.

PO creation:
Material = $1000
PO Charge of $100 is created, and "distributed to the line"
PO total is $1000

PO Receipt: - there is just 1 line in the PO!
Material = $1000 + $100 
Total Cost on Material Line on PO= $1100 (goes to Raw Material Inventory)

So, the PO is received at $1100.

When the vendor invoice for the material arrives, record the invoice

Vendor Invoice Receipt:
PO Amount (credit) = $1000
Invoice Paid to Material Vendor = $1000
Inventory value (debit): $1100
Freight Back Off Account (credit): $100

When the Freight Bill comes in from the carrier, we don't invoice it against the PO. It is just an invoice journal line and posts to our Freight In Expense. This offsets the earlier credit:

Freight Bill Receipt:
Freight Invoice (credit to vendor account) = $100
Freight Back Off (debit)  = -$100
Net Freight In Expense = 0

Have you looked at this option? if you did, what was the reason you chose not to use it?

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Zvika Rimalt
Functional Consultant
Vancouver BC Canada
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7.  RE: Costing -and the inclusion of duty and freight in stand cost of material

Posted 11 days ago
​Zvika, we have not tried that method. We were more rushed with our Go Live than we would have liked, and one of the side effects was that we didn't have time to explore many of the new options available in AX. This was one area where we opted to bring over our old process unchanged from our previous ERP system. Easier to train and it functions well.

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Steve Latta
Accountant
Ortec, Inc.
Easley SC
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8.  RE: Costing -and the inclusion of duty and freight in stand cost of material

Posted 11 days ago
Beyond the time saving of using charges, there is a major advantage of that option which is a functionality that allows you to adjust the freight amount on the transaction once you get the actual invoice from the freight vendor.

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Zvika Rimalt
Functional Consultant
Vancouver BC Canada
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9.  RE: Costing -and the inclusion of duty and freight in stand cost of material

Posted 11 days ago
​Steve, Ludwig, and Zvika,

I greatly appreciate your responses.  Going to digest, research, and review with Operations and Finance.  Exactly what you said Steve is what we are trying to avoid - it sounds like what we want but then later on we realize through our reporting that it is not working as we thought it did.

Steve - hope you get to see the solar eclipse.

Sincerely,
Maggie

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Maggie Dominguez
Inolex Chemical Co.
Philadelphia PA
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10.  RE: Costing -and the inclusion of duty and freight in stand cost of material

Posted 11 days ago
​AX (at least 2012) allows for multiple costing structures.  We track purchase cost (the value actually paid to the vendor for a purchased item) and we use a "standard" cost price that is the active price the system uses to value inventory and to book COGs when sold.  The purchase price (PO price to a vendor) is set to update automatically each time we purchase an item - the update occurs when A/P vouchers a PO with a new price.  The "cost" price is set manually and must be intentionally activated in order to update.  We add a percentage value to each foreign sourced item to account for cost of getting the item to us.

The biggest issue that we have with this scenario is resetting standards.  When it is time to roll standards, we must use the latest purchase price and manually recalculate the standard.  There is no system field or functionality to automatically make the update during a cost roll.

Hope this helps.

Deb

Muttiple Cost Screen Shot

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Debbie Parod
Montana Silversmiths
Columbus MT
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11.  RE: Costing -and the inclusion of duty and freight in stand cost of material

Posted 8 days ago
​I've worked with customers who have included material burden factors in their AX standard costs.  The critical question to consider is what account will be used to offset the entry to inventory for those costs, and then how that account will be cleared.  For example, if freight is added to the material cost as the item is received, you will have to credit some account with that freight burden amount.  At some point, that account will develop a huge credit balance, unless you are periodically debiting it with some other transaction.  You might choose to use the entry from the payment vouchers to the freight company.  No matter what you do, you will need to evaluate the balance in that account periodically to deal with the variances between your accrual and your actual payments.

Ax provides tools to execute all of this, but you need to think about the policies that will apply to manage the process.

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Kevin McLean
Strategic Solutions NW, LLC
Beaverton OR
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12.  RE: Costing -and the inclusion of duty and freight in stand cost of material

Posted 8 days ago
I think it is possible to direct the "credit" into the same P&L account where you record the freight cost, when you record a freight invoice.

Even better in my mind, is to create a contract account to the above freight cost, just to keep things clean and separate.

This will service the purpose of moving the burdened freight from your P&L into your balance sheet (inventory cost), and you can keep tracking the balance of the 2 accounts to see if you are over burdening or under burdening your inventory.

At any financial year close this balance (along with all other P&L balances) will go to 0.

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Zvika Rimalt
Functional Consultant
Vancouver BC Canada
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13.  RE: Costing -and the inclusion of duty and freight in stand cost of material

Posted 7 days ago
​One more thought occurs to me.  One of the reasons for setting the standard with a base material price and additional burden factors is that it keeps the purchase price variance accurate.  If you roll all of your costs into the standard as a single number, you are guaranteeing that the purchase price will always be different from the standard cost, and the entire difference will be booked to the purchase price variance account at the time of receipt.  If you set up your standard cost with a material base and separate burden factors for the other costs to be included in standard cost, then the purchase price variance will be calculated as the difference between the purchase order price and the material portion of the standard cost.  That will make the accounting for purchase order receipts more accurate and more useful.

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Kevin McLean
Strategic Solutions NW, LLC
Beaverton OR
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14.  RE: Costing -and the inclusion of duty and freight in stand cost of material

Posted 7 days ago
Hi Maggie,

You may consider to use the costing sheet setup for indirect costs for purchase - as shown in the screen print below. A surcharge of 2 pct will be added to the purchase price of your raw material item when calculating the standard cost price on the costing version. Required is that your raw material is linked to one of the 4 cost groups under node COP-Material, e.g. M1, M2, M3 or M4. In my example of raw material item t1 cost group M1 is linked.


Calculating the standard cost price of your raw material with inventory model = standard cost:

On the raw material item (in this case item t1) I entered a purchase price of 10 for site 1 on the selected costing version 10. Calculation of the standard cost price will result in the cost price of 10.20


The indirect costs included in the standard cost price of this raw material item t1 you can check via button View calculation details:
Give the surcharges a proper name / code and consider to use a separate ledger account to post this surcharge on for covering the costs you'll need to pay (e.g. for transportation or insurance).

Hope that this meets your requirements!

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Sicco Antuma
Mprise B.V.
The Netherlands
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