You are serving a manufacturing company. You are in charge of implementation of standards costing by leveraging Dynamics AX 2012. You would like to gain insights of that functionality.

Then this blog post is for you.

I’ll walk you through the key points you need to know about standard costing in manufacturing. Particularly how to set up standard costing for direct materials. As a result you get insights and be ready to dig deeper. But in case you are not familiar with standard costing at all, please have a look Standard costing. Or how to control costs of production first.

In order to follow this guide you need to be familiar with Dynamics AX production control functionality.

Example to go through

To demonstrate how the standard costing works in AX 2012 I use the same example as presented in Standard costing. Or how to control costs of production.

Standards
Price of apples = $1.5 per kg
Consumption of apples = 2 kg per liter of juice

Actual
Yield of juice = 5 000 liters
Consumption of apples = 12 500 kg
Cost of apples = $18 000

Variances
Total variance = $3 000 unfavorable
Direct material quantity variance = $3 750 unfavorable
Direct material cost variance = $750 favorable

1. The very basic params

1.a. First, let’s set the parameters how to breakdown costs. AX offers two options: “No” and “Sub ledger”. You should specify “Sub ledger”. In this case AX splits costs by cost groups. In turn, this affects how variances are calculated. If you don’t split cost by cost groups, variances will not be split also.

Next, set “Variances to standard” to value “Per cost group”. That means that AX calculates variances per cost group. In most cases you should have at least variances for cost of materials, costs of labor, and overhead costs. By calculating the variances per groups you are able to set different ledger accounts to post them to ledger.

1.b. Now let’s set up ledger entries for variances. There you need at least specify variances the for:

• “Production price variance” – posts for price variance of materials or resources.
• “Production quantity variance” – variances because of difference in quantity consumed of materials or resources.
• “Production substitution vatiance” – variances because different material or resources was used.

If you need to post material/labor/overhead variances on different ledger accounts, then you  can use “Cost code” and “Cost code relation” fields to set up appropriate ledger codes. Your cost groups or cost types setup must allow to split variances by accounts you need.

1.c. Then you need an item model group where inventory model is standard cost. A finished good item will be linked to this group further in the guide.

1.d. You need a costing version where costing type is standard cost. If you don’t have one then create it.

2. Materials setup

2.a. It is time to create item for materials. Let’s create apples in accordance with the example we are following. Here is how I did that.

Please note that I use FIFO item model group for the raw material item. It means that the system determines actual cost of apples by using the first in, first out method of inventory valuation.

2.b. Next you need to set a standard cost for the item created.

Use the version of the cost you created in the step 1.d. Make sure that the price unit is correct. When the price was inserted in the table, you need to activate it by button “Activate”.

3. Released good setup

3.a. What you need now is to create an item for the finish good. It is juice.

Item model group for the item must be standard cost and production type must be “Formula” or “BOM”. I use a formula item.

3.b. Now let’s create a formula for the finish good. A formula is very important for standard costing as it contains quantities of materials which will be copied to standard.

3.c. When you create a new formula, AX links it to the item. The link is called “Version”. What you need now is to change formula size. As in our example production batch is 5’000 liters, then let’s set the formula size as 5’000.

3.d. Next you need to add materials to the formula. Add apples and set quantity 10’000 kg. The quantity is calculated according to the standard. It is 5’000 liters of juice times 2 kg of apples per liter.

Then the version and the formula must be approved and activated.

3.e. You have everything you need in the system to calculate the standard cost of juice we produce. Let’s do it.

3.f. When the calculation is done, the system shows “Item price” form. Go to the “Pending prices” tab and have a look complete calculation results.

The standard for apples is calculated.

Consumption per lot size = 2 kg per liter * 5’000 liters = 10’000 kg
Cost per lot size = 10’000 kg * $1,5 per kg = $15’000

Now you need to activate the cost by clicking the appropriate button in the “Item price” from.

4. Production run and variances

4.a. Before production can be run, let’s add apples to the stock. I used a movement journal to do the job.

Please pay attention on the cost price. I use $1.44 according the example we follow.

Actual
Consumption of apples = 12’500 kg
Cost of apples = $18’000

Actual cost price = $18’000 / 12’500 kg = $1.44 per kg

Don’t forget to post the journal.

4.b. It is time to create a batch. I don’t show here in great details how to run the production order as it is not different if you use standard cost or not. But what is important here is to start production for 5’000 liters. Also the need is to register 12’500 kg consumption of the apples as in our example specified and post the picking list.

After that you need to end the production order. At the stage “Ended” variances are calculated.

4.c. Now, you can go and see variances calculated.

Price variance = ($1.44 – $1.5) * 12’500 kg = $(750) favorable
Quantity variance = (12’500 kg – 10’000 kg) * $1.5 = $3’750 unfavorable

When I fist tried standard costing in AX it was really hard to understand how that works and what was going on there. But when I learned theory and played a little with AX, I liked that functionality. I hope that you like it too.

If you would like to know more or have any question, please feel free to drop a comment.

Thanks for reading!