Commodity Costing

When working with commodities, there are two types of cost to maintain:

• The cost at which the commodity is valued in inventory. This value is used when calculating the costs for manufacturing activities in which the commodity was consumed.
• The cost of the commodity as it is paid to the vendor from whom the item was purchased.

Unlike other types of raw materials, the cost of a commodity is oftentimes derived from one or more cost factors. A cost factor is similar to a market price in that it represents a standard rate at which cost is calculated. Cost factors are dynamic values, and subject to fluctuation.

Cost factors are not necessarily defined for the commodity itself, but rather a particular property of that commodity. If it is possible to record variations in such a property with individual units or lots of a commodity, different commodity costs will be calculated, although the same cost factor will be used to perform the calculation. It also may be that different cost factors are applied to a commodity depending on how the commodity is consumed in production.

You can choose whether to calculate a commodity's inventory cost, purchase cost, or both according to these cost factors.

Commodity Cost Components and Classes

The cost factors that are used to calculate commodity costs are defined for commodity cost components. A commodity cost component is a property or characteristic of a commodity that is used to determine cost. It is possible to Link a commodity cost component to a quality control test , so that recorded test results may impact the calculated cost of individual item lots.

Commodity cost components are grouped together into commodity classes. The cost factors that are defined for commodity cost components are entered for every class to which the component has been assigned. For example, if the same cost component was assigned to three different commodity classes, you would maintain three separate cost factors for that component.

When a commodity item appears on a production BOM or a purchase line, it will have an assigned commodity class. The program uses the cost factors that have been entered for the class's defined cost components to calculate the cost of the commodity on a particular production or purchase activity. Because commodity classes are assigned to specific activity lines, it is possible to calculate different costs for a commodity on each transaction. For example, you could enter a separate commodity class on each production BOM line for a commodity if you want to cost that commodity according to the manufacturing process in which it is consumed.

Commodity Receiving

A commodity is received on a commodity manifest, which combines purchases from multiple vendors into a single receipt amount. By lot tracking a commodity, it is possible to differentiate between the original purchases and the receipt. The commodity lot that is received into inventory is assigned to consumption lines when you are recording production activities. Purchase lines for the commodity, on the other hand, contain the lot that was assigned for each individual vendor purchase.

This differentiation is particularly important if quality control tests play a role in determining a commodity's cost. Because quality control test results are recorded against individual lot records, the test results that are used to calculate the cost of a commodity that is consumed in production may be different than the test results that are used to calculate the cost of a commodity on a purchase line.

Although different lot numbers are recorded on commodity purchases and receipts, Dynamics 365 Business Central item tracing capabilities maintain the relationship between these item lots. This is important not only to lot traceability but also costing, as it may be necessary to reconcile differences between a commodity's inventory value and the amount on the related purchases orders.

Cost Periods

The commodity cost factors that are used to calculate the cost of a commodity are typically not known at the time of receipt. These cost factors may be determined by an outside party, such as a government or industry agency, and usually fluctuate on a periodic basis. Oftentimes the commodity cost factors for a particular period are not made available until after that period has ended. As a result, the time between which a commodity is received and its final cost is known can be significant.

Commodities must be set up as standard cost items in Microsoft Dynamics NAV. When the commodity is initially received, its value is determined from this standard cost.

Once new cost factors for a commodity become available, you set up a cost period in the Commodity Cost Periods window. Cost factors are established for each commodity cost component that has been assigned to a commodity class. You then instruct the program to use the new cost factors to update the cost of commodity entries that were posted during the cost period. The program updates the value of consumption entries according to the commodity class that is assigned on the related production BOM line. The value of the corresponding positive ledger entry to which the consumption entries were applied is adjusted accordingly.

You can also utilize these new cost factors to update the cost of commodities on purchases. This adjustment is made according to the commodity class that is assigned on each purchase line. You can update each document individually or use the Update Commodity Orders batch job to adjust multiple purchases at once. When you invoice the purchase, an adjustment is made to the value of the purchase entry in the item's ledger.

When you calculate both inventory and purchase costs for a commodity item, there may be a discrepancy between these values. For example, if we calculate a commodity's inventory value using one commodity class, but determine the cost of the commodity on the related purchase lines using a second one, we will obtain different values. During the posting of purchase orders for a commodity, the program uses the assigned lot tracking numbers to the identify the related entries in the item ledger, then records any differences between the commodity's purchase and inventory values in the appropriate G/L account.