This is the fourth instalment in my series of articles explaining the inventory cost model in Dynamics 365 for Finance and Operations (D365FO). The series is expected to include the following parts:
- Part 1: Core concepts.
- Part 2: Configuration.
- Part 3: Cost management.
- Part 4: Landed cost.
- Part 5: Cost controlling.
In the previous posts, we looked at the core concepts underpinning the inventory cost model in D365FO and how some of the key areas should be configured. In this post we will look more into how you work with landed cost.
I am not sure if there is a formal definition of what landed cost is, but for the purpose of this article landed cost is defined as:
Total cost of an inbound shipment of goods including product cost, freight, insurance and duties.
The concept of charges
In D365FO, landed costs are recorded and managed through so-called Charges. A charge can be any type of landed cost and can be set up for products and suppliers. A charge is a relatively simple concept based on the following business logic:
- A Charge can be applied to a purchase order header or lines manually or automatically.
- A charge cannot be split across multiple purchase orders.
- A purchase order header charge can be allocated across the purchase order lines (manually).
- Purchase order line charges can be included in the product cost and taken into the inventory.
- A charge can only be applied to the supplier on the purchase order – not a 3PL supplier.
- Charges on a purchase order are perceived to be estimated – realised charges are connected to the invoice.
Before we can use Charges in D365FO, they need to be configured. Since we are dealing with inbound charges, the configuration takes place in the Procurement and sourcing module under Setup / Charges.
Firstly, we must configure the necessary charge codes as shown in the following example.
The key decision to make here is how to post the charge to the general ledger. In this case, FREIGHT, the cost (debit) is posted to a nominal ledger account (600120) and the debt (credit) is included is the amount owed to the supplier and therefore the accounts payable account set up for the supplier.
In the next example, FEE, the debit configuration is pointing to Item. This means that the charge will go to the inventory account for the item on the purchase order line and be included in the inventory value.
Obviously, charge codes with debit posting set to Item are only relevant for purchase order line charges.
Once the charge codes have been defined, they can be used manually on a purchase order. However, most companies would like to have default charges applied automatically. This is set up as Automatic charges.
Firstly, I have set up a handling fee of $5.00 for vendor 1001 as shown in the following example. This is set up as a Header charge.
This means. that all purchase orders for vendor 1001 will have a handling charge applied to the purchase order header automatically.
Next, I have set up two line item charges for freight and fee respectively. The freight charge is multiplied by the quantity on the purchase order line. The fee charge is a fixed amount for each purchase order line.
The charges are automatically applied to all purchase order lines for vendor 1001, item 1000.
I could also have set up automatic charges for a group of vendors or a group of items. These groups are maintained in special charges groups.
Use of charges in the purchasing process
When I create a new purchase order for vendor 1001, the handling charge is automatically applied as shown in the following screenshot.
If required, I can add, change or delete charges in the purchase order header. Charges in the purchase order header are maintained under Maintain charges.
The purchase order header charge is a general charge that will not be included in the inventory value. The charge can be allocated to the purchase order lines instead by using the Allocate charges menu point as shown below.
Now, when I create a purchase order line for item 1000, the freight and fee charges are automatically applied as shown here.
Since the fee charge is fixed, it does not change with the order quantity whereas the freight charge does.
Once the purchase order has been confirmed to the supplier, changes to charges cannot be applied until the invoicing stage.
At the invoicing stage, the user cannot remove the estimated charges on the purchase order. The purchase order charges are automatically connected to the invoice charges, but the user can remove the connection and apply new corrected charges. This way, the user can match the invoicing but at the same allow comparison between estimated charges and actual charges for that purchase order.
The following screenshot shows the inventory transaction details for the purchase order line after the supplier invoice has been applied.
As you can see, the purchase order line amount of $1,798.00 has been increased to $1,798.50 because of the $0.50 fixed fee charge. This charge has been included in the inventory value because the charge code was set up to post the debit side to the item.
If we look at the financial voucher for the purchase order as a whole, we can see that the $2.00 freight charge has been taken to the “Freight/transportation in” account and the $5.00 handling charge has gone to “Other miscellaneous expenses” account. Lastly, it is worth noting that the accumulated charges have been added to the accounts payable account as well.
The above example pretty much sums up what can be achieved with charges in D365FO. If your requirements involve distributing freight charges across multiple purchase orders, the Transportation management module may be applicable, but it is beyond the scope of this article.
As mentioned, the system keeps both the estimated and the realised charges, but I have yet to find a report that shows a comparison or any statistics.