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Indirect costs

Overview

Indirect costs are expenses you can’t directly link to a specific product or service. These include administrative costs such as employee salaries and office supplies, and overhead costs such as rent, utilities and machinery costs.

When you process transactions for a works order, you can configure indirect costs to capture overhead costs or additional fees in your general ledger. Physical transactions for indirect costs are recognized in inventory when you post a picking list journal or report as finished journal. Financial transactions for indirect costs are recognized in inventory when you post the end journal.

Cost groups

In Dynamics 365, cost groups are used to group similar costs together for the purpose of calculating the cost of production. Cost groups can be used to group direct costs, such as raw materials and labour, as well as indirect costs, such as overhead and machine costs.

You must create at least one cost group to use for indirect costs.

In the example below, cost groups have been setup as follows:

  • Labour – e.g. L1, L2 etc. These have a cost group type of Direct manufacturing and have been separated by production department. When a cost group is of type Direct manufacturing it can be assigned to cost categories which in turn are assigned to route operations.
  • Material – e.g. M1, M2 etc. These have a cost group type of Direct material and have been separated by material type. When a cost group is of type Direct material it can be assigned to released products.
  • Indirect – OVH1, OVH2 etc. These have a cost group type of Indirect and have been separated by type of overhead e.g. transport overhead, material overhead, labour overhead etc. When a cost group is of type Indirect it can be assigned to indirect costs for the following:
    • Surcharge – A surcharge node represents an additional cost element applied to the base cost of a product or process. It allows you to factor in extra expenses that may arise due to specific conditions, such as handling fees, taxes, customs duties, or environmental charges. Surcharge nodes are typically expressed as a percentage or a fixed amount.
    • Rate – A rate node defines the unit cost for a particular resource or operation. It is used to specify the cost per unit of measure associated with a specific activity, such as labour rates, machine rates, or overhead rates. The rate node allows you to establish consistent costing standards for different resources involved in the production or manufacturing process.
    • Output Unit-Based – An output unit-based node assigns costs based on the quantity of output produced. This node type enables you to allocate costs proportionally to the number of units or items produced. For example, if the output unit is “each,” the costs will be distributed per unit produced.
    • Input Unit-Based – An input unit-based node assigns costs based on the quantity of input consumed. This node type allows you to allocate costs proportionally to the quantity of input materials or resources used in the production process. It helps determine the cost impact of each input item on the final product.
  • Subcontracting – these have a cost group type of Direct outsourcing; these cost groups can be assigned to products of type service.

Learning with Microsoft

Further information related to indirect cost posting can be found on Microsoft Learn via the URL below.

Indirect cost posting – Finance | Dynamics 365 | Microsoft Learn.