Harness Backflush Costing for Automotive Lean Manufacturers in D365

Posted on: July 26, 2021 | By: Lauren Yang | Microsoft Dynamics AX/365, Microsoft Dynamics Manufacturing

Costing for automotive lean manufacturing in Dynamics 365 for Supply Chain Management (SCM) enables the production flow to use the cost accumulation method known as backflush costing. Lean manufacturing is the North American equivalent of the Toyota Production System, and improves processes through continuous improvement (kaizen) and elimination of waste. In the backflush costing method, the direct materials consumed are accumulated in the production flow’s work in progress (WIP) cost account. The main difference between backflush costing and standard costing is that, for backflush costing, variances aren’t calculated per kanban or finished product. Instead, variances are calculated per production flow over a period. This method introduces a truly lean concept for reporting material consumption. Backflush costing allows automotive companies to measure the complete costs of a production run by working backwards when calculating costs. Overall, it can offer a competitive advantage by lowering operating costs and improving productivity.

Backflush Costing

Automotive companies can run backflush costing to periodically value the WIP and produce an end-of-period status that calculates the variances of material, labor, and indirect costs. In the backflush costing process, all production flows of the legal entity are used in the same batch run. When backflush costing is run in a batch, the processing might be multi-threaded by production flow. Backflush costing performs the following steps:

  1. Determine the unused quantities in the production flow as of the period’s end date. After the backflush costing is run, you can view the unused quantities on the date of the costing run in the Unused quantities dialog box.
  2. Calculate the production flow’s net realized usage over the period.
  3. Clear the WIP from the realized resource consumption and products.
  4. Calculate production variances to standard cost for the period.
    • For consumed components for the period:
      • Financially update the net realized quantities of material that the production flow consumed over the period. The system processes in first-in, first-out (FIFO) order on the individual inventory transactions to financially update the physically updated transactions for the production flow, until the net realized quantities for the period are reached.
      • Transactions are financially split to map the exact consumed quantities.
      • Unused quantities in the production flow WIP remain in physically updated status.
    • For production completed quantities of the period:
      • Financially update the inventory transactions for the completed quantities for the period.
    • For the conversion cost:
        • The applied conversion cost transactions (route transactions) that were recorded for the period are financially updated.
        • All direct manufacturing cost is financially updated. All kanban process jobs that are completed during the period are accumulated.
        • All indirect cost calculated for the consumed material within the period is calculated and deducted from WIP. The remaining indirect cost is posted as a variance.
  5.  Calculate the production variances to standard cost. The variance is calculated per cost group.

Configuring Backflush Costing

To enable costing, you must complete the following setup:

  • Set up WIP accounts for the production group and production flow. The WIP accounts for the production flow are specified in the production group. The backflush costing production flow calculates variances as the difference in the WIP value before and after backflush costing is run for each production flow. Therefore, we recommend that you create a WIP account for every production flow.
  • Assign a cost category to the resource group. You must assign a cost category to the run-time category of the work cell. To determine variances by activity, you should create a cost category for every work cell. The cost categories for setup and quantity aren’t considered in costing for lean manufacturing. The WIP accounts per resource group are ignored in backflush costing. For subcontracted activities, no cost category is required. The cost group that is assigned to the active service is used instead.
  • Assign cost groups. To enable segmentation of the cost contribution in a production flow, you must assign cost groups by cost group type:
    • Direct material cost group – Direct material requires a cost group that identifies the material category for costing. This cost group enables an aggregated view of cost, WIP, and variances by direct material.
    • Direct manufacturing cost group – The direct manufacturing cost group captures the direct cost contribution of operational resources to the production flow. This cost group enables an aggregated view of cost, WIP, and variances by direct manufacturing cost.
    • Indirect cost group – The indirect cost group is required in order to calculate the indirect cost contribution to the production flow. This cost group enables an aggregated view of cost, WIP, and variances by indirect cost.
    • Direct outsourcing cost group – The cost group for the services enables an aggregated view of assigned cost and WIP, and determines the cost variances of the subcontracted services.
    • Cost group for a finished product – Finished products require a cost group that identifies the product category for costing. This cost group enables an aggregated view of cost, WIP, and variances by product category. The standard cost for products is calculated with the cost calculation based on the bill of materials (BOM), and either the production flow and kanban rules or the route.

Cost Calculation for Lean Manufacturing

For automotive products that are supplied out of a production flow, the BOM calculation must be based on either a route version or a production flow. The BOM calculation calculates the cost of a product and the related breakdown to the resources and materials that are required in order to build the product. The deduction from the WIP account for the production flow is done by using the breakdown of a product by item and cost group.

Calculation that is based on the production flow:

Lean manufacturing for Dynamics 365 for Supply Chain Management is independent of routes. The cost calculation for products that are supplied from a production flow can be based on the production flow itself. Before the calculation can be done, a kanban rule must be created that supplies the product out of the production flow. If a product can be supplied from multiple production flows at the same site on the calculation date, you can select the production flow for the BOM calculation. On the Default production flow page, you can configure a default production flow for each item. If multiple kanban rules exist for the same product in the same production flow that is active on the calculation date, the calculation selects the first kanban rule that is active for the calculation.

Calculation that is based on the route:

Calculation that is based on a route is as valid as calculation that is based on a production flow, but it doesn’t use the costing for Lean manufacturing functionality. To determine which option (production flow or route) you should use to calculate the cost, consider the results of the cost breakdown. The version that comes closer to reality and produces fewer variances overall is the better option. In a Lean manufacturing environment where a product is supplied by a single production flow and a single kanban rule, the calculation that is based on the production flow is probably more accurate. For a product that can be supplied by Lean manufacturing and production orders on the same site, or that can have multiple production flows or multiple kanban rules in the same flow, a calculation might be more accurate if it’s based on a route version that is built specifically for the cost calculation, not for the production.

Next Steps  

If you are interested in learning more about backflush costing as well as maximizing the use of Microsoft Dynamics 365 for Finance and Supply Chain Management contact us here to find out how we can help you grow your business.  You can also email us at info@loganconsulting.com or call (312) 345-8817.



25 Brilliant Ideas to Outsmart Your Competition with Microsoft Dynamics
25 Brilliant Ideas to Outsmart Your Competition with Microsoft Dynamics

Free Download:

25 Brilliant Ideas to Outsmart Your Competition with Microsoft Dynamics

Download the guide ›

Top 10 Inventory & Operations Decisions Distributors Are Making Blind
Top 10 Inventory & Operations Decisions Distributors Are Making Blind

Free Download:

Top 10 Inventory & Operations Decisions Distributors Are Making Blind

Download the guide ›

2020 Nucleus Research Report on ERP Technology

Free Download:

2020 Nucleus Research Report on ERP Technology

Download the guide ›