With Microsoft Dynamics AX 2012, Microsoft introduced new functionality for calculating and applying indirect costs associated with project activities. Indirect costs can include costs such as rent, office supplies, IT support, telephone charges and similar costs and are typically calculated as a percentage of the direct labour or as an hourly rate.
In Microsoft Dynamics AX 2012, indirect cost components can be configured, grouped and assigned to project hour journal transactions. This is complementary behaviour to the existing burdening of production labour via production cost categories and costing sheets. On-line help, training documentation and Microsoft TechNet all have comprehensive information to configure and use indirect cost components. This is great functionality that those of us in the project manufacturing world have been waiting for… and it works quite well!
However, there is an issue in Microsoft Dynamics AX 2012 when you use indirect costs in project forecasts – specifically with project cost control calculations. Let me explain…
When using project forecasts, indirect costs that have been configured to apply to project hours journal transactions (actual costs) will also apply to project hour forecasts (estimated costs). This is correct – we want to know the total forecasted costs include indirect costs.
To demonstrate, I have set up a project cost category called “FCST_ENG” with an hourly rate of $25. I have also configured an indirect cost category at a rate of $50 per hour, and created a test project. In the example shown below, I have created an hour forecast for my test project of 100 hours:
On the General tab, I can review the indirect and total cost amounts that are applied per my test configuration:
You can see that Microsoft Dynamics AX is correctly applying the indirect cost (100 hours @ $50/hour) to the hour forecast transaction (I will also note that the correct indirect cost is applied to actual hour journal transactions). So far, so good.
The issue arises when I perform a Cost Control calculation for my test project:
You will notice that the indirect costs applied to the hour forecast are not being included in the “Total budgeted cost” calculation – the calculation includes only the base hourly cost. I will also note that, although not demonstrated above, the indirect cost is correctly applied to actual hour journal transactions shown in the “Actual cost” calculation.
The result is that the forecast/budget is understated by the amount of the indirect cost. Since the actual cost transactions do calculate correctly, I am not comparing “apples-to-apples” and my cost control is inaccurate.
Furthermore, the cost control calculations are also the basis for calculating POC (percentage of completion) for revenue recognition in estimate projects. The result is that the automatic POC calculation is incorrect (overstated) and each individual project estimate must be overridden with a manual POC calculation.
Fortunately, Microsoft has been working diligently on this issue and as of this writing has developed a hot fix that we are currently testing. Please note that this hot fix is not yet publicly available but hopefully will be soon.
In conclusion, the project indirect cost component is a welcome addition to Microsoft Dynamics AX functionality that provides project manufacturers with a wider perspective on cost management and control. If you use indirect cost components in your project forecasts, be sure to review your calculations to ensure your indirect costs are included.
By Dave Blanchard, Sr. Solutions Consultant, Microsoft Dynamics AX