Business Central Inventory GL Entries - Standard Cost Manufacturing
- Ken Sebahar
- Sep 25
- 11 min read
Updated: Oct 9
In earlier posts, Business Central Inventory GL Entries - Purchases and Business Central Inventory GL Entries - Sales, we walked through examples to demonstrate how Business Central uses Posting Groups to determine the G/L Entry records that get created when posting Purchase and Sales documents. Specifically, we reviewed how the Inventory Setup fields determine when G/L Entry records are created and then showed exactly how Posting Groups are used to determine which G/L Accounts are debited and credited during each G/L Entry.
In this post, we will continue walking through the General Ledger Entries that get created throughout a standard cost manufacturing process when posting Production Order activities, including consumption of raw materials, output of finished goods, and "Finishing" the Production Order.
When setting up production type Items in Business Central, the Costing Method field is very important in determining how the unit cost will be calculated for the finished good, and also how the G/L Entry records are created. For the purpose of this example, the Costing Method will be set to "Standard" for the finished good Item, which will allow us to review how and when material, capacity, and overhead variances are calculated and reporting throughout the system.
For an overview of Posting Group setup provided by Microsoft on Microsoft Learn, please refer to Microsoft Learn: Set up posting groups.
Background and Assumptions
The G/L Entries detailed below are all generated within Business Central in real-time as each transaction is posted due to the following setups on the Inventory Setup page:
Scenario Details
The Cronus Brewery uses Business Central to record the production of their beer. In this specific manufacturing example, we will be brewing a 500L batch of Cold Lager beer. The following setups will apply:
The Work Center to be used will be BK1 "Brew Kettle #1" with:
Flushing Method = Manual (which means we will be posting the actual time that the Work Center was required for each Production Order)
Direct Unit Cost per Hour of $2.00/Minute (or $120.00/Hour)
Overhead Rate of $1.00/Minute (or $60.00/Hour)
The Routing will consist of a single Operation for Work Center BK1:
Since each 500L batch requires about one day of effort to complete and there are 8 hours in a work day at Cronus, the Run Time has been set to 1 Minute per Liter to reflect that Brew Kettle #1 will be utilized for (approximately) the entire day.
Note: each operation step could be defined as its own Operation via the creation of additional Routing lines, but for the sake of simplicity, we will use a single operation that combines these steps.
The Bill of Material will consist of the following raw material Items detailed in the Production BOM card page below. Each raw material component Item has been set up with:
Costing Method = Standard
Flushing Method = Manual (the actual quantity consumed will be recorded)
Once the Bill of Material and Routing have been assigned to the Item, the Calculate Std. Cost process is run to populate the Standard Cost and Unit Cost fields on the Item Card. For additional information on calculating standard costs for Items, please visit this Microsoft Learn page: About calculating standard cost - Business Central | Microsoft Learn
The Cost Shares page can be used to view the makeup of the newly calculated Standard Cost:
Production Order Processing
A new Released Production Order is created to brew a 500L batch of Cold Lager on September 15, 2025.
The Refresh Production Order step is run to generate the material components required as well as the routing operations required for this Production Order.
The Statistics page can be viewed to confirm the total expected costs for this Production Order. At this point, no actual materials or capacity costs have been posted so the "Actual Cost" columns are zero:
Consumption Posting
In this production scenario, all components are picked at the start of production. The Consumption Journal is used to record the consumption of the raw material Items/Quantities from inventory and record Work-in-process (WIP) costs against RPO-196.
For more information on usage of the Consumption Journal, please visit this Microsoft Learn page: Register consumption output for a production order - Business Central | Microsoft Learn
In this example, again, to keep things simple while still showing how the GL Entries will be created, we have recorded an actual consumption quantity that is 2% greater than the Expected Quantity to be consumed for each component Item.
Entry #1
This entry below is generated to reduce the value of raw material inventory while increasing WIP:
Debit: Inventory Posting Setup – “WIP Account”
Based on the Inventory Posting Group assigned to the component Item and the Location assigned to the Production Order.
Typically defined as an Asset type G/L Account.
Credit: Inventory Posting Setup – “Inventory Account”
Based on the Inventory Posting Group assigned to the component Item and the Location assigned to the Production Order.
Typically defined as an Asset type G/L Account.
If you look carefully at these GL Entries, you will notice that two sets of GL Entries have been created for each component. The first set of GL Entries reflects the costs associated with the Expected Quantity to be consumed. The second set of GL Entries reflects the costs associated with the additional quantity consumed (the 2% overage of each Item in this example).
The consumption of raw materials is reflected in the Actual Cost column of the Prod. Order Statistics page. Here you can clearly see that there is a 2% material cost variance for this Production Order:
Output Posting
The Output Journal will be used to record the actual quantity outputted against Production Order No. RPO-196. In this example, we will record an actual output quantity of 505L, which is 1% greater than the expected output quantity. Because this output is being recorded against the last operation on the Prod. Order Routing, the quantity produced will be placed into finished goods inventory, resulting in new Item Ledger Entries and G/L Entries.
Additionally, since the Work Center was utilized for the full work day, an actual Run Time of 480 minutes will be recorded, resulting in new Capacity Ledger Entries and G/L Entries.
In this example, a single G/L Register is created during the posting of the Output Journal. However, this entry is effectively two different G/L Entries combined into one. The first entry is to record the capacity costs (direct and indirect/overhead labor/machine costs). The second entry is to record the value of the finished good item in inventory.
Entry #2
The first four lines in the entry above are created to record the application of direct and indirect capacity costs to the value of the finished good item. The system will generate a separate G/L Entry for direct costs vs. indirect costs (overhead costs), so there are two G/L Entries debiting the WIP account in this example. The direct cost amount posted is $960 (480 minutes * $2.00/minute) while the indirect cost amount posted is $480 (480 minutes * $1.00/minute).
Debit: Inventory Posting Setup – “WIP Account”
Based on the Inventory Posting Group assigned to the finished good Item and the Location assigned to the Production Order.
Typically defined as an Asset type G/L Account.
Credit: General Posting Setup - "Direct Cost Applied Account"
Based on the Gen. Prod. Posting Group assigned to the Work Center and no (blank) Location Code.
Typically defined as a Cost of Goods sold account (or expense account) which effectively absorbs (or offsets) the actual direct labor and machine costs posted to the Payroll accounts, etc.
Credit: General Posting Setup - "Overhead Applied Account"
Based on the Gen. Prod. Posting Group assigned to the Work Center and no (blank) Location Code.
Typically defined as a Cost of Goods sold account (or expense account) which effectively absorbs (or offsets) the actual facility and administrative costs posted to the Facility and/or Payroll expense accounts, etc.
Entry #3
The last two lines in the G/L Register above have been created to increase the value of finished goods in inventory while removing that value from WIP. We outputted 505L at a standard cost of $4.75, for a total of $2,398.75.
Debit: Inventory Posting Setup – “Inventory (Interim) Account”
Based on the Inventory Posting Group assigned to the finished good Item and the Location assigned to the Production Order.
Typically defined as an Asset type G/L Account.
Credit: Inventory Posting Setup – “WIP Account”
Based on the Inventory Posting Group assigned to the finished good Item and the Location assigned to the Production Order.
Typically defined as an Asset type G/L Account.
The application of the direct and indirect capacity costs is now reflected in the Actual Cost column of the Prod. Order Statistics page:
Note 1: A Variance is recorded for Capacity Cost and Capacity Overhead in the example above because the Routing was created expecting 1 minute of Run Time per Liter (each Batch is 500L and the actual time reported was exactly 8 hours). This variance is reflected above in the Capacity Need row. These variances could have easily been eliminated by setting the Run Time to 0.96 minutes per liter instead of 1.00 minutes per liter.
Note 2: If each batch usually takes one full day to produce, another option to avoid variances and eliminate the need to record the actual time is to change the Flushing Method on the Work Center to "Backward". This will automatically post the expected run time as the actual run time, resulting in direct and indirect capacity costs being applied, but without any variances.
Production Order - WIP Report
The information displayed on the Prod. Order Statistics page is also available in a Report format. The Production Order - WIP report is useful for month-end reporting to reconcile the values reflected in the WIP Account on the balance sheet. This report can be backdated to any date in order to provide a full detailed reconciliation at any point in time.
For additional information on this report, please refer to this Microsoft Learn page:
Changing the Production Order Status to Finished
Once all activity has been recorded against a Released Production Order, the final step is to change the Status of the Production Order from Released to Finished. This is completed by selecting the Change Status... button on the Released Production Order page. For additional information on finishing production orders, please visit this Microsoft Learn page: About finished production order costs - Business Central | Microsoft Learn
In a standard costing environment, this is the point when WIP is zeroed out and all production variances are recorded. For RPO-196, the following GL Entry records are created:
In this example, a single G/L Register is created when changing the Status of the Production Order from Released to Finished. While all of these entries must be considered together in order to arrive at the correct values, it can be helpful to think of this entry as two different G/L Entries. The first entry is to zero out the WIP Account. The second entry, which is only applicable in a standard costing environment, is to record the required production variances which also results in the finished good item being placed into inventory at the standard cost.
Entry #4
The first four lines in the G/L Register above have been created to zero out the WIP account. This is done by first zeroing out WIP for the costs (material and capacity) and then zeroing out WIP for the value of the finished good.
Debit: Inventory Posting Setup – “Inventory Account” ($2,332.50)
Based on the Inventory Posting Group assigned to the finished good Item and the Location assigned to the Production Order.
Typically defined as an Asset type G/L Account.
Credit: Inventory Posting Setup – “WIP Account” ($2,332.50)
Based on the Inventory Posting Group assigned to the finished good Item and the Location assigned to the Production Order.
Typically defined as an Asset type G/L Account.
Debit: Inventory Posting Setup – “WIP Account” ($2,398.75)
Based on the Inventory Posting Group assigned to the finished good Item and the Location assigned to the Production Order.
Typically defined as an Asset type G/L Account.
Credit: Inventory Posting Setup – “Inventory (Interim) Account” ($2,398.75)
Based on the Inventory Posting Group assigned to the finished good Item and the Location assigned to the Production Order.
Typically defined as an Asset type G/L Account.
Entry #5
Whether the G/L Accounts detailed below are debited or credited depends on whether each of the variances were negative variances or positive variances. In this example above, the result was a negative material variance (relative to the outputted quantity, more actual material than expected was recorded). However, the capacity and overhead variances were negative (relative to the outputted quantity, less actual time than expected was recorded):
Debit: Inventory Posting Setup – “Inventory Account” (the net of the 3 separate entries above)
Based on the Inventory Posting Group assigned to the finished good Item and the Location assigned to the Production Order.
Typically defined as an Asset type G/L Account.
Debit: Inventory Posting Setup - "Material Variance Account"
Based on the Inventory Posting Group assigned to the finished good Item and the Location assigned to the Production Order.
Typically defined as a Cost of Goods Sold type G/L Account.
Credit: Inventory Posting Setup - "Capacity Variance Account"
Based on the Inventory Posting Group assigned to the finished good Item and the Location assigned to the Production Order.
Typically defined as a Cost of Goods Sold type G/L Account.
Credit: Inventory Posting Setup - "Mfg. Overhead Variance Account"
Based on the Inventory Posting Group assigned to the finished good Item and the Location assigned to the Production Order.
Typically defined as a Cost of Goods Sold type G/L Account.
This example did not include any subcontract (outside processing) operations, but in the case where a subcontract operation was included, a variance may also be recorded during this step as follows:
Credit: Inventory Posting Setup - "Subcontracted Variance Account"
Based on the Inventory Posting Group assigned to the finished good Item and the Location assigned to the Production Order.
Typically defined as a Cost of Goods Sold type G/L Account.
The net result of these entries is that the "Inventory" account reflects the 505L of Item FG-CB-CL at the standard cost of $4.75/L, or $2,398.75.
Month-end Reporting
When the Production Order - WIP report is run using an "Ending Date" after the Production Order is finished, the report will appear as follows:
Now that the Production Order status has been changed to finished, no further entries can be posted against it. However, there is a feature to allow a finished Production Order to be "reopened" in order to make additional entries if certain conditions are met. For more information on the Reopen Production Order process, please visit this Microsoft Learn page:
If you made it this far, congratulations! I would never expect anyone to be an expert after reviewing this post. Not only was this a significant amount of content to absorb, but it also did not cover all of the various scenarios and one-off exceptions that occur in the real-world. But my hope that you now are in a much better position to set up Business Central and run through a series of sample/test Production Orders in order to more fully understand how and when G/L Entry records are created within a Business Central standard costing manufacturing environment!
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