Reconciling Capacity Costs

tiki

Hello!

I am trying to understand why NAV handles certain manufacturing costs the way it does. From the manufacturing costing manual:

The values of the capacity ledger entries are debited to the WIP account in the
balance sheet and the credit is posted to the following balancing accounts in the
income statement:
• The Direct Cost Applied account for the value entries of the type
Direct Cost.
• The Overhead Applied account for the value entries of the type
Indirect Cost.

We are using work centers to handle labor and indirect costs in production. However, after the sale of a finished good is recorded, the COGS for the finished good goes into the income statement accounts (as expected) but the capacity costs are backed out - leaving just the cost of the raw materials in the income statement.

How then is labor added to production costs to tally the final value of a finished good?

I'm thinking maybe it comes out of payroll, but that begs the question of what if my work center was a machine? Would those production costs be accounted for in operating expenses then?

Thanks for the help!!