This article will help you understand how cost is maintained and provide guidance on setting up your inventory cost structure.
Multiple cost capabilities
Inform is capable of valuing inventory by a variety of methods. It features multi cost storage for every unique product handled, whether it is a regular, non-stock or special item.
The cost carried by an item will follow it through the system with regard to purchases, sales and adjustments. If incoming purchase costs are carefully managed, there should be minimal user intervention required to keep the system functioning optimally.
From an operational standpoint, the focus is to obtain as accurate a determination as possible to facilitate individual performance metrics on an item level.
From a financial standpoint, the concern is maintaining the same information in the General Ledger so that at month end, the value of stock is accurately reflected on the balance sheet.
This is accomplished by use of Company Master Settings and Cost Calculation Fields.
Please consult DDI Customer Support before making any changes to these settings.

- Before implementing a costing structure, it is important to understand the purpose of the various costing flags in Company Master. Go to File > Company > Master > Pricing and Costing Tab to review your settings. The following fields control the costing method used in various situations.
- Sales Order GP% Cost Column: determines cost displayed on Sales Order > Detail > Line Items. If you want your sales force to set and /or view pricing, this field should be set the same as Sales Commission Cost.
- This cost does not post to the General Ledger. If you are using a “loaded” cost in this field, the unit costs for each item will be higher than what actually books to the G/L.
- Sales Order GP Cost and Sales Commission Cost should use the same calculation method for consistency
- Sales Commission Cost Column: determines cost to be used in sales commission calculations. Generally includes a sales load of 2-7% and is set to C4.
- This cost does not post to the General Ledger. It is used in the Sales Commissions functions to calculate what has been earned based on loaded costs.
- Sales Invoice G/L Cost Column: determines what cost to use when the Sales Order is invoiced and when Point of Sale transactions are posted. At that point, Inventory is reduced (credited) and Cost of Sales is increased (debited).
- This cost posts to the General Ledger and is represented by Source Code SJ.
- Sales Invoice G/L Cost and Inventory Adjustment Cost should use the same calculation method for consistency and financial integrity.
- Inventory Adjustment Cost Column: determines the value to use when adjustments are made to quantities, costs and status; essentially any changes to merchandise value that are not a result of regular buying and selling.
- This cost posts to the General Ledger and is represented by Source Code IC.
- Default PO Cost Column: determines the default value to use when making a new PO for the item. If set to C5, the field will update with the latest Purchase Order cost. If set to C1, the field will update as soon as C1 is changed.

Regardless of the selected method, all system-maintained costs originate from the incoming stream of received purchase orders. It is important to receive the merchandise at the correct cost to update the current value.
Stock value is updated in 2 stages:
- A new stock receipt updates the physical value of all items (if using an averaging method). It creates a new layer (if using an incremental value method). This is a hallmark of a perpetual inventory system, in which stock value is increased by directly posting value to an inventory asset account.
- However, the selling cost is not updated until the vendor invoice is entered with a link to the original PO. This linking process is necessary to complete the purchasing cycle and close the PO. At the time of selling, the system reduces inventory value and posts an opposing cost of goods accordingly, thereby maintaining the gross profit by item and by sales invoice.
- If a product sells before its vendor invoice is entered, and the cost has changed, the system will apply the existing (but expired) cost to post the sales transaction. An additional internal entry will compensate for the value change (for users of C2 G/L Cost only).
- Stock transfers and adjustments use the existing cost (if using an averaging method), or the earliest layer cost (if using FIFO).
- It is possible, but not recommended, to override the current cost of an item, thereby negating the prior calculation stream.

- Before implementing a costing structure, it is important to understand the purpose of the various costing flags in Company Master. Go to File > Company > Master > Pricing and Costing Tab to view your settings. Refer to the following table for definitions of the available costing methods.
Cost |
Maintenance |
Definition and Special Considerations |
---|---|---|
C1 |
User Maintained. Updates only when manually input by user. |
Used for entering a Standard Cost of an item. Items are valued at the most recent number entered into this field. This cost is commonly used as the base calculation for prices. If using this cost for valuation and financial purposes, it must be constantly updated. Keep in mind that increasing C1 cost will affect all merchandise on hand, not just the current shipment. This cost is not recommended as a valuation method for this reason. |
C2 |
System Maintained. Manual updating will override the system calculation stream. |
Weighted Average Cost. Must be used in order for inventory to reconcile between stock value and G/L value. This cost is maintained by actual PO costs and is a succession of C5 values averaged over time. Purchases contribute to changes in C2 value, but sales and adjustments do not. |
C3 |
System Maintained. Manual updating will override the system calculation stream. |
Landed Cost equal to the current C2 value plus a Freight Allocation. Freight may be included as part of the merchandise invoice or from a third party shipper. The allocation may be based on value or volume. |
C4 |
System Maintained. Manual updating will override the system calculation stream. |
Most commonly used as Sales Order Cost and Sales Commission Cost with a load added. Generally not used to value inventory or record financial transactions. |
C5 |
System Maintained. Manual updating should follow the C1 value. |
Last PO Cost. Generally used as a reference field to manage accurate input of new purchase orders. |
C6 C7 |
User Maintained or System Maintained |
These are optional fields which can be set to calculate from existing fields, or as manual fields. |
FIFO (F) |
System Maintained. Manual updating is not allowed. |
First In First Out Layered Cost. Every item’s value consists of a series of “layers” with varied costs. Purchases build the newest cost layer and sales consume the oldest layer. Returns use the original sale cost if there is a link to the document within the system. Adjustments pull from the most recent layer and use the C5 cost. In the absence of any layers, the FIFO cost will pull from the C5 field, then the C2 field, then the C1 field. |
Landed FIFO (LF) |
System Maintained. Manual updating is not allowed. |
First In First Out Layered Cost with Freight Allocation. Use of this cost requires a special control flag to be specified in Company Master. |

This table demonstrates the differences between using Average Cost and FIFO Cost for inventory valuation. In an environment of rising costs, FIFO will result in a higher valued inventory asset.
The scenarios outlined here assume that costing by warehouse is the same for all locations.
PO #00001 Quantity: 10 Unit cost $10 Total value $100 |
PO #00002 Quantity: 10 Unit cost $15 Total value $150 |
PO #00003 Quantity: 10 Unit cost $20 Total value $200 |
PO #00004 Quantity: 50 Unit cost $5 Total value $250 |
Scenario |
Value Using Average Cost |
Value Using FIFO Cost |
---|---|---|
Three successive shipments are brought in to stock. (PO #00001, 00002, 00003) Quantity on Hand = 30 |
Value = 100 + 150 + 200 = $450 C2 cost = 450 / 30 = $15 |
Value = 100 + 150 + 200 = $450 FIFO cost is layered: 10@$10 / 10@1$5 / 10@$20 |
A sale of 5 items is made. Quantity on Hand = 25 |
Sale cost = 5 x 15 = $75 Remaining value = $375 C2 cost = $15 |
Sale cost = 5 x 10 = $50 Remaining value = $400 FIFO layers: 5@$10, 10@$15, 10@$20 |
A sale of 10 items is made. Quantity on Hand = 15 |
Sale cost = 10 x 15 = $150 Remaining value = $225 C2 cost = $15 |
Sale cost = (5 x 10) + (5 x 15) = $125 Remaining value = $275 FIFO layers: 5@$15, 10@$20 |
A physical count finds that there is 1 less item in stock than the system displays. Quantity on Hand = 14 |
Adjustment cost = $15 Remaining value = $210 C2 cost = $15 |
Adjustment cost = $20 Remaining value = $255 FIFO layers: 5@$15, 9@$20 |
A shipment of 50 items is received at a discount price. (PO #00004) Quantity on Hand = 64 |
Purchase cost = $5 Remaining value = $460 C2 cost = $7.1875 |
Purchase cost = $5 Remaining value = $505 FIFO layers: 5@$15, 9@$20, 50@$5 |