Inventory costing methods

• 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.

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.