If a stock receipt cost is changed between the initial receipt and A/P invoice entry, and there have been any sales or adjustments in the time in between, a PO Variance will result.
Inform calculates and posts real time variances through the Inventory Control Journal to eliminate the need for end of month adjustments. The process is handled from a purchasing perspective with regard to any changes in the value of a stock receipt that has sold prior to making a change in said receipt. If a stock receipt cost is edited after a product is sold, a variance will post to make up the difference between purchase cost and selling cost.
It will use the same G/L account specified for Inventory Changes in the G/L Control Table with full consideration for multi-branch organizations. This new posting removes the Invoice Average Cost Variance from consideration in Inventory reconciliations. Please note that PO Variances are only valid for systems posting inventory value at C2 average cost.
- Go to Inventory > Inventory Adjustment Report.
- Choose G/L Cost Adjustment, warehouse, and date range, and then click Run.
For more information, see Inventory Adjustment report.
- Go to Accounting > End of Month Closing & Journals > Inventory Adjustment Journal.
- Choose an accounting period instead of date range.
- Click Run.
Follow these instructions for tracing the source of a PO Variance.
- Locate a PO Variance in the G/L. These items are posted through the Inventory Adjustment Journal (Source Code “IC”).
- Look up the PO in Purchasing > Purchase Order Inquiry.
- Identify the item that generated the variance through the PO Audit Tab.
- Look up the receipt in Purchasing > Stock Receipts to verify the number of units received and the receipt date.
- Check File > Product > Analysis: Transactions to determine if any units of the product were sold before the stock receipt cost adjustment.
- Look up the sales transaction and proceed to the General Ledger tab to verify that the system used the original cost.
- Calculate the variance.
Example: An item is received at a cost of $100 and sold shortly thereafter. When the vendor invoice arrives, the cost has increased to $120 per unit, so the original stock receipt is edited to match the vendor invoice. The cost used to decrease inventory value at time of selling is now outdated at $100. A variance has resulted because the $120 increase is not fully offset by a $100 decrease.
Debit Inventory Change $20
Credit Inventory Asset $20
When there is a difference between the value of a linked purchase order stock receipt and the amount posted to the Inventory G/L account, the system will post the variance to the A/P Receiving Variance G/L account, as specified in the G/L Control Table. These transactions will post through the Purchase Journal with full consideration for multiple branches.
Example: Due to rounding, a linked PO value of $1,000 does not match the vendor invoice amount of $1,001.
Debit Inventory Asset $1,000
Debit Non-Inventory Clearing $1
Credit Inventory Asset $1
Refer to the sample merchandise invoice below. The value assigned to Inventory matches the Linked Receipt Value with the difference posting to Inventory Adjustments.
Merchandise designated as “Return to Vendor” on a sales order will follow the existing physical process by residing in the Returned Goods warehouse until action is taken to send back to the vendor. A separate Return Inventory asset G/L account will hold a debit balance corresponding to the positive quantity of merchandise awaiting return. If a vendor return inventory G/L account is not specified, the system will use the Non-Inventory account.
When stock is returned to the vendor by negative PO, the reconciliation may go out of balance. The stock was initially valued at average cost but it may be sold back at a different cost to the vendor. As a result, the decrease in physical inventory value is different than the decrease in G/L value and the reconciliation is thrown out of balance.
A merchandise return transaction is comprised of 2 portions:
- The Sales Return uses the same cost for the return value as to the original purchase. This cost is posted to the G/L and re-averaged into existing stock, thereby avoiding variances.
- The Vendor Return uses a different cost and there is a possibility of a second discrepancy if the vendor accepts the stock at a different cost.
- If this return does not bring the quantity to zero, the average cost will recalculate and no PO variance will post.
- If this return brings the quantity down to zero, the PO variance adjustment will post. The system will post an entry through the Inventory Adjustment Journal equivalent to:
<PO Rtn> = [Return PO Value] minus [Original Average Value]
Example: An item was originally purchased when C2 Average Cost was $155. The vendor is willing to take the item back for $150. Use of a negative PO will reduce the physical value by $155, but the corresponding vendor credit memo will only give back $150. To account for the discrepancy the system will post:
Debit Accounts Payable $150
Debit Purchase Cost Variance $5
Credit Inventory Asset $155
It is common for the on-hand quantity of an item to become negative in certain situations:
- The customer is billed before the stock receipt is processed
- The product is on a transfer from another branch that has not been received in the system
- The wrong product was billed from the system
- The incorrect warehouse was referenced
For users of average cost or landed average cost, when additional items are received, increasing the quantity to above zero, a weighted cost averaging discrepancy could result. Consider this example:
A product shows a quantity of -1 unit at an average cost of $10 per unit. An additional unit is purchased at a higher cost of $20 per unit. The resulting calculation is skewed because weight averaging is not effective with negative numbers.
If the new units come in at a higher cost, a reconciling entry is needed to decrease G/L inventory value:
Debit Inventory Adjustments $10
Credit Inventory Asset $10
|Costing example involving a negative item (cost increase)||Quantity||Unit Cost||G/L Value|
|1||Product quantity is -1 unit||-1||10.00||-10.00|
|2||One unit is purchased at a higher cost||1||20.00||20.00|
|3||The net result is 0 units on hand with a G/L value of $10.00||0||10.00|
If the new units come in at a lower cost, the entry will be in reverse to increase G/L inventory value
Debit Inventory Asset $5
Credit Inventory Adjustments $5
|Costing example involving a negative item (cost decrease)||Quantity||Unit Cost||G/L Value|
|1||Product quantity is -1 unit||-1||10.00||-10.00|
|2||One unit is purchased at a lower cost||1||5.00||5.00|
|3||The net result is 0 units on hand with a G/L value of -$5.00||0||-5.00|
There is an option to post an end of month accrual based on the value of Un-Invoiced PO's at the time of system end of month close.
A field on the G/L Control Table must be specified with a Current Liability account called Un-Invoiced Material combined with a company master flag setting to enable the posting. This will remove the Un-invoiced PO value from the end of month inventory reconciliation calculation.
At the time of monthly closing the system will accrue the value of the current un-invoiced material into the period being closed, followed by a reversal in the next period.
The one step monthly close must be enabled in order to use the accrual feature to ensure that A/R is closed before A/P. Go to File > Company > Master: Accounting and set One Step End of Month Closing for A/R & A/P to Y.
At the close of each accounting period, the system will make the following journal entry (with full consideration for multi-branch organizations using separate G/L accounts for each branch/warehouse).
Debit Inventory Asset $$$
Credit Un-Vouchered Material Liability $$$
The following month’s entry will be:
Debit Un-Vouchered Material Liability $$$
Credit Inventory Asset $$$
Please note that users of this workflow should disable period changes for vendor merchandise invoices. All vendor invoices must be entered to the current processing period to avoid overstating inventory G/L value in the closed period.
Users may now include negative quantities and Drop Ship quantities in the body of the main report.
- To include Drop Ship quantities, go to File > Company > Master: Purchasing/Inventory and set Include Drop Ship Warehouse in Inventory Value for All Warehouses (Y/N).
- To include negative-quantity items, produce the Inventory Value Report on the screen and choose Include Negative Inventory.
- The displayed G/L Inventory Value corresponds to the report selection, including drop ship warehouse value, returned goods value and negative value.