Review this information if you are considering changing the system’s active inventory valuation and costing method. This guide covers the systematic steps necessary to switch costing methods at the beginning of a new fiscal year.
- Consult with your CPA before making any costing changes because there may be tax implications.
- Produce a report comparing your current inventory value at current cost method versus proposed cost method.
- Apply the change at the beginning of a new fiscal year.
- Avoid making mid-year cost method changes.
- Determine whether your system is based on Cost by Warehouse.
- Determine whether customer pricing is based off the current cost method before considering any changes.
- Make sure that there are no unresolved transactions from any previous year which could potentially require a Previous Fiscal Year Re-Open.
- If a prior year is accidentally re-indexed, the costing changes will affect the Inventory and Cost of Sales accounts.
DDI can share “best practices” for using the inventory system; however we cannot provide legal or accounting advice.
Go to File > Product > Master > Report or Advanced Report Writer. Verify that the items in the “proposed cost column” are consistently populated with a cost to avoid under valuation and over statement of profit.
A General Ledger Re-index will be performed to apply the changes retroactively to the beginning of the current fiscal year.
There is no system mechanism to restrict a future re-index from changing the account balances all the way back to the beginning of the year.
This method calculates product value independently by warehouse location.
If rollups exist under the current cost it must continue to be maintained.
After a cost change has been made to the current year, beware of making any prior year changes that require a General Ledger Re-index. Always produce “before” and “after” Trial Balance Reports to confirm that only the predicted accounts experienced balance changes.
Depending on your company structure and system setup, there could be additional accounts affected, including Direct Ship Inventory, Non-Inventory, Inventory Change, Rebates Receivable and Rebate Income accounts. Some of these changes are irreversible.
The Weighted Average value of a product (known as C2) is dependent on an accurate and timely incoming stream of purchase order costs. The unit cost is updated every time a new stock receipt is processed. If the stock receipt cost is the same as the current C2 value, there will be no effect to the cost.
- The system will maintain this value for every item whether or not it is specified as the active costing method. Therefore, minimal intervention is needed to change to this method.
- Users changing from C1 (Manual Cost) to C2 (Average Cost) should produce comparative reports to determine if all items carry a relevant value in both fields.
- At any given time, all items using the same product number will be valued the same. Users of cost by warehouse maintain distinct cost calculations by warehouse.
- Overtyping the C2 value in Product Master (known systematically as a “C2 Override”) will disrupt the automatic calculation stream. This is not recommended unless there is an issue with the existing cost.
First In First Out value is calculated as a series of layers. New layers are created from purchases. The oldest layers are consumed by sales. Transfers and Adjustments use the oldest layer.
- To ensure an accurate FIFO value after the cost change, all items must have a current C2 value based on the purchasing history of the product. If the product has not been purchased since before conversion to the Inform system, it is advisable to manually assign a procurement cost.
- Items missing a C2 Average Cost will use the C5 Last PO Cost for FIFO purposes. In the absence of C5, the C1 Standard Cost will be used.
- Items with negative quantities should be cleaned up. FIFO will pull the C5 cost for a negative item, regardless of other stored costs.
Landed cost methods apply a freight allocation to the raw cost of the product. Systems using Landed Cost are distinct because vendor freight is considered part of overall inventory value and the added cost is picked up at the time of sale rather than at the time of purchase.
- Consult DDI before instituting a Landed Average or Landed FIFO change. There are several setting changes that must be applied before using a method that apportions freight.
- Educate staff members to handle freight carefully and consistently in order to apply the correct apportionment.
- Maintain monthly reconciliations between your Inventory General Ledger account(s) and Inventory Value by Warehouse report. This will verify whether or not the new method is accurate.
- Produce a monthly Sales Journal by G/L Cost to validate that the gross margin percentages for each sales invoice are in line. For ease of use, export the report to Excel and sort by GP Percent.
- Before closing the final period of the year
- Produce a Trial Balance for the final accounting period of the year (Accounting > General Ledger > G/L Inquiry > select period > Search). Export the content to Excel.
- Consider building a monthly balance report in Advanced Report Writer to capture 12 months of balances at once. For more information, please refer to “Creating a Monthly GL Balance Report.”
- Re-Index the G/L (Accounting > General Ledger > Re-Index General Ledger). Users should refrain from entering any transactions that update the G/L while the re-index is running.
- Produce a second Trial Balance for the same period and compare to the original to determine if there were any balance changes. This final re-index is required because once the costing method is changed the year must never be re-indexed again.
- Close Accounts Receivable and Accounts Payable Periods
- Close Accounts Receivable and Accounts Payable at Accounting > End of Month Closing & Journals. DDI recommends a consolidated close.
- Produce an Inventory Value Report by Warehouse or retrieve the Excel listings from the Attachments tab of the End of Month Closing and Journals menu.
- Consider using Advanced Report Writer to create an exportable list of products at “current” and “proposed” cost.
- Close the General Ledger Year
- This process should be done immediately after the EOM close in order to display new year opening balances (Accounting > General Ledger > General Ledger Year End Close).
- Re-opening the G/L is allowed for input of journal entries (Accounting > General Ledger > Re-Open Previous Fiscal Year). Ensure that it is only re-opened when absolutely necessary and that there is no chance of a re-index happening.
- Go to File > Company > Master > Pricing & Costing.
- Edit “Sales Invoice G/L Cost Column” and “Inventory Adjustment Cost Column” to the new method.
- “Sales Order GP Cost Column” and “Sales Commissions Cost Column” are optional because they do not control valuation or G/L posting. These fields are important for sales order viewing purposes and commission calculation and may contain rollups from another value such as C1 or C2.
- “Last PO Cost Column” should use the C5 value for displaying the most recent vendor cost. For systems displaying the C1 value, use care and consideration to receive product at the correct vendor cost
- Consult DDI Support before editing any other fields.
- Produce an Inventory Value Report by Warehouse at the new cost.
- Produce a report in ARW comparing “old” and “new” cost.