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Monday, August 26, 2013

Inventory Valuation Methods



In Great Plains, the cost posted to General Ledger differs among different inventory valuations methods. GP supports the following Valuation Methods:

 FIFO valuation method or LIFO Perpetual valuation method
" The Actual Cost is posted to the General Ledger when the item is received in Inventory. The Actual Cost is posted to the General Ledger when the item is sold, decreased, or transferred."

FIFO valuation method or LIFO Periodic valuation method

" The Actual Cost is posted to the General Ledger when the item is received in Inventory. The Standard Cost is posted to the General Ledger when the item is sold, decreased, or transferred."

Average perpetual valuation method

" The Actual Cost is posted to the General Ledger when the item is received in Inventory. The Average Cost is posted to the General Ledger when the item is sold, decreased, or transferred."


Inventory value differs according to the adopted valuation method, as shown below;

  • FIFO or LIFO Perpetual Valuation | On Hand Quantity is Multiplied By the Cost at which Item Was Received.
  • Average Perpetual Valuation | On Hand Quantity is Multiplied By The Current Cost of the Item

  • FIFO or LIFO Periodic | Valuation On Hand Quantity is Multiplied By The Standard Cost of the Item.
I will shed a light on the cost calculation criteria in Dynamics GP when the valuation method is FIFO Perpetual through the following Case Study



Item Number
Date Received
Quantity
Quantity Sold
Unit Cost
Extended Cost
100XLG
09/04/2011
9
0
70
630
100XLG
10/04/2011
10
0
72
720
Grand Total

19
0
142
1350




Points to Consider: 
- When selling 12 units of (100XLG) on price $ 95
- Items received first are sold first
- The following transactions are recorded on GP 


Sales

Debit
Credit
Accounts Receivable / Cash
1140

Sales

1140

Cost (COGS)

Debit
Credit
COGS
(9*70) + (3*72)

Inventory

(9*70) + (3*72)

 

Dynamics GP Help Note !


  • Item Purchase Receipts Report Helps in determining the Cost & Quantities Available for Each Receipt
  • Item Purchase Receipts Report and Stock Status Report are always the same (same inventory source)
 
Valuation Methods Pros and Cons


Valuation Method
Pro’s
Con’s
FIFO Perpetual
And
LIFO Perpetual
- Easy Management & Easy for  Inventory and GL Reconciliation

- Purchase Receipt and Stock Status always Shows the Cost which appears in GL
- Cost Of Sales will be determine by first/last layer of receiving

- This needs  to look into purchase receipt  detail
Average Perpetual
One Cost For All sales which appears in Item Card




- Back dated posting will affect
already Posted Receipts
Already posted Sales.
Which creates Variances continuously

FIFO Periodic
And
LIFO Periodic
- Helps If company wish to have standard costing for period of time
It requires periodic Cost revaluation which increase inventory management task



  
Best Regards,
Mahmoud M. AlSaadi
 



9 comments:

  1. Hi Mahmood,

    For an item which is valued FIFO periodic the stock status report give message a revalued periodic-cost item can result in a zero quantity and in fact report 0 balance. How ever the net of the historical transactions for the inventory is not zero -- what is the theory here ....

    Cheers!
    Sanjay

    ReplyDelete
    Replies
    1. Since the inventory stock status report retrieves data from IV30300, which is considered as the "history table", which can as well be deleted using the "Remove Transaction History Utility", zero quantity with extended amount in GL can be encountered, because GL should be theoretically and practically linked to SEE30303 on a journal entry base.
      Therefore, the Historical Stock Status report shows this comment regardless of the quantity, either if if it is zero or not.

      Delete
  2. We are using FIFO periodic valuation with manufacturing module in GP Dynamics. In inventory receiving shipment, purchase distribution is using standard cost and not actual cost, any idea? Thanks

    ReplyDelete
    Replies
    1. The item initially should have a valuation method of "Perpetual not Periodic". By default, the unit cost will be originating from the purchase order for this specific receiving. You can still edit the unit cost if you have the setup configured to allow editing the unit cost of the receiving.

      You can consider the inventory utility to change the valuation method, but there are various consideration to be associated.

      Delete
  3. We are using avereage perpetual costing..
    Some times when we receive quantity of an item.. the system devide cost into two lines
    X-1 quantity with the average cost
    and 1 pc with the remaining fractions that could not be devided on the hole quantity since the system has no ability more than 5 digits after comma
    the problem is that.. system read the current cost according to the cost of the 1 pc
    not the X-1 Qty !!
    we tired finding a solution to make system recalculate the average cost depending on X-1 qty instead of the 1 pc :-( we still using adjust cost utility after each purchasing trx!!!!
    do you have please any suggustion to solve this problem

    ReplyDelete
    Replies
    1. Hello,
      Thanks for your question, I will be reviewing it shortly and get back to you with a detailed answer. It might need a blog post to get things cleared out.

      Best Regards,

      Delete
  4. Have you found any solution for this issue?

    thank you.

    ReplyDelete
    Replies
    1. I have illustrated my findings on a blog post, check it out on
      http://mahmoudsaadi.blogspot.com/2014/12/revisiting-average-costing-in-dynamics.html

      Delete
  5. Hello,

    I am having trouble understanding why our unit costs for transaction entries are different from the standard costs or current costs for our items. We use FIFO Perpetual for all of our items. I've noticed that when posting inventory transaction entries - the unit cost for some items differs greatly from the current cost of the item. Even while entering in the transactions, the current cost will be listed, but when the entry is posted and printed, the unit cost might be different. It appears the unit cost is an average (taken from the various costs of all receipts and on hand quantities), but why is it doing this? Is there a way we can ensure the unit costs for transactions are the same as the current costs?
    Thank you,

    ReplyDelete