Exact Cost Reversing Mandatory explained in Dynamics 365 Business Central

Revisit your inventory returns costing policy

Hello everyone, my name is Christos Pittis, and I am a Dynamics 365 Business Central/LS Express consultant, and I work for Memorli Business Solutions. In this episode I am going to show you how to make use of the Exact Cost Reversing Mandatory functionality in Dynamics 365 Business Central so to ensure that returned items, both in sales and purchases, are valued at the same cost as the original transaction when being put back on inventory/drawn from inventory.

When a Purchase Order is returned from inventory, how should it be valued? And, conversely, when a Sales Return is put back into stock, how it should be valued?
Users need to ensure that returned items, both in sales and purchases, are valued at the same cost as the original transaction when being put back on inventory/drawn from inventory.

After going through this exercise, you might want to revisit your inventory returns costing policy in Dynamics 365 Business Central.

Go ahead and create a new Item, named “test-exact” and set the costing method to FIFO.

The Automatic Cost Posting and Automatic Cost Adjustment fields in Inventory Setup are off for now.

Now let’s create 3 Purchase Orders and post them all:

Check the Item Ledger Entries.

Notice the entries are open aka not applied to any outbound entries yet (Sales, Purchase Returns etc.)
Check the Value Entries of each Item Ledger Entry.

Visit the Purchases & Payables Setup and Sales & Receivable Setup and activate the Exact Cost Reversing Mandatory fields.

Create a Purchase Return Order for the 23/01/20 Unit Cost £10.

The proper way is to use the Copy Document function so to copy the correct invoice information and apply this outbound entry to the correct inbound entry.
For now, I will do it the manual way so to demonstrate where the problem is.

WRONG:

Notice the Direct Unit Cost (Excl. VAT) is set to £30 instead of £10. That is because the system takes the Last Direct Cost from the Item Card and the Appl.-to Item Entry field is empty.

I will now delete the lines and use the Copy Document function.

CORRECT:

The Direct Unit Cost (Excl. VAT) is set to £10 as expected, and the Appl.-to Item Entry field is filled in with the Purchase entry.

Post it.
Have a look at the Item Ledger Entries again; you will see that are not open anymore.

Visit the following for the return Item Ledger Entry: Value Entries and Applied Entries.

Value Entries

Applied Item Entries

In simple words, the return entry has used to correct unit cost and has been closed off because it linked to the correct purchase entry.

I will run the Adjust Cost – Item Entries batch job.

The Unit Cost has now changed to £25; it’s two entries open:
Quantity 1, Unit Cost £20
Quantity 1, Unit Cost £30

(*** Remember, Adjust Cost is not set to run automatically in this example)
(*** FIFO uses the Average logic to calculate this field)

I will run the Post Inventory Cost to G/L.

If you open the Values Entries, you will see the updated Cost Posted to G/L field.

Create a Sales Order and sell one item for £50.

Click F7 to view the Statistics on this document. The original cost is £25 as per the Unit Cost on the Item Card.

Post it and check the Item Ledger Entries.
A Sales type, Item Ledger Entry has been created and linked with entry 645 - remember the costing assumption is FIFO.

Run the Adjust Cost – Item Entries and Post Inventory Cost to G/L batches.

Revisit the Item Ledger Entries and notice the Cost for the sale entry.

It has inherited the unit cost of the purchase entry (the one that is linked against) according to FIFO.
Check the Value Entries too.

You can now see a corrective line of £5 (£25-£5=£20).

Create a Sales Return Order using the Copy Document function.

The system links the inbound entry with the correct outbound entry. The cost is £20 as expected.

Post it and run the Adjust Cost – Item Entries and Post Inventory Cost to G/L batches.

Item Ledger Entries

The Sales Return (inbound entry) is still open and will be closed off when an outbound entry (Sale, Purchase Returns etc.) is posted for that item.

Value Entries

Lastly, create and post an Item Charge Purchase Invoice for the receipt that is linked to the sale.

Purchase Invoice

Item Charge Assignment

Post it and run the Adjust Cost – Item Entries and Post Inventory Cost to G/L batches.

Item Ledger Entries

The extra £5 freight cost is added not only to the Purchase line involved but also to the Sales and Sales Return.

Purchase Line

Sale

Sales Return

Thanks for reading this blog post and watching my YouTube video. You can connect with me on LinkedIn https://uk.linkedin.com/in/christospittis 

Christos Pittis

Dynamics 365 Business Central/LS Express consultant

Director at Memorli Business Solutions https://www.memorli.co/