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I would like to know if anyone in the community has had any experience with a manufacturing implementation where the Average Perpetual Inventory valuation method was used? If so, are theere any 'flags' I should be aware of?
thanks
paula
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The inventory ripple effect caused by Average Perpetual costing can be a huge drain on performance, especially if posting large numbers of manufacturing orders or sales invoices. The inventory ripple effect is discussed in more detail in a Microsoft publication (check CustomerSource or PartnerSource) called "How to determine, maintain and report accurate costing in Inventory".
The short version of it is that GP maintains an average cost for each receipt layer. Selling or consuming a receipt layer causes the average cost for that layer and others around it to change, thus forcing the system to generate correcting journal entries in a "ripple" effect.
This article also discusses what happens in a non-MFG environment when the ripple effect changes the cost of a receipt layer against which quantities have already been sold. Automatic GL entries are created to adjust the value of inventory as well as adjust the COGS/Inventory from the posting of the Sales Invoice. This works fine.
What does not work well, however, is when manufacturing is used. Consider the case where a raw material is received into inventory at the wrong cost. It is then used on a manufacturing order, the MO is finished, and the FG product is sold on a sales invoice. If you were to go and update the cost layer for the raw material item, the system does not also update the cost of the finished good receipt layer (and, in turn, the cost at which the item was sold on the sales invoice). This creates a complicated process of having to potentially update the receipt layer for the raw material item and the MO receipt.
All the while, the inventory ripple effect is generating journal entries left and right, sometimes only for a few pennies at a time. If you're in a high volume environment, this can really be a drain on time and performance!
David
I have not. All mine have been std or actual costing. I cannot think of any 'flags' other than I would suggest if at all possible to not run inventory negative to reduce the 'auto adjustments' made for costing. I am beginning to become a big believer of actual. Std's are just an arbitrary number that is selected as the 'cost' of an item. If no business processes are put in place to control it, it is not much more than a periodic std. Have not done much with average, but have done some clients coming from average and I believe they all went to actual.
Dan Liebl, CMA CPIM | Senior Consultant | OTT,Inc | DLiebl@OTT-inc.com
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