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How is the Item Unit cost calculated using FIFO? and when we run the Adjust Cost - Item Entries... what is actually happening? In this example we have items in inventory that cost 131.20, 137.20 and 142.50. What does the 138.97116 represent? We are using FIFO not average costing. When I use the items on a job the cost that is carried to the job is this Unit Cost but it looks like an average.
I wish I had a good answer to the cost of components. If you were to take an extreme example and purchase 2 of the same item, one for $1.50 and then one for $100,000, your unit cost would be $50,000.75. If you had a job with the only line being an item and ran through all of the posting for the job to completion, you'd end up with two value entries for Negative Adjustment: -50,000.75 and +49,999.25. The G/L Entries would look the same with the large values in inventory and inventory adjustment accounts netting to -$1.50 and $1.50, respectively. Thus, after all is said and done, you'd be posting the FIFO value. But, you're not posting that value by itself, you're posting two values that net to the FIFO value.
Ian,
Thanks for the explanation. We use Jobs and the price of items has been changing more than normal. We take items and post them in the Job Planning Lines when we consume the items on the job. It appears that this cost that the Job Card shows as the cost is based on the average calculation. I need a way to tell the cost of the components used on the job on the FIFO method. How would be the best way to get this cost?
Thanks,
Ezra
There are several places where the costing method-based calculations are different. A major area is COGS. For example, let's say you purchased 100 units of an item at $1, the wholesale price was raised to $3, and you bought another 100 units at the $3 price. The unit cost on the item card would be $2 regardless of FIFO/average costing method, but your COGS on the individual sales would be different. If costing method = FIFO, the first 100 units sold would have a cost of $1. If you sold the item for $4, you would have $300 gross profit on the first hundred units. With average costing, cost would be $2 for all 200 units. Thus, the first 100 units would only result in $200 gross profit. Likewise, on the final 100 units, FIFO would have a gross profit of $100 while average would still be $200.
You can see that if you sell all 200 units, the gross profit is $400 regardless of costing method. This will be true when/if LIFO, specific, etc. are introduced as well.
I don't see a lot of average costing used with digitally-calculated COGS. One reason one might want to use average is if there are constant price fluctuations in sourcing items. An example would be if the purchase price for an item was based on quality metrics and the amount paid for inventory varied week to week, but the sales price was fixed. In that case, FIFO would cause gross profit to be different even if the same number of items were sold in a period.
Ian,
Thanks for the explanation.
Where in the D365FOB system are the FIFO or Average cost calculation used or why have different methods if they are calculated exactly the same?
Thanks,
Ezra
Unit Cost is a weighted average of the "Cost Amount" by "Ledger Entry Quantity" in Value Entries.
Both FIFO and Average (and every future costing method aside from standard) unit cost is
(Sum of Value for Item No.) * (1 / Sum of Quantity for Item No.) = Total Value / Total Quantity = Unit Cost.
Unit cost does not go to 0 when inventory goes to 0, it stays as the previous value. But, when you replenish the inventory, it will change to a new value based on the new purchase cost.
Adjust Cost - Item Entries posts values that affect COGS. For example, if we purchase an item for $1.00 and sell the item for $2.00, we make $1.00. If we later post an item charge against the original purchase for another $1.00, the cost needs to be adjusted. Adjust Cost - Item Entries will take the additional $1.00 and apply it so that we make $0.00 on the sale. However, A.C.I.E. should not need to be run all of the time as D365FOB typically has "Automatic Cost Adjustment" set to TRUE. I think this field is only TRUE when a company is created through the wizard, though. I would have to test it to see as this field is still hidden as far as I know.
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