Dynamics Community Forum Thread Details

Standard Cost of an Item wrong w/ 7 months of transactions

We have an item with a base unit of measure in inches and a costing method of standard. We just realized that at the beginning of this year, the standard cost was inadvertently updated to what appears to be the cost per foot (0.058 instead of 0.00486). We have used 408,000 inches of this item this year and can see that we have purchase variances totaling over $21K. Besides the purchase variances, we see no glaringly obvious variance entries. I assume this means both our finished goods and cost of goods sold for any use of this item has been overstated.

We have about 54K of this item on hand. If we change the standard cost to what it should be, with this do anything to the quantity on hand that we need to be concerned about? What is the least painful route to correct the errors this has caused?

Hello Emily Thiel,

Thank you for posting your question on the Microsoft Community Forum.

My thoughts are that, to a great extent, the value issue will wash. When a Purchase Invoice is posted, you most likely had a significant favorable variance posted because the Standard Cost is based on a per foot cost but the Base Unit of Measure is inches. When you bought from the vendor, the price was based on the Unit of Measure of inches, so you have a larger than normal favorable variance. When you state that the Purchase Variance is 21,000, I would assume that this is a favorable purchase price variance - i.e. a credit balance. Of course, any time the Item is sold, the Inventory Value is higher than is expected, so the profitabililty of the item was incorrect and Cost of Goods is overstated. However, when netting the Purchase Price Variance against the Cost of Goods in total, you will have a great deal of offset from a total financial perspective.

Therefore, my recommendation would be to manage this through a current revaluation journal posting to revalue the remaining inventory down to correct values and restate the standard cost to the correct per Base Unit of Measure per unit cost. The posting of the Revaluation Journal would result in a credit to Inventory and Debit to Inventory Adjustment (Expense Account). This will of course put the entire writedown expense into the current period of revaluation. However, again, this would be offset by the Purchase Price Variance credit overstatement. The timing of offset, of course,w ould be base on the when the Purchase Invoices were posted.

I think a lot of this depends upon materiality. You would most likely need to discuss this with your auditors to determine the best way to manage the financial reporting. Becuase this all happened in the same year and now you caught it, the entire effect should wash out for the most part in the first 7 months of the year at this point.

Please let me know if you have any additional questions.

Best Regards

Tom

Quick Links