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Hello,
I am trying to understand how applied and unapplied item ledger entries affect Item average cost calculation.
I have the following situation for an item:
Purchased 1 quantity with 200
Purchased 1 qty with 2200
The second purchase cost is wrongly entered so I register a Credit memo: -1 qty and 2200
Purchase 1 qty with 220
Because the credit memo is not applied with the purchase of 2200, my item cost is wrongly calculated as 873.33
If I manually apply the credit memo with the invoice the item cost is right with a value of 210
I would like to understand how is the cost 873.33 calculated in this case because it is not clear? Can anyone suggest?
Regards
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Thank you, it is clear now.
Nav has Item Application method is Automatic & Fixed the Fixed Application is that what you do with Selecting Item Ledger Entry "Appl.-from Item Entr" filling or in the credit memo when you do "Get Posted Document Lines to Reverse." when you do fixed Application system is Reversing the Exact Cost of the Purchase or Sales so that average cost calculation ignore such entries.
EXAMPLE – FIXED APPLICATION WITH AVERAGE COST
The following example, which illustrates the effect of fixed application, is based on the following scenario for an item that uses the Average costing method:
1. In entry numbers 1 and 2, the user posts two purchase invoices. The second invoice has the incorrect direct unit cost of LCY 1000.00.
2. In entry number 3, the user posts a purchase credit memo, with a fixed application applied to the purchase entry with the wrong direct unit cost. The sum of the Cost Amount (Actual) field for the two fixed applied value entries becomes 0.00
3. In entry number 4, the user posts another purchase invoice with the correct direct unit cost of LCY 100.00
4. In entry number 5, the user posts a sales invoice.
5. The inventory quantity is 0, and the inventory value is also 0.00
The following table shows the result of the scenario on the item’s value entries
If the user had not made the fixed application between the purchase credit memo and the purchase with the incorrect direct unit cost (step 2 in the previous scenario), then the cost would have been adjusted differently. The following table shows the result on the item’s value entries if step 2 in the previous scenario is performed without a fixed application.
In entry number 3, the value in the Cost Amount (Actual) field is valued by average and therefore includes the erroneous posting of 1000.00. Accordingly, it becomes -433,33, which is an inflated cost amount. The calculation is 1300 / 3 = .- 433,33.
In entry number 5, the value of the Cost Amount (Actual) field for this entry is also inaccurate for the same reason.
Note:
If you create a fixed application for an inventory decrease for an item that uses the Average costing method, then the decrease will not receive the average cost for the item as usual, but will instead receive the cost of the inventory increase that you specified. That inventory decrease is then no longer part of the average cost calculation
The Above Example is from the Microsoft Explanation of the Average Cost & Fixed Application & Auto Application Scenario of Item Costing.
Thnaks
Indika
if this helps you to solve your problem kindly make it Verified Answer so that will other user in the community.
Indika, so you mean that in cases when the outbound transaction that is applied to an inbound transaction do not have the same cost, the inbound transaction is used by the system to calculate average cost, and if the two item ledger entries have the same cost the inbound transaction is closed and does not affect cost calculation?
Thank you
Hi, DynamicsUser123
You System Calculated Average Cost is Correctly i'll explain later but I have to tell you that when you cancel Purchase with credit memo you should Never select Item Lines manually you have use function "Get Posted Document Lines to Revers" this function automatically do the Item Ledger Entry Application with you purchase Lines and it will reverse the same cost.
How the Average Cost is Calculated also very simple I hope you Inventory Setup "Average Cost Period is Set to "Day"
In the Average Cost system Take all the Inbound Transaction for particular Day and Average is as per you example you have 3 Quantity Purchase and Total Cost is 2,620.00 if you Divide 2,620.00/3 you average unit Cost is 873.33 will get so all the outbound transaction will be valued at this Rate that is why credit Memo has taken the Average Cost.
As i Explain if you do "Get Posted Document Lines to Revers" on the Credit memo you will not face this issue system will apply purchase lines with credit memo lines of wrong entry and close it so any other outbound transaction cannot apply for that.
attached is to simply understand how average cost is calculated
for more information about average costing you can follow the below link
https://msdn.microsoft.com/en-us/library/hh168079(v=nav.90).aspx
Thanks
Indika
if this helped to solve your problem please mark it as Verified Answer that will help other users on the community.
Please check this link for clear understanding. msdn.microsoft.com/.../hh997366(v=nav.80).aspx
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