na2009 enus inc_03

Inventory Costing in Microsoft Dynamics NAV 2009

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CHAPTER 3: INVENTORY COSTING FUNCTIONALITY

Objectives

The chapter discusses the following concepts:

Assignment of costs to acquisitions, including unit cost calculation.

Flow of costs from purchases to sales for the various costing

methods.

How cost flow for transfers and returns is handled.

Purpose and functioning of the inventory adjustment batch job.

How and why the program creates rounding value entries.

Introduction

The inventory costing principles described in the previous chapter form the

foundation for the functionality that this chapter introduces and describes.

Starting with the acquisition of goods, the program assigns costs to those goods

that carry through to the sales, and any possible transfers or returns. This chapter

details how the program assigns costs to acquisitions and how the costs flow to

outbound transactions. Since costs of purchases have the potential to change over

time, either through item charges or revaluations, Microsoft Dynamics® NAV

2009 implements an inventory adjustment batch job that ensures costs of

purchases and sales are updated with the correct costs over time. This chapter

discusses the batch job and how it works.

Inventory Acquisition

As described earlier in this manual, to calculate the inventory value, accountants

must record and calculate item acquisition costs. The generic formula for

calculating the total acquisition cost of an item is expressed as follows:

Acquisition

Cost

= Purchase

Costs

(–Discounts)

+ Additional

Acquisition

Costs

+ Indirect Costs

This is applicable in Microsoft Dynamics NAV 2009.

The underlying costing structure in the program allows for the categorization and

recording of all three elements of the item acquisition costs. This makes it

possible for the company to analyze its expenditures and make informed

decisions based on this information.

In Microsoft Dynamics NAV 2009, the item purchase cost is called the direct

unit cost. This is the amount that the company must pay its vendors in

Chapter 3: Inventory Costing Functionality

5

accordance with the purchase invoice. Additional acquisition costs are referred to

as item charges. The program assigns these two types of direct costs by tracing

them to the specific purchase(s).

The program assigns indirect costs through cost allocation rather than tracing. In

the program, you can add these costs to the direct item cost as a percentage

and/or a fixed overhead amount per unit. The indirect cost percentage and

overhead rate are specified in the corresponding fields on the Invoicing FastTab

of the item card.

FIGURE 3.1 OVERHEAD RATE AND INDIRECT COST PERCENTAGE FIELDS ON THE INVOICING FASTTAB

In the program, you record and assign costs through inventory posting. The

following section describes the mechanism behind the cost assignment.

Unit Cost Calculation

As established earlier, in Microsoft Dynamics NAV 2009, inventory is valued on

the basis of value entries. The program records costs in the Value Entry table in

the Cost Amount (Actual) field. The program fills in this field every time it

posts an inventory transaction, by using the amount from the Unit Cost (LCY)

field on the purchase line as a basis and multiplying by the quantity.

To calculate the unit cost on the purchase line or item journal line, the program

uses one of the following values from the item card:

Last Direct Cost, together with Indirect Cost % and Overhead

Rate, when the item is valued at acquisition cost.

Unit Cost, when the item is valued at standard cost.

The program uses the last direct cost if the company chooses to value the

inventory increase at the acquisition cost. When the user creates a purchase line,

the program copies the value in the Last Direct Cost field on the item card to the

Direct Unit Cost Excl. VAT field on the purchase line (or to the Unit Amount

field on an item journal line). This is valid for all costing methods except

Standard.

The program uses the unit cost on the item card when the company chooses to

value the inventory increase at the current standard cost. On a purchase line or


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item journal line, you cannot change the value in the Indirect Cost % field when

the costing method is Standard.

The Unit Cost (LCY) field on the purchase line reflects the unit cost of the item

including indirect costs. The program calculates the contents of these fields on

the purchase line according to the following formula:

Unit Cost (LCY) =

(Direct Unit Cost - (Discount Amount / Quantity)) * (1 + Indirect Cost % / 100))

+ Overhead Rate

On the item journal line, the Unit Cost field includes the indirect costs when the

entry type is Positive Adjustment:

Unit Cost = Unit Amount * (100% + Indirect Cost %) + Overhead Rate

When the entry type is Purchase, the Unit Cost on the item journal line contains

the same value as the Direct Unit Cost Excl. VAT field on the purchase line.

The following figures summarize the relationship between values specified in

different fields and on different windows in the program, according to the type of

transaction.

FIGURE 3.2 RELATIONSHIP BETWEEN VALUES FOR PURCHASE TRANSACTIONS


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FIGURE 3.3 RELATIONSHIP BETWEEN VALUES FOR SALES TRANSACTIONS

Companies implement their decision regarding the initial valuation base by

selecting a costing method:

FIFO, LIFO, Specific, and Average costing methods imply that

inventory valuation is based on acquisition costs.

Standard costing method implies that inventory valuation is based on

standard costs.

Definitions of the costing methods supported in Microsoft Dynamics NAV 2009

are introduced in the section "Costing Methods" later in this chapter.

The program calculates the unit cost of the item by summing up direct unit cost

(purchase invoiced value) and indirect costs. The direct unit cost is calculated by

the program based on the historical (previous) purchase costs.

However, as mentioned earlier, an item's total acquisition cost may also include

additional direct costs, such as freight or custom duties. You can post additional

direct costs to the inventory ledger as item charges. The program records these

additional costs in the value entries.

Inventory Posting

When the user posts an inbound transaction, the program creates an item ledger

entry and one or more value entries. The item ledger entry contains the purchased

quantity, while the value entries contain both the value of the direct unit cost and

indirect cost.


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In addition, when the user posts an item charge related to the purchase of an item,

the program creates an additional value entry with the item charge for the item

and assigns this value entry to the original item ledger entry. The program does

not create an additional item ledger entry; instead, the amount in the Cost

Amount (Actual) field on the original item ledger entry changes. This is because

the Cost Amount (Actual) field on the item ledger entry is a FlowField that

sums the cost amounts from all the value entries related to that item ledger entry.

This is similar to the way the detailed customer ledger entries are related to the

customer ledger entries.

The following example illustrates the principles of inventory posting in abstract

terms. Only relevant fields are considered.

A purchaser creates a purchase order including the amount of the vendor's

invoice and additional freight invoice. The purchaser then posts the order as

received and invoiced. The program creates the following item ledger entry:

Item Ledger Entry

Posting Date Entry

Type

Quantity Entry

No.

1/1/2010 Purchase 10 1

The program also creates the following value entries related to the same item

ledger entry:

Value Entry

Posting

Date

Entry

Type

Cost

Amount

(Actual)

Cost

Posted to

G/L

Item

Ledger

Entry No.

Entry

No.

1/1/2010 Direct

Cost

1000 0 1 1

1/1/2010 Direct

Cost

100 0 1 2

Demonstrations entitled ―Item Valuation with Direct Costs Only,‖ ―Item

Valuation with Direct and Indirect Costs,‖ and ―Item Valuation Based on

Standard Costs‖ demonstrate how the valuation of purchases works in the

program.

The demonstrations in this training manual are performed using the Accounting

Manager Role Center which is predefined in the RoleTailored client in Microsoft

Dynamics NAV 2009.

NOTE: You can also create a customizable Role Center that displays key

information that is required by your specific role and makes day-to-day tasks

easier to complete. Team members of other roles, such as accountant, can access

the same application areas through the Departments button in the navigation

pane.


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To set the Accounting Manager as the default Role Center, do the

following:

1. In the navigation pane, click the Departments button, and then click

Administration > Application Setup > RoleTailored Client.

2. Under Lists, click Profiles.

3. Double-click the Accounting Manager profile to open its card.

4. On the profile card, select the Default Role Center check box.

5. Restart the RoleTailored client.

Before starting the demonstrations, it is recommended that you set location

BLUE as the default for vendor 10000 and deactivate the option of mandatory

external document number on purchase documents in Purchases & Payables

Setup.

To set location BLUE as the default for vendor 10000, do the following:

1. In the navigation pane, click the Home button, and then click

Vendors.

2. Browse to vendor 1000 and open the vendor card.

3. On the Receiving FastTab, set the Location Code field to BLUE.

To deactivate mandatory external document number, perform the

following actions:


Purchase.

2. Choose the Administration category, and then under Setup, click

Purchase & Payables Setup.

3. On the General FastTab of the Purchases & Payables Setup

window, clear the Ext. Doc. No. Mandatory check box.

Demonstration: Item Valuation with Direct Costs Only

Create an item that will use the FIFO costing method.

1. In the navigation pane, click the Home button, and then click Items.

2. Click New in the Action pane and create an item with the following

specifications:

No. COSTING FIFO

Description Costing FIFO

Base Unit of Measure: PCS

Costing Method FIFO

Gen. Product Posting Group RETAIL

VAT Product Posting Group VAT25

Inventory Posting Group RESALE

Last Direct Cost 100.00


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Unit Price 120.00

Now create a purchase order for this item to see how the choice of

costing method affects the valuation.


Purchase Orders.

4. Click New in the Action pane and create an order for vendor 10000

with a posting date of 1/28/2010 for 10 pieces of item COSTING

FIFO. Notice that the program fills the Direct Unit Cost Excl. VAT

field with the value from the Last Direct Cost field on the item card.

Now, assume that you also have received an invoice for freight services

related to this purchase.

5. Enter a second line with an item charge. Select P-FREIGHT in the

No. field, and enter 1 in the Quantity field and 10 in the Direct Unit

Cost Excl. VAT field.

6. Assign this item charge to the item purchase line. (The procedure for

doing this is described in the topic "Assigning Item Charges to

Purchase Documents" in the online Help.)

7. Post the order as received and invoiced.

Have a look at the item ledger entries and value entries created as a result

of posting.

8. In the Navigation Pane, click the Departments button, and then

click Purchase.

9. Click History, and then click Posted Purchase Receipts. Browse to

the posted receipt for the order just posted.


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FIGURE 3.4 POSTED PURCHASE RECEIPT

10. Click Navigate in the Action pane. Select the line for Item Ledger

Entry and click Show.

FIGURE 3.5 RESULTING ITEM LEDGER ENTRY

Notice that the program has created only one item ledger entry for this

order, because only one line of the purchase order causes a change in

inventory quantity. The total landed costs of 1,010 LCY for this purchase

are specified in the Cost Amount (Actual) field. The entry number of

this record is indicated in the Entry No. field.


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Now see the value entries created for this transaction.

11. Click Related Information > Entry > Value Entries.

(Alternatively, click the value in the Cost Amount (Actual) field.)

FIGURE 3.6 RELATED VALUE ENTRIES

Since the purchase order contained two lines that affected a change in

inventory value, the program has created two value entries. The program

posts the invoiced purchase cost and the cost of the freight fee as direct

costs and copies the corresponding amounts to the Cost Amount

(Actual) field. You can see in the Item Ledger Entry No. field that both

entries relate to the same item ledger entry.

To view a list of all value entries related to a specific item charge type, do the

following:

1. In the navigation pane, click the Departments button, then click

Administration > Application Setup > Sales & Marketing >

Sales.

2. Under Lists, click Item Charges.

3. Select the item charge number for which you wish to view value

entries.

4. Click Related Information > Item Charge > Value Entries.

Demonstration: Item Valuation with Direct and Indirect Costs

1. Create an item with the following specifications:


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No. COSTING LIFO

Description Costing LIFO

Base Unit of Measure PCS

Costing Method LIFO

Gen. Product Posting

Group

RETAIL

VAT Product Posting

Group

VAT25


Indirect Cost % 10

Last Direct Cost 80.00

Unit Price 130.00

2. Create a purchase order for vendor 10000 with a posting date of

1/28/2010 for 10 units of item COSTING LIFO.

3. Use the Choose Columns... function to make the Unit Cost (LCY)

field visible. Notice that the unit cost includes both the direct cost

and the indirect cost associated with the item.

FIGURE 3.7 UNIT COST ON THE PURCHASE ORDER LINE


Have a look at the item ledger entries and value entries created as a result

of posting.


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5. Open the posted purchase receipt and use the Navigate function to

view the item ledger entry.


The total landed costs of 880 LCY for this purchase are specified in the

Cost Amount (Actual) field. The entry number of this record is

indicated in the Entry No. field.

6. View the value entries created for this transaction.


The invoiced purchase cost is posted as direct cost and indirect cost, and

the corresponding amounts are copied to the Cost Amount (Actual)

field. Both entries relate to the same item ledger entry.


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Demonstration: Item Valuation Based on Standard Costs


No. COSTING STD

Description Costing STD


Costing Method STANDARD




Standard Cost 100.00

Unit Price 120.00


1/28/2010 for ten pieces of item COSTING STD.

Assume that your vendor invoices the purchase at a cost of 90 LCY per

unit.

3. In the Direct Unit Cost Excl. VAT field, enter 90. Notice that the

program leaves the Unit Cost (LCY) as 100.

FIGURE 3.10 UNIT COST ON THE PURCHASE ORDER LINE


The program creates the following item ledger entry as a result of the

posting.


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The value of the ten units on hand, as specified in the Cost Amount

(Actual) field, is recorded at the standard cost amount of 1,000 LCY,

rather than the purchase price of 900 LCY.

5. View the value entries created for this transaction.


The total purchase cost is posted as two entries: direct cost of 900 LCY

and variance of 100 LCY representing the difference between the

standard cost amount and the direct cost of the purchase.

When reconciling inventory with the G/L, the program will post the

standard cost of 1,000 LCY to the Inventory account and the 100 LCY to

the Purchase Variance account.


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Cost of Goods Sold

In the following inventory equation, the cost of goods sold is an unknown

parameter that must be recorded and calculated:

Beginning

Inventory

+ Net

Purchases

– Cost of

Goods Sold

= Ending

Inventory

When determining the cost of goods sold, the major problem arises from

fluctuations over time in the unit acquisition costs of inventory items. If more

than one purchase is made of the same item at different prices and specific

identification is not feasible or possible, then some assumption must be made as

to the flow of costs to estimate the acquisition costs applicable to the units

remaining in the inventory.

In Microsoft Dynamics NAV 2009, the cost flow assumption is embedded in the

costing method associated with the item.

As described earlier in this manual, a cost flow assumption determines how the

program assigns acquisition costs to the inventory withdrawals and to the ending

inventory. In practical terms, it means that each time a company makes a sale, the

program must determine which items have been sold and which purchase entry or

entries the sale needs to be applied to.

Therefore, a link between an inventory increase and an inventory decrease is

necessary. This link is introduced by means of applying quantity postings against

each other. In the program, you can create an application between inventory

increase and decrease in two ways:

Manually

Automatically

The user will typically choose to make application manually when they need to

apply an inventory decrease to a specific inventory receipt. A procedure for

creating a manual application in the program referred to as a fixed application is

explained and illustrated below in the section "Fixed Application."

In most situations, it is preferable and more feasible to allow the program to do

the linking automatically based on some assumptions as to how items physically

flow through inventory. In Microsoft Dynamics NAV 2009, this assumption is

called the application method, and it is a property of the costing method of the

item.

Costing Methods

The costing method is a common term in the program for a combination of

application methods and cost flow assumptions. By selecting a costing method

for an item, the user determines both the flow of physical items in the company's

inventory and the financial treatment of that physical flow.


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The choice of a costing method has two consequences:

It determines which purchase entries and sales entries will be applied

to each other when you post a document. This is the application

method part of the costing method.

It influences the unit cost calculation (because this is affected by the

application method used for sales and purchase entries), which is

itself used for posting to the general ledger. This is the cost flow

assumption part of the costing method.

Microsoft Dynamics NAV 2009 supports the following five widely-recognized

costing methods:

FIFO (First-In-First-Out): With this method, the program applies

the entries of inventory decrease to the entries of inventory increases

that were purchased first. The cost of inventory decrease is thus

calculated by taking the value of the first inventory acquisition(s).

The principle of the FIFO costing method is illustrated in the

following example. The first three entries represent a sequence of

inventory increases, while the last three entries are the inventory

decreases valued according to the FIFO costing method:

Posting Date Quantity Cost Amount (Actual) Entry No.

1/1/2010 1 10 1

1/1/2010 1 20 2

1/1/2010 1 30 3

1/2/2010 -1 -10 4

1/3/2010 -1 -20 5

1/4/2010 -1 -30 6

LIFO (Last-In-First-Out): With this method, the program applies

the entries of inventory decrease to the entries of inventory increases

that were purchased most recently. The cost of inventory decrease is

thus calculated by taking the value of the last inventory acquisition.

The principle of the LIFO costing method is illustrated in the

following example:


1/1/2010 1 10 1

1/1/2010 1 20 2

1/1/2010 1 30 3

1/2/2010 -1 -30 4

1/3/2010 -1 -20 5

1/4/2010 -1 -10 6

Average: With this costing method, the program applies the entries

of inventory decrease to the entries of inventory increases that were

purchased first. The cost of inventory decrease is, however,

determined by calculating a weighted average of the remaining


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inventory at the valuation date of the inventory decrease. The way

the program calculates the average cost is described in greater detail

in a separate section. The principle of the average costing method is

illustrated in the following example:


1/1/2010 1 10 1

1/1/2010 1 20 2

1/1/2010 1 30 3

1/2/2010 -1 -20 4

1/3/2010 -1 -20 5

1/4/2010 -1 -20 6

Specific: The specific costing method represents an assumption that

individual units of items can be physically identified, typically with

serial and/or lot numbers. Based on this unique identification, the

unit's acquisition cost can be traced to a specific unit. With this

method, the program ensures that an entry of inventory decrease

containing an item with a serial number is always applied to an entry

of inventory increase that contains the same item with the same serial

number and thus the same acquisition cost. The principle of the

specific costing method is illustrated in the following example:

Posting Date Quantity Serial No. Cost

Amount

(Actual)

Entry

No.

1/1/2010 1 SN-1 10 1

1/1/2010 1 SN-2 20 2

1/1/2010 1 SN-3 30 3

1/2/2010 -1 SN-2 -20 4

1/3/2010 -1 SN-3 -30 5

1/4/2010 -1 SN-1 -10 6

Standard: With this costing method, the program applies the entries

of inventory decrease to the entries of inventory increases that were

purchased first. In terms of application method, this is the same as

for the FIFO costing method. However, as the inventory increase is

valued at standard costs rather than acquisition costs, inventory

decrease is also valued at the standard costs. The principle of the

standard costing method is illustrated in the following example:

Posting Date Quantity Cost Amount

(Actual)

Entry No.

1/1/2010 1 15 1

1/1/2010 1 15 2

1/1/2010 1 15 3

1/2/2010 -1 -15 4


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1/3/2010 -1 -15 5

1/4/2010 -1 -15 6

As explained by the definitions above, the costing methods differ in the way they

value inventory decreases. However, all costing methods have one thing in

common when the quantity on inventory is zero, the inventory value is also zero.

It is also important to note that while, in general, the inventory costs are

capitalized according to the cost flow assumption embedded in the individual

costing method, the value of inventory decrease transactions are initially posted

as based on just two types of unit cost:

Average cost for items valued according to all costing methods

except Standard.

Standard cost for items valued according to the standard costing

method.

To make an inventory valuation according to the selected costing method, the

costs must be adjusted using the inventory adjustment batch job. This issue is

addressed later in this chapter in the section "Inventory Adjustment."

The attributes of costing methods are summarized per costing method in the

following table:

Costing

Method

Unit Cost

Calculation for

Inventory Increase

Application

Method

Initial Unit Cost

Calculation for

Inventory Decrease

FIFO Acquisition Cost FIFO Average Cost

LIFO Acquisition Cost LIFO Average Cost

Average Acquisition Cost FIFO Average Cost

Specific Acquisition Cost Serial No.,

Application No.

Average Cost

Standard Standard Cost FIFO Standard Cost

NOTE: The program uses FIFO as the default costing method if you do not

manually fill in the field for the item.

Application Methods

Item ledger, value, item application, and sometimes capacity ledger entries are

created when the user posts an item journal line. When you post an inventory

transaction, the program records the quantity posting in the item ledger entries,

the value posting in the value entries, and then in addition, the program records

an item application in the item application entries. In the item application entries,

the program creates a link between inventory increases and inventory decreases,

to show exactly which inventory increase was used for which inventory decrease

(and vice versa). When you post an inventory decrease, the program records an


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item application entry linking the inventory decrease to an inventory increase.

The program does this using the costing method of the item as a guideline.

There is a defined set of priorities as to how the program treats the physical item

flow. These priorities depend on the way applications between outbound and

inbound entries are created. They are described as follows:

Every time the user posts an inventory decrease (sales line, item

journal line), the program checks whether there is a fixed application

between entries, that is, if the line contains an entry number that

indicates which posted item entry this line needs to be applied to. If

the fixed application has been created, the program links the line

with that item entry.

If no fixed application exists, the program checks whether item

tracking entries with serial numbers have been created for the line. If

there are such entries, the program links the appropriate increase and

decrease in inventory together according to the FIFO or LIFO

methods, depending on the selection in the Costing Method field on

the item card.

If there are no item tracking entries for the line in question, the

program refers to the costing method and applies the outbound entry

to an inbound entry according to the application method associated

with the selected costing method.

Technically, the mechanism of applying inventory entries against each other

works in the following way:

1. When the user posts an inventory increase transaction, the program

places a check mark in the Open field on the created item ledger

entry. The incoming quantity is copied to the Remaining Quantity

field.

2. When an inventory decrease of the same item is posted, the program

applies the entry of the outbound transaction to the inbound item

ledger entry(s) with the check mark in the Open field. The quantity

in the Remaining Quantity field of the corresponding entry is

reduced by the number of units sold. If the quantity of the outbound

entry is the same or greater than the remaining quantity of the

inbound entry in question, then the program closes this entry by

deleting the check mark from the Open field.

Records regarding which item entries have been applied to a specific item entry

are stored in the Item Application Entry table, which does not have user

interface.

The following example provides an insight on the applied item entries for item

1968-S.

1. Open the item list and select item 1968-S.

2. Click Related Information > Item > Entries > Ledger Entries.


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FIGURE 3.13 ITEM LEDGER ENTRIES OF AVERAGE-COST ITEM 1968-S

Notice that the remaining quantity for entry number 28 has been reduced

compared to the original quantity when added to the inventory. This

indicates that one or more outbound entries have been applied to this

entry.

3. Select entry 28 and click Related Information > Application >

Applied Entries.

FIGURE 3.14 APPLIED ITEM ENTRIES FOR ITEM LEDGER ENTRY 28

The table contains a list of entries that have been applied to the selected

inventory increase entry.


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Fixed Application

As described earlier, the costing method determines the assumption of how the

cost flows from inventory increase to inventory decrease. It is always possible for

the user to overrule this assumption if more accurate information about the cost

flow exists. This is done by creating a fixed application between entries.

The following table demonstrates how fixed application influences the cost of

inventory decreases:


1/1/2010 1 10 1

1/1/2010 1 20 2

1/1/2010 1 30 3

1/2/2010 -1 -20 2 4

1/3/2010 -1 -10 1 5

1/4/2010 -1 -30 3 6

Fixed application is based on the same principle as the specific costing method.

The following example describes the procedure for creating a fixed application

between the entries.

1. In the navigation pane, click the Home button, and then click Sales

Orders.

2. Click New in the Action pane and create an order for customer

10000 with a posting date of 1/28/2010 for two units of item 1968-S.


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FIGURE 3.15 SALES ORDER FOR TWO UNITS OF ITEM 1968-S

3. Use the Choose Columns... function to make the Appl.-to Item

Entry field visible. In the Appl.-to Item Entry field for the sales

line, click the drop-down arrow.

The program opens the Item Ledger Entries window with a list of

all open item entries to which the sale transaction in question can be

applied to.

FIGURE 3.16 ITEM LEDGER ENTRY TO APPLY

4. Select the entry and click OK. The program copies the entry number

to the Appl.-to Item Entry field on the sales line.

5. Post the order as shipped and invoiced.

6. Have a look at the item ledger entries for item 1968-S.


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FIGURE 3.17 ITEM LEDGER ENTRY NUMBER 27 AFTER APPLICATION

The remaining quantity of the first inbound entry is now reduced by the

two sold units. By clicking Related Information > Application >

Applied Entries, all the outbound entries are visible that have been

applied to the selected inbound entry.

There are a number of situations where creating a fixed application can be useful.

You may need to correct a wrong posting or to ensure an accurate cost reversal in

connection with a sales return. The former is illustrated in the following

demonstration, while the latter is addressed in the section "Inventory Transfers

and Returns."

Demonstration: Correcting Wrong Posting


No. COSTING AVR

Description Costing AVR


Costing Method Average




Last Direct Cost 200

Unit Price 250

Now, create two purchase invoices for the item, one of which will

contain an incorrect direct unit cost.


Purchase > Order Processing.


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3. Under Lists, click Purchase Invoices.

4. Click New in the Action pane and create a purchase invoice for

vendor 10000 with a posting date of 01/30/2010. Enter an invoice

line for one unit of item COSTING AVR with the direct unit cost of

200 LCY, as copied by the program from the item card. Post the

invoice.

5. Create a second invoice for the same vendor with the same posting

date. Enter a line for one unit of item COSTING AVR with the direct

unit cost of 2200 LCY, entered by mistake instead of 220 LCY. Post

the invoice.

Now you have to correct the second posting by means of creating a

purchase credit memo for the wrongly posted amount (thus taking the

incorrect value out of the inventory) and posting a new purchase invoice

with the correct direct unit cost of 220 LCY.


Purchase > Order Processing.

7. Under Lists, click Purchase Credit Memos. Create a purchase

credit memo for one unit of item COSTING AVR for vendor 10000

with a posting date of 1/30/2010. The Direct Unit Cost Excl. VAT

field is populated with the previous direct unit cost of 2,200.

Now, you must apply this entry to the second purchase entry that was

posted with the wrong direct unit cost.

8. Create a fixed application to the purchase entry in question (refer to

steps 3-4 of the previous demonstration on how to create a fixed

application). Post the purchase credit memo.

Item ledger entries that are applied to each other are not valued by

average. The two relevant entries serve to cancel each other, and the sum

value of the Cost Amount (Actual) field for the transaction becomes

zero. Thus, the program excludes it from the normal average cost

calculation.

9. Create a purchase invoice for the same vendor with a posting date of

1/30/2010 and the correct direct unit cost of 220 LCY. Post the

invoice.

There are now two units of item COSTING AVR on inventory with a

total value of 420 LCY (200 + 220 LCY). The item's average unit cost is

thus 210 LCY.

NOTE: For more information on how average cost is calculated in Microsoft

Dynamics NAV 2009, refer to the section “Average Cost Calculation” of this

chapter.

Now create a sales invoice for the item.


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Sales & Marketing > Order Processing.

11. Under Lists, click Sales Invoices. Create a sales invoice for

customer 10000 for two units of item COSTING AVR with a posting

date of 1/30/2010. Post the invoice.

When you post the sales invoice, the program calculates the cost amount

by using the unit cost from the item card. Thus, if you view the value

entry for the sale you just posted, you see that the cost amount is 400

LCY, because the unit cost on the item card is 200 LCY. To adjust the

cost for the sale to the weighted average cost, you must run the Adjust

Cost Item Entries batch job for item COSTING AVR.

12. In the navigation pane, click the Home button, and then click Items.

On the Action pane, click Adjust Cost – Item Entries. On the

request page, specify COSTING AVR in the Item No. Filter field

and click OK.

To view the entries created as a result of the inventory postings made in

connection with the above described demonstration, open the item ledger

entries for item COSTING AVR.

FIGURE 3.18 RESULTING ITEM LEDGER ENTRIES

Notice that the cost amount for the sale has been updated by the

adjustment process with the correct average cost.

Now, assume that no fixed application has been made between the

purchase credit memo and the purchase entry with the wrong direct unit

cost.

13. Create an item with the same specifications as item COSTING AVR

(refer to step 1 of the demonstration), but set the item number to

COSTING AVR2.


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14. Perform steps 2-12 of the demonstration for item COSTING AVR2,

but do not create a fixed application in step 8.

The value of the inventory decreases without the fixed application is

inaccurate.

FIGURE 3.19 INCORRECT COST AMOUNT

Item ledger entry number 327 represents the posted credit memo. The

Cost Amount (Actual) field contains the amount of -873.33 LCY. Since

no fixed application was made to apply this inventory decrease to the

second purchase entry, the program posted the value of this decrease

based on the unit cost calculated as weighted average, meaning that it

added the sum of the costs of all the inventory increases on 2/1/2010 and

divided it by the sum of the quantities of the inventory increases (200

LCY + 2200 LCY + 220 LCY / 3 = 873.33 LCY). This affected the total

value of inventory on hand, and thus affected the average unit cost

calculation used to value another inventory decrease. As specified in the

last record, the sales transaction is valued at the cost amount of -1746.67

LCY instead of the correct 420 LCY.

Application Worksheet

Automatic or manual item applications can be unwanted since they can lead to

wrongly calculated unit costs. Functionality to correct item applications can

therefore be very useful. The Application Worksheet is designed specifically for

tasks involved in removing and reapplying item ledger entries. However, it is

only suited for skilled users who have a good understanding of costing

functionality in general and item application principles in particular.

It might be necessary to remove an item application or reapply item ledger

entries for different reasons, such as when you:

Forget to make a fixed application.


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Make an incorrect fixed application.

Need to return an item to which a sale has already been applied.

NOTE: Transfer, drop shipment, and consumption/output item applications

cannot be redistributed.

When you remove an item application, the program moves the old entry from the

Item Application Entry table to the Item Application Entry History table, which

serves as an audit trail of the applications that have been removed. The program

then adds the un-applied quantity to the Remaining Quantity fields of the item

ledger entries that have been un-applied and, if necessary, updates the Open

fields as well.

When you manually create a new application using the Application Worksheet,

the program creates a new item application entry and updates the Remaining

Quantity and Open fields of the associated item ledger entries, accordingly.

If the Automatic Cost Adjustment field (Inventory Setup) is set to Always, the

program automatically runs the cost adjustment batch job after each item

application performed in the Application Worksheet window. If automatic cost

adjustment is not used, users must run the Adjust Cost - Item Entries batch job to

make sure all costs are up to date.

Demonstration: Use the Application Worksheet

Consider the previous scenario, where no fixed application has been made

between the purchase credit memo line and the purchase entry with the incorrect

cost amount. You need to resolve this situation and reapply the purchase credit

memo line to the correct purchase entry.

1. View the item ledger entries for item COSTING AVR2.

2. Select the entry that relates to the purchase credit memo (with

quantity of -1) and click Related Information > Application >

Application Worksheet.

3. Set the item filter to ―COSTING AVR2‖.


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FIGURE 3.20 APPLICATION WORKSHEET

4. Click Related Information > View > Applied Entries

(alternatively, press F9).

FIGURE 3.21 INCORRECT APPLIED ENTRY

When you posted the purchase credit memo without creating the fixed

application, the program automatically applied the purchase credit memo

line to the first purchase entry available for application.

5. Click Remove Application in the Action pane.


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The purchase entry is transferred to the application worksheet and is now

open.

You also need to remove the application created by the program between

the two purchase invoice lines and the sale entry.

6. Select the entry of Sale type (with quantity of -2) and click Related

Information > View Applied Entries.

FIGURE 3.22 AUTOMATICALLY APPLIED ENTRIES

The program automatically applied the sale entry to the purchase entry

with the incorrect amount and the purchase entry created when you

posted the invoice with the correct amount after posting the purchase

credit memo.

7. Select both entries and click Remove Application in the Action

pane.

The entries are also transferred to the application worksheet and are now

open.

Now you need to create the correct fixed application between the credit

memo and the erroneous invoice.

8. Select the entry that relates to the purchase credit memo (with

quantity of -1) and click Related Information > View > Select

Additional Entries to Apply.

9. Select the entry with the incorrect amount and click OK.

10. Close the application worksheet.


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The program automatically applies the sale entry to the correct purchase

invoice lines.

Unit Cost Calculation on Sales Transactions

As established earlier, the basis for inventory valuation in Microsoft Dynamics

NAV 2009 is the value entries. Costs in the Value Entry table are recorded in the

Cost Amount (Actual) field. The program fills in this field every time an

inventory transaction is posted by using the amounts from the Unit Cost (LCY)

field on the sales line or Unit Cost field on the item journal line as a basis and

multiplying by the quantity.

To calculate the unit cost on the sales line or item journal line, the program uses

the following values on the item card:

Unit Cost, for items with a costing method other than Standard.

Standard Cost, for items with a costing method of Standard.

The standard cost is a static amount that always remains the same after it is

entered by the user, unless the user changes it. The unit cost, however, is

continually updated by the program with the average cost of the item. This

update occurs in the following situations:

When posting a transaction, if the net invoiced quantity of the item

changes from negative or zero to positive, and the unit cost on the

item card is zero, then the program fills the Unit Cost field on the

item card with the value from the Last Direct Unit Cost field.

When running the Adjust Cost Item Entries batch job, the program

fills the Unit Cost field on the item card with the calculated average

cost of the item.

NOTE: Since the Adjust Cost Item Entries batch job plays such an important

role in determining the unit cost of the item, it is recommended to run this batch

job daily, during non-business hours.

Just as in the inventory acquisition posting, when the user posts an outbound

transaction (inventory decrease), the program creates an item ledger entry and a

value entry. The item ledger entry contains the sold quantity, while the value

entries contain the value of the cost amount.

Average Cost Calculation

The average cost is calculated for each inventory decrease for items that use the

Average costing method. The calculation is made with a periodic weighted

average, using an average cost period that is set up by you. The calculation is

based on the valuation date, which is defined automatically as the date from

which an inventory increase or decrease will affect the average cost, and it is

stored in the Valuation Date field in the Value Entry table.


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You set up how the program calculates the average cost using Inventory Setup.

There are two options:

Average Cost Period: The program calculates the average cost for

each average cost period. This can be for each day, each week, each

month, or each accounting period. All inventory decreases that were

posted within the average cost period will receive the average cost

calculated for that period.

Average Cost Calc. Type: The average cost can either be calculated

each item, or each item, variant, and location.

When you post a transaction for an item that uses the Average costing method,

the program creates an entry in the Avg. Cost Adjmt. Entry Point table. This

entry contains the transaction‗s item number, variant code, and location code. In

addition, the entry contains the valuation date, which in this table is the last date

of the average cost period in which the transaction was posted. This should not

be confused with the valuation date that appears in the Value Entry table, which

shows the actual date that the entry‗s value takes effect. The program uses the

valuation date in the Value Entry table to determine in which average cost period

the value entry belongs.

The program actually calculates the average cost of the transaction when you run

the cost adjustment batch job. If you have set up automatic cost adjustment in the

inventory setup, this happens automatically when you post the transaction;

otherwise, you must run the batch job manually. To identify the items (or items,

locations, and variants) for which the batch job calculates average costs, the

program uses the entries in the Avg. Cost Adjmt. Entry Point table. For each

entry whose cost has not yet been adjusted, the program does the following to

determine the average cost:

1. Determines the cost of the item at the beginning of the average cost

period.

2. Adds the sum of the receipt costs that were posted during the average

cost period. These include purchases, positive adjustments, outputs,

and revaluations.

3. Subtracts the sum of the costs of outbound transactions that were

fixed applied to receipts in the average cost period. These might

include purchase returns and negative outputs.

4. Divides by the total inventory quantity as of the end of the average

cost period, not including those inventory decreases that are being

valued.

The program then applies this average cost to the inventory decreases for the

item (or item, location, and variant) with posting dates in the average cost period.

If any inventory increases are fixed applied to inventory decreases in the period,

the program forwards this average cost to these entries as well.

The following example demonstrates the effect of calculating the average cost

with different average cost periods. Average Cost Calc. Type is set to Item.


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Example: Effect of Using Different Average Cost Periods

The following table contains item ledger entries for an item that uses the Average

Costing Method. The Cost Adjustment batch job has not yet been run for these

entries, so the values in the Cost Amount (Actual) field of the inventory

decreases are just initial values, corresponding to the inventory increases they are

applied to.

Item Ledger Entries

Posting

Date

Item Ledger Entry

Type

Quantity Cost Amount

(Actual)

Entry

No.

1/1/2010 Purchase 1 20 1

1/1/2010 Purchase 1 40 2

1/1/2010 Sale -1 -20 3

2/1/2010 Sale -1 -40 4

2/2/2010 Purchase 1 100 5

2/3/2010 Sale -1 -100 6

If the average cost period is set to Day, the entries in the Avg. Cost Adjmt. Entry

Point table that apply to the value entries appear as follows:

Avg. Cost Adjmt. Entry Point

Item No. Variant

Code

Location

Code

Valuation

Date

Cost is

Adjusted

ITEM1 BLUE 1/1/2010 No




When the Cost Adjustment batch job is run, the program calculates the average

cost for each day and applies it to the inventory decreases as follows:

Item Ledger Entries

Posting

Date

Item Ledger Entry

Type


(Actual)

Entry

No.

1/1/2010 Purchase 1 20 1

1/1/2010 Purchase 1 40 2

1/1/2010 Sale -1 -30 3

2/1/2010 Sale -1 -30 4

2/2/2010 Purchase 1 100 5

2/3/2010 Sale -1 -100 6


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If the average cost period is set to Month, the entries in the Avg. Cost Adjmt.

Entry Point table that apply to the value entries appear in the following table.

Note that for each combination of item number, variant code, location code, and

valuation date, the program creates only one entry. Note also that the valuation

date is set to the last day in the average cost period, which in this case is the last

day of the month.

Avg. Cost Adjmt. Entry Point

Item No. Variant

Code

Location

Code

Valuation

Date

Cost is

Adjusted



When the Cost Adjustment batch job is run, the program calculates the average

cost for each month and applies it to the inventory decreases as follows:

Item Ledger Entries

Posting

Date

Item Ledger Entry

Type


(Actual)

Entry

No.

1/1/2010 Purchase 1 20 1

1/1/2010 Purchase 1 40 2

1/1/2010 Sale -1 -30 3

2/1/2010 Sale -1 -65 4

2/2/2010 Purchase 1 100 5

2/3/2010 Sale -1 -65 6

The average cost of entry number 3 is calculated in the average cost period for

January, and the average cost for entries number 4 and 6 is calculated in the

average cost period for February. To get the average cost for February, the

program adds the average cost of the piece received into the inventory (100) to

the average cost at the beginning of the period (30), and divides the result (130)

by the total quantity in inventory (2). This gives the resulting average cost of the

item in the February period (65). The program then assigns that average cost to

the inventory decreases in the period (entries number 4 and 6).

The valuation date is set automatically by the program for each value entry.

There is a defined set of rules as to how the program sets this date. In essence,

these rules represent certain combinations of two parameters, which are as

follows: posting date of the transaction and the sign of the valued quantity on the

value entry (negative or positive) indicating whether it is an inventory increase or

decrease. The rules are summarized in the following table.


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Inventory Increase

Valued Quantity Posting Date Valuation Date

Purchase orders and

invoices, positive

adjustments, sales

credit memos

Posting date of item

ledger entry

Same as posting date

Item charges Posting date of value

entry

Valuation date of the item

ledger entry the charge is

assigned to

Revaluation Posting date of the

revaluation value entry


Inbound transfer Posting date of the item

ledger entry

Valuation date of the

applied entry of outbound

transfer

Inventory Decrease

Valued Quantity Posting Date Valuation Date

Sales orders and

invoices, negative

adjustments, item

charges, outbound

transfer, purchase

credit memos

Posting date of item

ledger entry is later than

the latest valuation date

of applied value entries

of inventory increase


Same as above Posting date of item

ledger entry is earlier

than the latest valuation

date of applied value

entries of inventory

increase

Latest valuation date of

applied value entries of

inventory increase

The rules described above for setting valuation dates for item entries of different

types are illustrated in the following abstract example:

Value Entry

Posting

Date

Item

Ledger

Entry Type

Valuation

Date

Valued

Quantity

Cost

Amount

(Actual)

ILE

No.

Entry

No.

1/1/2010 Purchase 1/1/2010 2 20 1 1

1/15/2010 Item Charge 1/1/2010 2 8 1 2

2/1/2010 Sale 2/1/2010 -1 -14 2 3

3/1/2010 Revaluation 3/1/2010 1 -4 1 4

2/1/2010 Sale 3/1/2010 -1 -10 3 5

If the quantity on inventory is less than zero after posting the inventory decrease,

then the valuation date is initially set to the posting date of the inventory


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decrease. This date may be changed later – according to the rules described

above – when the inventory increase is applied.

The average cost may need to be adjusted later if an inventory increase or

decrease is posted with a valuation date earlier than the valuation date used when

calculating the average cost of the inventory decrease.

The program records all the source value entries that it uses for calculating the

average cost, grouped and summarized by average cost period. You can view

these entries in the Average Cost Calc. Overview window by clicking the

AssistButton next to the Unit Cost (LCY) field for the item using the Average

costing method.

The following figure offers an insight to average cost dynamics using the

Average Cost Calc. Overview window for item COSTING AVR.

FIGURE 3.23 AVERAGE COST CALCULATION OVERVIEW

The average cost calculation overview for the item displays in expanded lines

above each closing entry all the entries that were used to calculate the average

cost displayed in the closing entry line. You can collapse lines to only view the

summarized closing entry for the end of each average cost period.

The Type field indicates what kind of entry it is and how the program used it in

the calculation of the average cost. It may have the following values:

Type Entry Description

Closing Entry The entry is a summary of the average cost on the last day of the

average cost period.

Increase The entry represents an inbound transaction by which the item

came into inventory, such as a purchase or a positive


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adjustment. Notice that the increase relates to inventory value -

not unit cost.

Decrease The entry represents an outbound transaction by which the item

went out of inventory, such as a sale or a negative adjustment.

Notice that the decrease relates to inventory value - not unit

cost.

Applied

Increase

The entry is an inbound transaction where the entry was fixed

applied to an inventory decrease. An example of this is a sales

return that was fixed applied to a sales invoice.

Applied

Decrease

The entry is an outbound transaction where the entry was fixed

applied to an inventory increase. An example of this is a

purchase return fixed applied to a purchase receipt.

Revaluation The entry contains a value that resulted from the posting of a

revaluation journal that changed the value of the item in

inventory. The program adds partial revaluation costs to the

average cost calculation after calculating the decreases.

Demonstration: Valuation Date for Sales and Purchases

This demonstration illustrates how the program sets valuation dates and

calculates the average cost when performing sale and purchase operations.

1. Create a purchase invoice for vendor 10000 with a posting date of

2/2/2010. Note the number of the invoice. Create a line for 10 units

of item COSTING AVR with a direct unit cost of 150 LCY. Post the

invoice.

2. Create a purchase order for the same vendor with a posting date of

2/3/2010. Create a line for 10 units of item COSTING AVR with a

direct unit cost of 150 LCY. Post the order as received (not

invoiced).

Now change the last purchase order (created in step 2 above) so that it

has a direct unit cost of 130 LCY.

3. Click Actions > Functions > Reopen. Enter a posting date of

2/4/2010, and change the direct unit cost on the line to 130 LCY.

Post the order as invoiced.


2/5/2010. Create a line for item charge P-FREIGHT for one unit with

a direct unit cost of 10 LCY.

Assign the item charge to the purchase invoice you created in step 0.

5. Click the Qty. to Assign field. In the window that appears, click

Actions > Functions > Get Receipt Lines.

6. Select the line that corresponds to the needed invoice (with the

needed Document No.) and click OK.

7. Assign the item charge to the retrieved receipt line and post the

invoice.


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8. Create a sales invoice for customer 10000 with a posting date of

02/6/2010. Create a line for four units of item COSTING AVR. Post

the invoice.

9. Create a sales invoice for the same customer with a posting date of

2/1/2010. Create a line for one unit of item COSTING AVR. Post the

invoice.

Now view the value entries created for item COSTING AVR as a result

of all the postings performed in the above steps.

10. Open the item list, select item COSTING AVR and click Related

Information > Item > Entries > Value Entries.

FIGURE 3.24 RESULTING VALUE ENTRIES

NOTE: The layout of the above window is modified to display the relevant

fields Posting Date, Valuation Date, Invoiced Quantity and Cost Amount

(Actual) next to each other. Use the function Choose Columns... to make the

Valuation Date field visible. Sort the entries in the window by the Entry No. field

in ascending order, and specify a posting date filter to only show the entries

posted later than 2/1/2010.


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Now analyze the entries in the above window regarding how the program

sets a valuation date for each of the transactions and, consequently, how

the inventory is valued.

The valuation date of the purchase invoice is the same as its posting

date, 2/2/2010.

The valuation date of the purchase order posted as received is the

same as the posting date, 2/3/2010.

The valuation date of the same purchase order posted as invoiced

(with a posting date of 2/4/2010) is the same as the posting date of

the order receipt, 2/3/2010.

The valuation date of the item charge posted on 2/5/2010 is the

valuation date of the item ledger entry for the purchase invoice this

charge has been assigned to, 2/2/2010.

The valuation date of the first sales invoice posted on 02/6/2010 is its

own posting date. This is because this posting date is later than the

latest valuation date of the purchase the sale is applied to, that is

2/3/2010.

The valuation date of the second sales invoice posted on 2/1/2010 is

the latest valuation date of the applied purchase entry, which is

2/2/2010.

To view how the program calculates the weighted average cost of the

item, run the Adjust Cost – Item Entries batch job, then open the

Average Cost Calc. Overview window for item COSTING AVR.

11. Open the item list and click Adjust Cost – Item Entries in the

Action pane.

12. Set the Item No. filter to COSTING AVR and click OK.

NOTE: For a detailed description of the Adjust Cost – Item Entries batch job,

refer to the respective topic in the “Inventory Adjustment” section of this

chapter.

13. Open the item card for item COSTING AVR. Note the item‘s unit

cost.

14. Click the AssistButton next to the Unit Cost field.

15. Expand all closing entries except the one with the valuation date of

1/30/2010.


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FIGURE 3.25 UPDATED AVERAGE COST CALCULATION OVERVIEW

Each closing entry represents a calculated average item cost for a

specific valuation date. The program creates these entries based on the

average cost period specified in Inventory Setup (the current setting is

Day). Thus, the unit cost on the item card is equal to the unit cost

calculated on the latest valuation date.

16. Select the last entry (with quantity -4) and click Related

Information > Line > Value Entries.


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FIGURE 3.26 ITEM LEDGER ENTRIES USED IN CALCULATION

The item‘s average cost on 2/6/2010 was calculated based on the above

value entries as (-600 + 40.21) / (-4).

Demonstration: Valuation Dates for Transfers

This demonstration illustrates how the program sets valuation dates and

calculates the average cost when performing item transfers.


2/8/2010. Create a line for 10 units of item COSTING AVR for the

Red location with a direct unit cost of 150 LCY. Post the invoice.

Create a transfer for 10 units of item COSTING AVR from location Blue

to location Red.

2. Click the Departments button, then click Warehouse > Inventory,

and under Tasks, click Item Reclass. Journal.

3. Enter a posting date of 2/10/2010, and then specify the item number

and quantity. Use the Choose Columns… function to display the

Location Code and New Location Code fields. Specify the

respective location codes in the fields.


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FIGURE 3.27 ITEM TRANSFER IN THE ITEM RECLASSIFICATION JOURNAL

4. Post the journal line.

Now view the value entries created for item COSTING AVR as a result

of all the postings performed in the above steps (specify a posting date

filter to display the entries posted on 2/8/2010 or later).


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FIGURE 3.28 RESULTING VALUE ENTRIES

The last two entries in the above record list represent the transfer from

location Blue to location Red. The valuation date of the outbound

transfer entry is its posting date, and the valuation of the inbound transfer

entry is the valuation date of the outbound transfer entry.

5. Open the Average Cost Calc. Overview window for item

COSTING AVR and expand the last closing entry (with the

valuation date of 2/10/2010).


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Note that the unit cost at which the transfer is valued is an average cost

calculated for each item, irrespective of the location, and is equal to

143.97 LCY. If the item's average cost was calculated for each location,

then the average cost of the item at the Blue location would be 139.95

LCY, and the item would be transferred to the Red location with this unit

cost.

To finish the demonstration, run the Adjust Cost – Item Entries batch job

for item COSTING AVR.

Accounting for Non-Inventoriable Costs

Determining cost of goods sold implies accounting for the inventoriable costs,

meaning acquisition cost representing expenses related to the purchase,

applicable to the units sold.

For many companies, however, it may also be important to account for non-

inventoriable costs. This cost category becomes particularly relevant in situations

where companies incur freight-out costs that affect the profit calculations, or they

deal with vendor- or headquarters-owned inventory and thus financially do not

carry any inventory on their own (the accounting model used in this case is often

referred to as retail-minus).


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In Microsoft Dynamics NAV 2009, to account for non-inventoriable cost

incurred in connection with sale transactions, accountants can use the item charge

functionality. Item charges represented by, for example, a cost of purchase

invoice for shipping services can be assigned to a shipment document. When

posted, the cost amount is recorded as a value entry related to the item ledger

entry for the sales. As the items that the item charge is assigned to are removed

from inventory, the cost amount does not affect the inventory value. Instead, it

affects the item's sales statistics as it is included in the profit calculation.

The program records non-inventoriable cost in the Value Entry table in the Cost

Amount (Non-Invtbl.) field.

Cost Shares Breakdown Report

The main purpose of the Cost Shares Breakdown report is to support decision

makers in addressing the reasons for cost variances daily. Companies where the

inventory value moves quickly from the balance sheet to the income statement

also need insight into the cost shares of sold items (COGS).

The Cost Shares Breakdown report can show the cost composition of sales,

inventory, and WIP inventory; this is facilitated with the Print Cost Share field

that has three options:

Sales

Inventory

WIP Inventory

The report can be used to print or view costs broken into COGS, inventory, or

WIP according to these different cost elements:

Purchase and material cost

Capacity cost

Capacity overhead cost

Manufacturing overhead cost

Subcontracted cost

Variance

Indirect cost

Revaluation

Rounding

The Cost Shares Breakdown report has the following limitations:

It breaks down cost at a single BOM level. Accordingly, it does not

roll up the costs from lower BOM levels.

It cannot calculate the cost share from items that use the Average

costing method.


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Demonstration: View the Cost Shares Breakdown Report

This demonstrates how to define and preview a report that displays the detailed

cost composition of all sales (COGS) made until a specific date.

1. Open the item list and click Reports > Cost Shares Breakdown in

the Action pane.

2. On the request page, specify the ending date of 2/1/2010. Leave the

rest of the settings as they are.

FIGURE 3.30 COST SHARES BREAKDOWN REPORT REQUEST PAGE

3. Click Preview.


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The report shows that the cost shares of COGS are broken down as follows:

A total of -32,623.29 LCY was posted as COGS.

Of the total, -34,014.25 was a result of material costs.

Of the total, 1,425.20 was a result of revaluation.

Of the total, -34.24 was a result of material variance.

Inventory Transfers and Returns

Item transfers between different locations within the company represent an

inventory movement. While in the end, the inventory value will remain

unchanged (unless there are additional costs associated with a transfer) the

program follows certain rules to determine the cost of the transfer transactions.

From the accounting point of view, the program treats vendor returns (purchase

credit memos) and customer returns (sales credit memos) as inventory decreases

and inventory increases, respectively. This may, however, result in a situation

where the inventory is valued incorrectly.

The following sections address costing issues regarding inventory transfers and

returns.

Item Transfers

To determine the cost of an item that is being transferred from one location to

another, the program uses a physical flow assumption described as a transfer

application. According to this application method, the program applies the entries

of the outbound transfer (transfer shipment) against the appropriate inventory

increases, according to the general cost flow assumption of the costing

method. The program then applies the entries of the inbound transfer (transfer

receipt) against the entries of the related outbound transfer.

The actual valuation of an inbound transfer entry depends on the costing method

setup for the item:

Items using the average costing method are valued using the average

cost in the average cost period in which the valuation date of the

transfer occurs. The way the program treats transfers of the average-

valued items is explained in connection with the description of

average cost calculation and valuation date (refer to the "Average

Cost Calculation" section of this chapter) and is presented in the

demonstration entitled ―Valuation Date for Transfers‖ earlier in this

chapter.

Items using the other costing methods are valued on the basis of the

cost of the applied entry of the inbound transfer and thus of the

original inventory increase.

The following examples illustrate this principle:


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You perform a transfer from location BLUE to location RED for an

item using the Average costing method. An average cost period of

Day is being used. As the average cost on the valuation date of the

transfer is LCY 15, the transfer is also valued accordingly. The

resulting value entries for the item are as follows:

Posting

Date

Item

Ledger

Entry Type

Location Quantity Cost

Amount

(Actual)

Entry

No.

1/1/2010 Purchase BLUE 1 10 1


2/1/2010 Transfer BLUE -1 -15 3

2/1/2010 Transfer RED 1 15 4

You perform a transfer from location BLUE to location RED for an

item using the Standard costing method. The item was originally

purchased at location BLUE with the standard cost set to LCY 10,

and was then transferred to location RED with the standard cost set

to LCY 12. Since the value of the original inventory increase is LCY

10, the transfer is valued at that—and not LCY 12, as shown in the

following table:

Posting

Date

Item

Ledger

Entry Type

Location Quantity Cost

Amount

(Actual)

Entry

No.


2/1/2010 Transfer BLUE -1 10 2

2/1/2010 Transfer RED 1 10 3

Inventory Returns

As mentioned earlier, purchase credit memos represent an inventory decrease.

Therefore, the program sets the cost of the returned inventory according to the

cost flow assumption defined by the costing method. In many cases, the cost of

the return appears different from the original acquisition cost because it is

calculated in this way.

Similarly, sales credit memos represent an inventory increase and are therefore

valued at the acquisition cost. However, since a sales return is not a purchase in

the usual sense, the program uses a unit cost (which is an average cost) as the

best suggestion to value returned inventory. The cost of the sales return

calculated in this way will often be different from the cost of the original sale.

When receiving returned goods, those goods must be put back in inventory at the

same cost as they were sold to the customer (the same applies when users handle

purchase returns, or make corrective credit memos). The reasons are to:

Cancel the effect of the postings made to the COGS account.

Restore the items in inventory at the correct cost.


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Exact cost reversal is based on posted invoices. Therefore, the correct price and

discount information is immediately reversed from the invoice.

If any item tracking lines need to be reversed, they are carried automatically to

the return document. The exact cost reversing link is established for each item

tracking line, so the lines are not split for each serial number.

To ensure that the program calculates the inventory cost of purchase and sales

returns correctly that is, the cost is exactly reversed at all times, you must make

a fixed application to link the return transaction to the original transaction entry.

NOTE: You may consider using the option of making the exact cost reversing

mandatory when processing sales or purchase returns. You activate this option

by placing a check mark in the Exact Cost Reversing Mandatory field in the

Sales & Receivables and/or Purchases and Payables setup. This indicates that

the program will not allow a return transaction to be posted unless the Appl.-

from Item Entry or Appl.-to Item Entry field on a corresponding order line

contains an entry.

Making a fixed application between the sales credit entry and the original sales

entry also ensures that any additional direct cost (posted as an item charge and

assigned to the purchase entry to which an original sale entry is applied) will be

forwarded to the sales credit entry.

You can select one or more posted document lines for exact cost reversal using

the Get Posted Document Lines to Reverse function from invoices, shipments,

return orders, and credit memos - on both the sales side and the purchase side. On

the sales side, the Posted Sales Document Lines window displays all posted

document lines for the customer in question.

The window provides rich information about the status of posted quantities,

displaying, for example, whether any have already been returned. Using the

Choose Columns… function, you can enable the Unit Cost (LCY) field that

shows the unit cost on the invoice line, and the Reverse Unit Cost (LCY) field

that shows the unit cost that will appear on the new document lines. If the line is

reversible (that is, if the line type is ‗Item‘, and the Qty. Not Returned field

value is more than zero), the Reverse Unit Cost (LCY) field is calculated based

on the item ledger entries corresponding to the original posted document line;

otherwise the reverse unit cost comes from the posted sales invoice line.

NOTE: Cost reversal is only supported for items. However, posted document

lines of all other types (for example, Resource) are also included in the Posted

Sales Document Lines window. The cost reversal functionality does not apply to

such posted document lines - they are copied to the reversing document

unchanged.

At the top of the Posted Sales Document Lines window, you can select the Show

Reversible Lines Only check box to view only lines with quantities that have


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not yet been returned, or, in the case of purchase lines, have been sold or

consumed.

You can also make the program use the original quantity for cost reversal by

selecting the Return Original Quantity check box. If it is not selected, the

program will use the remaining quantity when creating the lines.

Demonstration: Return Original Quantity

Your company wants to return four pieces of item 1976-W from location RED to

vendor 10000. However, three pieces have already been applied to sales that are

already processed.

1. Browse to the existing purchase order 106009.

FIGURE 3.31 PURCHASE ORDER 106009


Continue by creating the purchase return order.


Purchase > Order Processing. Under Lists, click Purchase Return

Orders.

4. Create a purchase return order for vendor 10000 with a posting date

of 2/12/2010.


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5. Click Get Posted Document Lines To Reverse in the Action pane.

6. On the lines, add the Location Code field to your view.

7. Browse to the last line that represents the purchase invoice created

when you posted purchase order 106009.

FIGURE 3.32 POSTED INVOICE LINES TO REVERSE

Notice that out of the four pieces originally purchased into location RED,

three are now applied elsewhere.

8. Select the Return Original Quantity check box on the Options

FastTab of the window, and click OK.

The program displays the following message:

FIGURE 3.33 MESSAGE ABOUT AUTOMATIC REAPPLICATION OF OPEN ENTRIES

9. Click OK.

Four pieces are transferred to the purchase return order. Finish the

demonstration by posting the order.

Inventory Adjustment

The preceding sections often refer to situations where costs at which inventory

decreases were valued (as a result of inventory posting) needed to be adjusted

before they can be posted to the G/L. These situations include the cases when:


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Inventory is valued according to FIFO or LIFO costing methods.

Unit cost is changed due to additional direct cost.

An item is valued at average cost.

Sale occurs before purchase.

Inventory is Valued According to FIFO or LIFO Costing Method

As demonstrated in the section "Cost of Goods Sold," to record and calculate the

cost of the goods sold, the program makes an inventory posting based on the unit

cost on the item card for items with a costing method other than standard, and the

standard unit cost for items with the standard costing method.

This cost is correct for items with the Standard costing method, but for FIFO,

LIFO, and Average costing methods, it will lead to the incorrect inventory

valuation. This is directly related to the definition of those costing methods:

The FIFO costing method values the inventory decrease by taking

the value of the first inventory increases on inventory.

The LIFO costing method values the inventory decrease by taking

the value of the last inventory increases on inventory.

The average costing method values the inventory decrease by

calculating the weighted average value of the inventory on the

valuation date of the decrease.

To ensure the correct inventory value, some adjustment to the costs recorded

during inventory postings must be performed according to the cost flow

assumption presumed by a selected costing method.

Unit Cost is Changed Due to Additional Direct Cost

When the originally recorded acquisition cost changes, the program must make

an adjustment to the outbound entries that have been applied to the acquisition.

As explained earlier, the cost flows from inventory increase to inventory

decrease, and the costs that are assigned to the sold items are based on that item's

inventory value, or acquisition cost, known at the time of sale. However, the

original value of the inventory increase may change at some later point in time,

after the cost of inventory decrease has been posted. For example, an invoice for

the freight services relating to the earlier purchase increases the original

acquisition cost. In this case, the cost of the sold item, if posted before the freight

invoice arrived, is incorrect.

An Item is Valued at Average Cost

For the average-valued items, an average cost of an inventory decrease may be

incorrect if an inventory increase or decrease is posted with a valuation date

earlier than the valuation date used when calculating the average cost of the

inventory decrease in question.


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Sale Occurs Before Purchase (Negative Inventory)

In other situations, it is not always possible to calculate the value of an inventory

decrease at the time of posting. An item can, for example, be sales invoiced

before it has been purchase invoiced.

Similarly, when a quantity of an average-valued item on hand is negative when

the sales transaction is posted, the cost of this transaction must be adjusted after a

purchase transaction of additional quantity of this item is posted.

Adjust Cost Item Entries Batch Job

In the program, cost adjustments are made with the Adjust Cost Item Entries

batch job. To ensure a balance between the inventory and G/L accounts, it is a

general requirement to run the Adjust Cost Item Entries batch job before posting

inventory costs to G/L. This batch job also serves an important role in updating

the unit cost on the item card with the current average cost of the item. Since the

batch job has such an important impact on the unit costs of sales, it is

recommended to run the batch job as often as possible, preferably daily, during

non-working hours.

The batch job processes only value entries that have not yet been adjusted. For

entries that are not valued by average cost, the user can view which entries will

be adjusted by the batch job by looking at the Applied Entry to Adjust field on

the item ledger entries.

The batch job adjusts the cost of items sold specified in the Cost Amount

(Actual) field in the Value Entry table as based on the costing method for the

item in question or according to the fixed application. When the program makes

an adjustment, it creates a new value entry that, together with the original

(unadjusted) value entry, makes up the adjusted cost amount of the sale entry in

question.

The posting date of the adjustment value entries created during the adjustment of

the sale entries' cost (and as a result of rounding) is set equal to the posting date

of the original entry. For example, the value entry of a sales adjustment amount is

posted with the same posting date as the invoice of the sale that the adjustment

was associated with. The same applies to the value posting of rounding entries.

This principle aligns with the general principle in Microsoft Dynamics NAV

financial management that sales revenue in G/L is recognized at the time of

posting the invoice.

If the original entry is in a closed inventory period, the program will use the

starting date of the next open inventory period.

To improve performance of the batch job, you can specify Item No. and Item

Category filters to delimit what entries are to be processed.

If the automatic cost posting option is activated in the inventory setup, you can

choose whether or not to make the program automatically post the resulting value


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entries to the general ledger by selecting or clearing the Post to G/L check box

on the request page, respectively.

Automatic Cost Adjustment

As an alternative to running the Adjust Cost Item Entries batch job manually,

you can set the program up to adjust for any cost changes automatically every

time you post inventory transactions. This allows you to operate with more

accurate inventory and WIP values and profit statistics without having to rely on

other users running the Adjust Cost Item Entries batch job periodically.

The automatic cost adjustment process and its results are the same as for the

Adjust Cost - Item Entries batch job.

NOTE: Therefore, all descriptions of the effects of the Adjust Cost Item Entries

batch job also apply to the automatic cost adjustment.

You enable automatic cost adjustment on the General FastTab of the Inventory

Setup window by selecting the needed value in the Automatic Cost Adjustment

field.

Because potential cost adjustment during every inbound posting can slow down

database performance, you can specify a time option to define how far back in

time from the work date an inbound transaction can occur to potentially trigger

adjustment of related outbound value entries. With the following options

available in the Automatic Cost Adjustment field, you can specify if and when

to adjust cost automatically when posting transactions:

Never Costs are not adjusted when posting.

Day Costs are adjusted if posting occurs within one day from the

work date.

Week Costs are adjusted if posting occurs within one week from the

work date.

Month Costs are adjusted if posting occurs within one month from

the work date.

Quarter Costs are adjusted if posting occurs within one quarter from

the work date.

Year Costs are adjusted if posting occurs within one year from the

work date.

Always Costs are always adjusted when posting, regardless of the

posting date.

The selection you make is critical to how your system will perform and how

accurate your costs will be. The shorter time periods such as Day or Week

provide you with better system performance, because they provide the more

stringent requirement that only costs posted within the last day or week can be

automatically adjusted. This means that the automatic cost adjustment will not


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run as frequently, thus avoiding a slowing of system performance. However, it

also means that unit costs will not be as accurate, since any costs posted over a

day or week ago will not be forwarded until you run the Adjust Cost – Item

Entries batch job.

When an item's cost has been adjusted automatically or manually, a check mark

is placed in the Cost is Adjusted field on the item card (Invoicing FastTab) and

on production order lines where the item is being processed.

Cost Adjustment and Sales Statistics

Profit and cost adjustments influence customer and sales statistics. Profit figures

can be derived directly from the sales statistics, and the summed-up cost

adjustment amount can be drilled-down to individual value entries.

For instance, open the Sales Statistics window for customer 10000.


Customers.

2. Browse to customer 10000 and click Sales Statistics in the Action

pane.

The fields that display adjustment profit and cost on the Sales FastTab in the

Customer Statistics window are as follows:


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FIGURE 3.34 ADJUSTMENT FIELDS IN CUSTOMER STATISTICS

By clicking the value in the Cost Adjmt. Amount (LCY) field for any of the

columns, you can view the value entries that caused the cost changes during the

specific period.

3. Click the value in the Cost Adjmt. Amount (LCY) field for column

This Year.


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FIGURE 3.35 VALUE ENTRIES USED IN COST ADJUSTMENT

The Document Type and Document Line No. fields provide the direct link of

value entries to the Item Ledger Entry table, allowing you to trace the sales

documents related to the value entries.

Demonstration: Sales of Inventory Valued According to FIFO

This demonstration shows how the program adjusts cost for items using the FIFO

costing method.


COSTING FIFO.

The unit cost of the closing entry on the valuation date of 1/28/2010 is

101 LCY (calculated from the scenario entitled ―Item Valuation with

Direct Costs Only‖ earlier in this chapter).


1/28/2010 and a line for 10 units of item COSTING FIFO with a

direct unit cost of 121 LCY. Post the invoice.


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COSTING FIFO.


now 111 LCY.

FIGURE 3.36 RECALCULATED UNIT COST

4. Create a sales invoice for customer 10000 for 20 units of item

COSTING FIFO with a posting date of 1/30/2010. Post the invoice.

5. Open the item ledger entries for item COSTING FIFO to analyze the

entries:


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FIGURE 3.37 RESULTING ITEM LEDGER ENTRIES

The last entry represents a posted sales transaction. The Cost Amount

(Actual) field for this entry contains –2,020 LCY. This means that the

items were sold at the unit cost of 101 LCY, which was the unit cost on

the sale date. This unit cost was set when the first purchase was posted at

a direct unit cost of 101 LCY.

However, as the item is set to use the FIFO costing method, the program

applied this sale to the first open entry of the inventory increase

(purchase invoice), and then applied the remaining quantity of the sale to

the second open inventory increase notice that the purchase item

entries now have a remaining quantity of zero. Correspondingly, part of

the sales entry must be valued at the acquisition unit cost of the first

purchase, which is 101 LCY, and the remaining half of the sales quantity

must be valued at the acquisition unit cost of the second purchase, which

is 121 LCY.

Notice that the Applied Entry to Adjust fields for the purchase entries

contain a check mark. This specifies that the Adjust Cost-Item Entries

batch job needs to update the Cost Amount (Actual) field for this entry

and any entries applied to it.

6. Run the Adjust Cost – Item Entries batch job for item COSTING

FIFO.

Now have a look at the item ledger entries for the item in question.


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FIGURE 3.38 UPDATED ITEM LEDGER ENTRIES

The amount in the Cost Amount (Actual) field for sales entry has been

updated based on the unit cost of the purchases to which the entry was

applied.

(Purchase 1) -10 x 101 LCY = -1,010

LCY

(Purchase 2) -10 x 121 LCY = -1,210

LCY

-2,220

LCY

7. Open the value entries for the sales entry to analyze the postings.


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The first entry is the original value entry containing the unadjusted cost

amount, while the second entry (created as a result of the batch job)

contains the amount of the cost adjustment.

Demonstration: An Item is Valued at Average Cost

This demonstration shows how the program adjusts cost for items using the

Average costing method.


COSTING AVR.


143.97 LCY. This average cost is calculated as based on the value entries

for the item.

This demonstration examines a situation in which the cost of an

inventory decrease must be adjusted because an inventory increase is

posted with an earlier valuation date.

2. Create a sales invoice for customer 10000 with a posting date of

2/12/2010 and a line for one unit of item COSTING AVR. The

program uses the unit cost, which is the average cost calculated when

the adjustment batch job is run, to value this transaction.


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FIGURE 3.40 UNIT COST ON SALES INVOICE LINE

3. Post the invoice.

4. Now create a purchase invoice for vendor 10000 with a posting date

of 02/11/2010 and a line for 10 units of the same item with the direct

unit cost of 140 LCY. Notice that the posting date is earlier than the

valuation date of the last sales invoice. Post the invoice.

Due to the new inventory increase entry, the unit cost at which the sale

was valued is now incorrect and therefore must be adjusted.

5. Run the Adjust Cost-Item Entries batch job for item COSTING

AVR.


COSTING AVR and expand the last closing entry.


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7. View the value entries for the sales entry with quantity of -1.

FIGURE 3.42 VALUE ENTRIES USED FOR RECALCULATING THE UNIT COST

The second value entry is the adjustment of the sales invoice, containing

the amount of the cost adjustment to indicate that the total cost of the

sales invoice has changed based on the recalculated average unit cost of

142.83 LCY (143.97 LCY-1.14 LCY).


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Demonstration: Sale Occurs before Purchase

This demonstration shows how the program adjusts cost in case there is negative

inventory.

Consider the average-valued item COSTING AVR.

There are 24 units of this item on stock at the Blue location. The average unit

cost of the item is 142.83 LCY.

1. Create a sales order for customer 10000 with a posting date of

2/15/2010 and a line for 30 units of item COSTING AVR. (Accept

the stockout message). Post the order as shipped and invoiced.

View the item ledger entry created by the shipment.


Sales & Marketing.

3. Choose the History category, and then click Posted Sales

Shipments.

4. Open the last shipment and use the Navigate function to view the

created item ledger entry.


The amount in the Cost Amount (Actual) field on the created item

ledger entry is calculated on the basis of the current unit cost. The

Remaining Quantity field contains –6 and the Open field contains a

check mark, which together indicates that six units out of the 30 sold

must still be applied to a purchase and adjusted to the correct average

cost.


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2/17/2010 and a line for 30 units of the same item with a direct unit

cost of 100. Post the order as received and invoiced.

6. Open the item ledger entries for the item and browse to the last

created entry.


When posting the purchase, the program applied the negative sale of six

units to the new purchase entry (note the remaining quantity on the

purchase entry). If you add the Applied Entry to Adjust field to your

view, it will contain a check mark on the Sale entry, meaning that the

cost of the sale must be adjusted.

7. Run the Adjust Cost-Item Entries batch job for item COSTING AVR

and view the item ledger entries for the item.

The amount in the Cost Amount (Actual) field for the sales entry in

question has changed based on the new average unit cost of the item,

which is now 122.756 LCY.


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FIGURE 3.45 UPDATED ITEM LEDGER ENTRY

Rounding

Rounding residuals can occur when valuing inventory decreases that are

measured in different units than the related inventory increases. For example, an

item can be sold in pieces while purchased in pallets. If a pallet consists of three

pieces, and the unit cost of one pallet is 1000, then later, when the items are sold

in pieces, the division between three pieces gives a rounding residual of 0.01. To

ensure the correct inventory value, this difference must be accounted for. This is

done by posting a rounding difference to the inventory as a separate value entry.

The program handles rounding residuals for all costing methods. When using the

average costing method, the rounding residual is handled by a cumulative

rounding during the adjustment batch job. When using a costing method other

than average, the program calculates the rounding residual when the inventory

increase has been fully applied (when the remaining quantity for the inventory

increase is equal to zero). The program then creates a separate entry for the

rounding residual. The posting date on the rounding entry is the posting date of

the last invoiced value entry of the inventory increase.

The following example first illustrates the mechanism behind rounding in

abstract terms and then as an actual case in the program. The example uses the

following sequence of inventory increases and decreases to show how the

rounding problem is handled.

Item Ledger Entry

Posting Date Quantity Entry No.

1/1/2010 3 1

1/2/2010 -1 2

1/3/2010 -1 3


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1/4/2010 -1 4

For an item using the average costing method, the rounding residual (1/300) is

calculated with the first decrease (entry no. 2) and carried forward to entry

number 3. Therefore, entry number 3 is valued as –3.34.

Value Entry

Posting

Date


(Actual)

ILE No. Entry

No.

1/1/2010 3 10 1 1

1/2/2010 -1 -3.33 2 2

1/3/2010 -1 -3.34 3 3

1/4/2010 -1 -3.33 4 4

For an item using a costing method other than Average, the rounding residual

(0.01) is calculated when the remaining quantity for the inventory increase is

zero. The rounding residual has a separate entry (number 5).

Value Entry

Posting Date Quantity Cost Amount

(Actual)

ILE No. Entry

No.

1/1/2010 3 10 1 1

1/2/2010 -1 -3.33 2 2

1/3/2010 -1 -3.33 3 3

1/4/2010 -1 -3.33 4 4

1/1/2010 0 -0.01 1 5

Demonstration: Rounding for the Average-Valued Item

Use the following steps and then analyze the way the program handles rounding

issues for the average-valued item:



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No. COSTING RND

Name Costing RND


Costing Method Average




Unit Price 100.00

Purchase Unit of Measure PACK (consisting of three pieces)


1/28/2010 and a line for one pack of item COSTING RND with the

direct unit cost of 160 LCY. Post the invoice.

The total cost for the three pieces of item COSTING RND is currently

160 LCY. However the item's unit cost, as specified in the Unit Cost

field on the item card, is 53.3333 LCY.

3. Create three individual sales invoices for customer 10000, each for

one piece of item COSTING RND. Enter a posting date of 1/30/2010

for each invoice, and post the documents.

4. Run the Adjust Cost Item Entries batch job for item COSTING

RND.

5. View the value entries for the item.

FIGURE 3.46 VALUE ENTRY CREATED FOR ROUNDING ADJUSTMENT

The program created an additional value entry as a result of the rounding

adjustment. With the adjustment entry, the actual cost for the second


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sales entry is -53.34 LCY, rather than -53.33 LCY as for the first and

third entries.

NOTE: The program calculates the cost for second value entry in the following

way: the rounding residual of the first sales entry is equal to 0.00333 (1/3 of

0.01). This amount is carried to the second sales entry, which also has the same

residual. The sum of these two gives 0.006666. This figure exceeds 0.005, which

is a rounding threshold. Therefore the total residual of 0.006666 for the first two

entries is rounded to 0.01, and added to the cost of the second entry.


Page 91

Test Your Knowledge

1. To determine the unit cost on a purchase line, the program uses either the

Last Direct Cost field or the Unit Cost field on the item card. What criteria

does the program use to decide which field it needs to use?

2. What entries does the program create when you post a purchase for 120 LCY

for an item with a standard cost of 100 LCY?

3. Describe a situation in which it is useful to use a fixed application.

4. What is the purpose of the valuation date on the value entry?

5. In Microsoft Dynamics NAV 2009, how does the Adjust Cost Item Entries

batch job adjust the value in the value entries so that they contain the correct

cost?

( ) The batch job changes the value in the Cost Amount (Actual) field

of the value entry to the correct cost.

( ) The batch job deletes the old value entry and creates a new one with

the correct cost amount.

( ) The batch job creates a new adjustment value entry in which the Cost

Amount (Actual) field contains the difference between the original

cost amount and the correct cost amount.


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Quick Interaction: Lessons Learned

Take a moment to write down three Key Points you have learned from this

chapter:

1.

2.

3.


Page 93

Solutions

Test Your Knowledge

1. To determine the unit cost on a purchase line, the program uses either the

Last Direct Cost field or the Unit Cost field on the item card. What criteria

does the program use to decide which field it needs to use?

MODEL ANSWER:

The program uses the value in the Last Direct Cost field as the basis for the unit

cost on the purchase line when the item uses a costing method other than

Standard, and it uses the Unit Cost field when the item's costing method is

Standard.

2. What entries does the program create when you post a purchase for 120 LCY

for an item with a standard cost of 100 LCY?

MODEL ANSWER:

When you post a purchase order for 120 LCY for an item with a standard cost of

100 LCY, the program creates one item ledger entry that posts the quantity, and it

creates two value entries. One value entry for the standard cost of 100 LCY and a

second value entry with an entry type of Variance and a cost amount of 20 LCY.

3. Describe a situation in which it is useful to use a fixed application.

MODEL ANSWER: You should use a fixed application in the following

situations:

When you need to correct a wrong posting.

When you need to ensure an exact cost reversal of a previous

posting.

4. What is the purpose of the valuation date on the value entry?

MODEL ANSWER:

The purpose of the valuation date on the value entry is to record the date from

which an inventory increase or decrease will affect the average cost.

5. In Microsoft Dynamics NAV 2009, how does the Adjust Cost Item Entries

batch job adjust the value in the value entries so that they contain the correct

cost?

( ) The batch job changes the value in the Cost Amount (Actual) field

of the value entry to the correct cost.

( ) The batch job deletes the old value entry and creates a new one with

the correct cost amount.


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(√) The batch job creates a new adjustment value entry in which the Cost

Amount (Actual) field contains the difference between the original

cost amount and the correct cost amount.

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