traverse knowledge base article inventory cost...

TRAVERSE Knowledge Base Article Inventory Cost Adjustments

This document describes the intended features and technology for TRAVERSE v11.2 as of October, 2019.

Features and technology are subject to change and there is no guarantee that any particular feature or

technology described in this presentation will be present in this or subsequent versions of TRAVERSE.

October 2019

©Copyright 2018-2019 Open Systems Holdings Corp. All rights reserved. OPEN SYSTEMS and TRAVERSE are registered trademarks of Open Systems Holdings Corp. All other marks are trademarks or registered trademarks of their respective holders.


Contents

Introduction .................................................................................................................................................. 3

Average Cost ............................................................................................................................................. 4

Terms ........................................................................................................................................................ 4

Updating Average Cost ............................................................................................................................. 6

Inventory Average Cost Adjustments ........................................................................................................... 6

Average Cost Calculation .......................................................................................................................... 7

COGS Adjustment ..................................................................................................................................... 8

Introduction

Inventory valuation is the cost associated with your inventory at the end of your reporting period. The

valuation affects the cost of the goods you sell, as well as the amount of your profit. There are multiple

ways to calculate the value of your inventory. Some costing methods are straightforward and based

solely on the price you paid for the inventory item when you purchased it. Other costing methods

depend on a calculation of the costs of inventory items, and can be affected by various transactions

involving inventory items. This article explains how TRAVERSE utilizes the average costing method to

maintain the correct average cost, and how it can affect the cost of goods sold (COGS).


Average Cost

The average costing method is characterized by calculating the total purchase cost of an item and

dividing that by the total purchased quantity of the item to derive a new average cost. Typically, the

average cost of an item is only updated when a transaction increases inventory quantities, such as a

purchase. For instance, when you enter a purchase order (PO) invoice for inventory items, the average

cost of inventory items is recalculated.

If the inventory valuation and the inventory cost balance are different, a COGS adjustment may be

necessary to reconcile the difference. However, you may want to wait to calculate and post a COGS

adjustment in case there are changes to costs or quantities. The Post COGS Adjustments function on the

Inventory Periodic Processing menu allows you to calculate and post COGS adjustments on demand if

you are using the average costing method.

Note: The transactions’ post functions do not post COGS adjustments when the inventory costing

method is “Average”.

Terms

Quantity on Hand: The quantity of items currently in inventory.

Invoice Quantity: The quantity of items included on the PO invoice. The invoice quantity is

always greater than zero.

Total Purchase Quantity: The item quantity purchased overall. The total quantity of an item

purchased from the first purchase to the most recent purchase.

Total Purchase Cost: The total cost ever paid for an item; the sum of every purchase (cost) of an

item from the first purchase to the most recent purchase.

COGS Adjustment: The Cost Of Goods Sold adjustment reconciles differences between the

inventory valuation and the inventory cost balance.

ACV: Actual Currency Valuation


Transactions that change the inventory quantity or cost of an Item

New Average Cost = (Total Purchase Cost)/(Total Purchase Quantity)

NOTE: Total refers to the sum of all purchases from the first purchase to the most recent purchase.

The Effects of Inventory Transactions on the Average Cost of an Item

Total Purchase Cost > 0

Average Cost = (Total Purchase Cost)/(Total Purchase Quantity)

NOTE: Total refers to the sum of all purchases from the first purchase to the most recent purchase .

Total Purchase Quantity > 0

Total Purchase Cost ACV* > 0

*Actual Currency Valuation

Do not update Average Cost

YES YES YES

NO NONO


Updating Average Cost

When TRAVERSE updates inventory quantity, cost, and/or history, average cost is updated. The

following transaction types will affect the inventory average cost:

PO Receipt, IN Purchase Good Received, AP Invoice, PO Invoice, IN Purchase Invoice, IN Adjustment Increase, IN Transfer To, MP Build Assembly, WM Adjustment Increase, WM Transfer To, BM Build Assembly

Zero cost transactions do not affect average cost.

The average cost will NOT be updated when:

Total Purchase Cost <= 0

Total Purchase Quantity <= 0

Total Purchase Cost ACV* <= 0

*Actual Currency Valuation

Inventory Average Cost Adjustments

There are a number of functions and actions that affect inventory quantities and costs, and thus the

average cost. The main focus of an average cost update is to maintain the correct average cost. You can

calculate and post COGS adjustments on demand if you need to reconcile the inventory valuation or the

inventory cost balance.

NOTES:

There is a special case for serialized items: sale return type transactions are included in average

cost calculations when a new serial number is added by a sale return type transaction.

All quantities are in the base unit of measure. All unit costs are for the base unit of measure.

The average cost is updated using the same formula even if the IN costing method is not

“Average”.

These transactions will affect average cost:

PO Receipt IN Purchased Good Received

AP Invoice PO Invoice

IN Purchase Invoice IN Adjustment Increase

IN Transfer To MP Build Assembly

WM Adjustment Increase WM Transfer To

BM Build Assembly


Average Cost Calculation

NOTE: The average cost is NOT updated if the Total Purchase Cost is less than or equal to 0, if the Total

Purchase Quantity is less than or equal to zero, or if the Total Purchase Cost Actual Currency Valuation is

less than or equal to 0.

Average Cost = (Total Purchase Cost)/(Total Purchase Quantity)

“Total” refers to the sum of all purchase costs or purchase quantities, from the first time the item is

purchased through the most recent purchase of the item.

For instance:

If the first order you placed for the item was for a quantity of 100 at a cost of $50 each for an order total

of $5,000, and you ordered the item in the same quantity with the same cost two additional times for

$5,000 order total each time, and for a cost of $60 each two more times for an order total of $6,000

each time, the average cost of the item would be:

Order 1: Qty 100 @ $50 each = Order total $5,000 Average cost = $5000/100 = $50

Order 2: Qty 100 @ $50 each = Order total $5,000 Average cost = $10,000/200 = $50


Order 4: Qty 100 @ $60 each = Order total $6,000 Average cost = $21,000/400 = $52.50



COGS Adjustment

If you use the average costing method for your inventory valuation, the posting functions of the

transactions that affect average cost do not automatically post inventory COGS adjustments.

To post COGS adjustments you must use the Post COGS Adjustments function on the IN Periodic

Processing menu. This function is only available if you use the average costing method for your

inventory valuation.

When the inventory cost balance and the inventory valuation are not in balance, the COGS adjustment

will reconcile the difference:

[Inventory] Valuation = (Quantity On Hand) * (Average Cost) [Inventory] Valuation ACV = (Quantity On Hand) * (Average Cost ACV) [Inventory] Cost Balance = net IN cost balance of all inventory activities for the item [Inventory] Cost Balance ACV = net IN cost ACV balance of all inventory activities for the item COGS Adjustment = (IN Cost Balance) – (Valuation) COGS Adjustment ACV = (IN Cost Balance ACV) – (Valuation ACV) Example with separate credit/debit tables: Transactions

Quantity Unit Cost Ext Cost

Quantity On Hand

Total Purchase Qty

Total Purchase Cost

Average Cost

PO Receipt 1 100 100 10,000 100 100 10,000 100

PO Invoice 1 of Receipt 1 100 110 11,000 100 100 11,000 110

PO Receipt 2 150 1,000 150,000 250 250 161,000 644

Delete PO Receipt 2 100 100 11,000 110

Re-enter PO Receipt 2 150 112 16,800 250 250 27,800 111.20

SO Invoice 1 50 111.20 5,560 200 250 27,800 111.20

PO Invoice 2 of Receipt 2 150 115 17,250 200 250 28,250 113

SO Invoice 2 100 113 11,300 100 250 28,250 113

Post PO and SO Transactions

Inventory Account Payables Account

Debit Credit Debit Credit

PO Invoice 1 11,000 PO Invoice 1 11,000

PO Invoice 2 17,250 PO Invoice 2 17,250

SO Invoice 1 5,560

SO Invoice 2 11,300

Cost Balance 11,390 Balance 28,250


COGS Account

Debit Credit

SO Invoice 1 5,560

SO Invoice 2 11,300

Balance 16,860

Inventory Valuation: 113 * 100 = 11,300

Calculate and post COGS adjustment

COGS Adjustment: 11,390 – 11,300 = 90

COGS Adjustment Account

Debit Credit

COGS Adjustment 90

Balance 90

Inventory Adjustment Account

Debit Credit

COGS Adjustment 90

Balance 90

Inventory cost balance: 11,390 – 90 = 11,300

Inventory balance is reconciled to Inventory valuation.


Detailed Example

Starting Qty on Hand = 0

[Inventory] Valuation = (Quantity On Hand) * (Average Cost) [Inventory] Cost Balance = net cost balance of all inventory activities for the item

Transaction Quantity Unit Cost Ext Cost

Quantity On Hand

Total Purchase Qty

Total Purchase Cost

Average Cost Valuation

Cost Balance

PO Receipt 1 100 $ 100 $ 10,000 100 100 $ 10,000 $ 100 $ 10,000 $ 10,000

PO Invoice 1 of Receipt 1 100 $ 110 $ 11,000 100 100 $ 11,000 $ 110 $ 11,000 $ 11,000

PO Receipt 2 150 $ 1,000 $ 150,000 250 250 $ 161,000 $ 644 $ 161,000 $ 161,000

Delete PO Receipt 2 100 100 $ 11,000 $ 110 $ 11,000 $ 11,000

Re-enter PO Receipt 2 150 $ 112 $ 16,800 250 250 $ 27,800 $ 111.2 $ 27,800 $ 27,800

SO Invoice 1 50 $ 111.2 $ 5,560 200 250 $ 27,800 $ 111.2 $ 22,240 $ 22,240

PO Invoice 2 of Receipt 2 150 $ 115 $ 17,250 200 250 $ 28,250 $ 113 $ 22,600 $ 22,690

SO Invoice 2 100 $ 113 $ 11,300 100 250 $ 28,250 $ 113 $ 11,300 $ 11,390

PO Receipt 1: Receive a quantity 100 @ $100 each, with an extended cost of $10,000. Quantity now on hand = 100 with a total purchase cost of

$10,000. The average cost = (Total cost of all purchases)/(Total qty ever purchased) so $10,000/100 = $100 average cost. Valuation = (quantity

on hand) * (avg cost) so 100 * $100 = $10,000 valuation. Cost balance = net cost balance of inventory activities so cost balance = $10,000.

PO Invoice 1 of Receipt 1: The invoice lists the received quantity of 100 @ $110 each, for an extended cost of $11,000. Qty now on hand = 100

with a total purchase cost of $11,000. The average cost = (Total cost of all purchases)/(Total qty ever purchased) so $11,000/100 = $110 average

cost. Valuation = (quantity on hand) * (avg cost) so 100 * $110 = $11,000 valuation. Cost balance = net cost balance of inventory activities so

cost balance = $11,000.


PO Receipt 2: Receive a quantity 150 @ $1,000 each, with an extended cost of $150,000. Quantity now on hand = 250 with a total purchase cost

of $11,000 + $150,000 = $161,000. The average cost = (Total cost of all purchases)/(Total qty ever purchased) so $161,000/250 = $644 average

cost. Valuation = (quantity on hand) * (avg cost) so 250 * $644 = $161,000 valuation. Cost balance = net cost balance of inventory activities so

(total cost of Invoice 1) + (cost of Receipt 2) = $11,000 + $150,000 = $161,000 cost balance.

Delete Receipt 2: Wrong unit cost entered, so delete the receipt. Qty on hand back to 100, total purchase quantity back to 100, total purchase

cost back to $11,000, average cost back to $110, valuation back to $11,000, and cost balance back to $11,000.

Re-enter PO Receipt 2: Receive a quantity 150 @ $112 each, with an extended cost of $16,800. Quantity now on hand = 250 with a total

purchase cost of $11,000 + $16,800 = $27,800. The average cost = (Total cost of all purchases)/(Total qty ever purchased) so $27,800/250 =

$111.20 average cost. Valuation = (quantity on hand) * (avg cost) so 250 * $111.20 = $27,800 valuation. Cost balance = net cost balance of

inventory activities so (total cost of Invoice 1) + (cost of Receipt 2) = $11,000 + $16,800 = $27,800 cost balance.

SO Invoice 1: The SO invoice lists the sold quantity of 50 @ $111.20 each, for an extended cost of $5,560. (Because this is a sale, the cost reduces

the cost balance.) Qty now on hand = 200 with a total purchase cost of $27,800 (PO Invoice 1 + PO Receipt 2). The average cost = (Total cost of

all purchases)/(Total qty ever purchased) so $27,800/250 = $111.20 average cost. Valuation = (quantity on hand) * (avg cost) so 200 * $111.20 =

$22,600 valuation. Cost balance = net cost balance of inventory activities so cost balance = (purchase cost – sale cost) = $27,800 - $5,560 =

$22,240 cost balance.

PO Invoice 2 of Receipt 2: The invoice lists the received quantity of 150 @ $115 each, for an extended cost of $17,250. Qty now on hand = 200

with a total purchase cost of $11,000 + $17,250 = $28,250. The average cost = (Total cost of all purchases)/(Total qty ever purchased) so

$28,250/250 = $113 average cost. Valuation = (quantity on hand) * (avg cost) so 200 * $113 = $22,600 valuation. Cost balance = net cost balance

of inventory activities so cost balance = (purchase cost – sale cost) = $28,250 - $5,560 = $22,690 cost balance.

SO Invoice 2: The SO invoice lists the sold quantity of 100 @ $113 each, for an extended cost of $11,300. (Because this is a sale, the cost reduces

the cost balance.) Qty now on hand = 100 with a total purchase cost of $28,250 (PO Invoice 1 + PO invoice 2). The average cost = (Total cost of all

purchases)/(Total qty ever purchased) so $28,250/250 = $113 average cost. Valuation = (quantity on hand) * (avg cost) so 100 * $113 = $11,300

valuation. Cost balance = net cost balance of inventory activities so cost balance = (purchase cost – sale cost) = $28,250 - $5,560 – $11,300 =

$11,390 cost balance.

COGS Adjustment = cost balance – valuation, so the COGS Adjustment would be $11,390 – $11,300 = $90 COGS adjustment

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