Item Costs and Valuation Methods

In MYOB Advanced, you can track stock item costs over time in accordance with the valuation method assigned to each item. Item costs are tracked for base units, as the units in which items are stored at warehouses or moved between locations or warehouses. Depending on the valuation method you have selected for the stock item, the cost of its base unit is either computed by the system based on purchase receipts or estimated outside the system and entered manually by a user.

For information on allocation of purchase price variance amounts for items with different valuation methods, see Allocating the Purchase Price Variance.

In this topic, you will read about valuation methods and costs in inventory.

Valuation Methods

The system uses the item's valuation method to revalue its stock and to determine its unit cost for sales orders and inventory transactions.

Note: The decimal precision for prices and costs is defined by the number specified in the Price / Cost Decimal Places box on the Companies (CS101500) form.

You specify the Valuation Method for the item on the General Settings tab of the Stock Items (IN202500) form. You can assign one of the following valuation methods:

  • FIFO (first in, first out)
  • Specific
  • Average
  • Standard Cost

These methods are discussed in detail in the following sections.

Note: You can reassign an item's valuation method only if the on-hand quantity of the item in stock is equal to zero.

FIFO Valuation Method

If the FIFO valuation method is assigned to a stock item, its unit costs are recorded in layers, each of which is identified by the receipt date, the quantity, and the purchase price (unit cost).

Each new receipt creates a new cost layer with a specific unit cost. You can view the cost of the last layer in the Last Cost box on the Price/Cost tab of the Stock Items form.

Note: By default, the item cost is zero until it has been automatically or manually assigned.

When a certain quantity of the stock item is issued, the cost for the item is assigned starting with the earliest available cost layer. If the quantity to be issued is greater than the quantity in the earliest layer, the entire quantity from the earliest layer will be issued (with the associated unit cost) and the rest of the required quantity will be issued using the next earliest layer (with another unit cost).

Consider assigning the FIFO issue method to items actually issued from the inventory. This will help your company avoid discarding obsolete items.

Suppose that a stock item was purchased in the following way:

  • Cost layer 1: May 10, 5 units at $8 each
  • Cost layer 2: June 10, 5 units at $10 each

The total stock cost is (5 * $8) + (5 * $10) = $90.

Then suppose that a sales order has been created with 8 items. All units from cost layer 1, and three units from cost layer 2 will be used to complete the issue transaction, with the extended cost equal to (5 * $8) + (3 * $10) = $70. For the next sales order, there will be no more items with the $8 unit cost.

Note: For each location in a warehouse that has the Cost Separately check box selected on the Locations tab of the Warehouses (IN204000) form, separate cost layers will be created, based on purchase receipts made to the particular location. If certain quantities of the items should be issued from the location, the extended cost will be computed based on those location-specific cost layers.

For each warehouse, on the Warehouses form, you also can define which costs should be used for items returned to the warehouse (on returns) and for items found during inventory counts (on inventory receipts) by selecting one of the following options in the FIFO Default Returns Cost box:

  • Average: To recalculate the item cost as an average cost of available items
  • Last: To set the item's cost equal to the last cost

Specific Valuation Method

The Specific valuation method is used for serialized items (those with lot or serial numbers). With this method, the unit cost for each item is defined by the unit's purchase price. The unit cost assigned to the item on its receipt will remain the same until the item is issued, used as a component, or sold.

With the Specific method, cost layers are based on the serial or lot numbers. New receipts specifying the same serial or lot number will update the cost of the layer.

For example, suppose that a stock item was purchased as follows:

  • May 19, 100 items starting with the serial number 11023423 at $2.00 each
  • May 21, 100 items starting with the serial number 11023523 at $2.10 each
  • May 19, 100 items starting with the serial number 11023623 at $1.90 each
  • May 19, 100 items starting with the serial number 11023723 at $2.20 each

The total stock cost is $820. When items with the serial numbers 11023666 and 11023444 are sold—that is, the item is issued from the warehouse,—the unit costs recorded to the COGS account are $1.90 and $2.00 respectively.

Average Valuation Method

If the Average valuation method (also known as average moving cost) is assigned to the stock item, the unit cost will be calculated as the average weighted cost of all items at the warehouses—that is, the total costs of all quantities of the inventory items at the warehouses divided by the total quantity. This valuation method is used for items that do not require tracking by lot or serial numbers or by expiration dates.

The system updates the average cost every time a new inventory receipt, issue, adjustment, transfer, kit assembly, or kit disassembly document specifying a unit cost different from the current average cost is released. The inventory receipt, issue, adjustment and transfer documents can be created directly on the Receipts (IN301000), Issues (IN302000), Adjustments (IN303000), and Transfers (IN304000) forms respectively or generated on release of other documents.

The documents affecting the average cost and examples of documents that can generate them on release are listed below:

  • Inventory receipt:
    • Purchase receipt on the Purchase Receipts (PO302000) form
    • Transfer receipt on the Purchase Receipts form
    • Labor or move transaction for a production order on the Labor (AM301000) or Move (AM302000) form respectively
    • Disassembly transaction on the Disassembly (AM301500) form
  • Inventory issue
    • Purchase return on the Purchase Receipts (PO302000) form (if the Original Cost from Receipt or Manual Cost Input option is selected in the Cost of Inventory Receipt From box in the Summary area of the form for the return)
    • Invoice for a sales order the RMA Order automation behavior on the Invoices (SO303000) form
    • Invoice or credit memo created directly on the Invoices form with the Advanced SO Invoices feature enabled on the Enable/Disable Features (CS100000) form
    • Material return transaction on the Materials (AM300000) form
  • Inventory adjustment
  • Assembly and disassembly transactions on the Kit Assembly (IN307000) form

Once an inventory document with a different unit cost has been released, a batch of journal entries will be generated to adjust the costs of all available items. You can view the current average cost in the Average Cost read-only box on the Price/Cost tab of the Stock Items (IN202500) form.

Suppose that a stock item was purchased as follows:

  • Purchase 1: 100 items at $2.00 each
  • Purchase 2: 100 items at $2.10 each
  • Purchase 3: 100 items at $1.90 each
  • Purchase 4: 100 items at $2.20 each

The total stock cost is $820, and the average cost is $2.05. If you sell 250 items—that is, you issue the item from the warehouse—the unit cost is $2.05, and the extended cost recorded to the COGS account is $512.5 = $2.05 * 250.

For each warehouse, on the Warehouses (IN204000) form, you also can define which cost should be used for items returned to the warehouse (on returns) and for items found during inventory counts (on inventory receipts) by selecting one of the following options in the Avg. Default Returns Cost box:

  • Average: To recalculate the item cost as an average cost of available items
  • Last: To set the item's cost equal to the last cost

Standard Cost Valuation Method

Standard costs, which are estimated to include some of the indirect and direct costs allocated, for stock items are determined outside of MYOB Advanced by cost experts. For an inventory item with the Standard Cost valuation method assigned, the unit cost is entered directly by a user in the Pending Cost box on the Price/Cost tab of the Stock Items (IN202500) form.

For items with the standard cost valuation method, standard costs can be maintained for each warehouse separately if the Override Standard Cost check box on the Price/Cost tab of the Item Warehouse Details (IN204500) form is selected for the item stored at a particular warehouse.

The item cost doesn't change when new receipts are released.

Suppose that a stock item with a standard cost of $2.50 was purchased in the following way:

  • Layer 1: 100 items at $2.00 each
  • Layer 2: 100 items at $1.90 each
  • Layer 3: 100 items at $2.30 each
  • Layer 4: 100 items at $2.60 each

The total stock cost is $1000. Any differences between the standard cost and the unit cost on receipts multiplied by the quantity on the receipt are recorded to the standard cost variance account. In this case, $50, $60, $30, and –$10 respectively. On sales orders, the unit cost will appear as $2.50.

Generally, standard costs are revised at the end of the financial year based on the financial results of the year, although standard costs can be updated as often as required.

If you want to update standard costs for inventory items, you use the Price/Cost tab of the Stock Items or Non-Stock Items (IN202000) form. New values for standard costs are entered as pending standard costs. The pending cost assigned to an inventory item that uses the standard cost valuation method becomes effective starting on the date specified in the Pending Date box on this tab.

If you want to make similar changes to many or all inventory items, you use the Update Standard Costs (IN502000) form to enter new values and compare current and pending costs side by side for all inventory items. If you are satisfied with the changes, you can update the current standard costs with the pending standard costs for all items or only selected ones by using the Process All or Process action on the form toolbar. When standard costs are updated and inventory is revalued for multiple inventory items, the system generates a consolidated inventory adjustment for the items being processed to make the necessary cost corrections. The consolidated inventory adjustment is generated on the current business date. To view the list of generated adjustments, use the Adjustments (IN303000) form.

Attention: If multiple branches are used in the system a separate inventory adjustment is created for each branch.

If you want to change the settings of the standard cost for the item stored at a particular warehouse by using the Item Warehouse Details form, you make the required changes on this form and then update standard costs by using the Update Standard Costs form.

The system does not keep a history of the standard costs for the inventory items, displaying only the last cost and current cost values on the Price/Cost tab of the Stock Items form. The historical costs that were effective before the last cost are not stored in the database.

Item Cost Split by Subitem Codes

MYOB Advanced supports subitem codes, which can provide more detailed classification of the products, in addition to the inventory ID. The use of subitems may affect product costing if the FIFO or Specific valuation methods are used.

Subitem codes, like inventory IDs, consist of segments. Products with the same inventory ID and different subitem codes can be costed as one item, or the cost may be split among different values of one of the subitem segments. This is controlled by the Include in Cost option, which is specified for each segment of the INSUBITEM segmented key by using the Segmented Keys (CS202000) form:

  • If the check box is selected for the subitem segment, a separate cost layer is created for each value of the segment.
  • If the check box is cleared for the segment, all items with different values in this segment are handled as one item for costing purposes. For such a segment, one segment value should be marked as the aggregating value. It does not have to represent any real feature of the product (such as size or color); it will be used in cost layers to designate all available values of the segment.
CAUTION: Including or excluding the segment from cost calculation and changing the aggregating value may result in losing cost layers, because the cost layer is created differently when one segment is included in cost calculation and no segment is included.

Subitems can affect only cost, while price is always set at the inventory item level. For more information about subitem use, see Inventory Subitems.

Unit Cost and Extended Cost On Issues

For items with the Standard Cost or Average valuation methods, on inventory issues, unit costs (costs with respect to the base unit) are specified in the Unit Cost box on the Issues (IN302000) form.

If an item has the FIFO or Specific valuation method assigned, costs of its units may be different, and the Unit Cost box on the form displays the unit cost for the first unit to be issued, in accordance with the inventory item's issue method. You can invoke the Allocations dialog box to view particular items to be issued or to select them by lot or serial numbers. The Extended Cost value on the Issues (IN302000) form will automatically appear as the sum of the unit costs of all listed items.