The Cost of Inventory

For effective inventory management, your company needs to know the value of the inventory at its warehouses. MYOB Advanced implements the perpetual system of maintaining the cost of inventory. With perpetual inventory system, your company can know the quantity of inventory on hand, its cost and the cost of goods sold at any moment of time.

Multiple Valuation Methods

Under the perpetual inventory system, the balance of the inventory account (or multiple inventory accounts used for different warehouses or classes or groups of items) is updated with each sale or purchase transaction. Each time your company purchases stock items, the inventory account is debited for the cost of items; each time your company sells the items, the inventory account is credited for the cost of sold items.

Under the perpetual inventory system, you can use inventory valuation (cost flow) methods to define how unit costs are determined for each inventory item on issues, thus allowing the system to maintain a correct, up-to-date inventory cost. You can use the following valuation methods:

• Standard cost
• Average
• First-in-first-out (FIFO)
• Specific

You assign valuation methods to stock items in the following ways:

• By using the Item Classes (IN201000) form, you can assign a valuation method to a class, which will be used for the items of the class.
• By using the Stock Items (IN202500) form, you can assign a valuation method to a particular item, if you want to override the valuation method of its item class.

The valuation methods are discussed in detail in Item Costs and Valuation Methods.

Issuing of an Item with Negative Quantity On Hand

A negative quantity of a stock item is allowed at a warehouse location if the Allow Negative Quantity check box is selected in the General tab of the Item Classes (IN201000) form for the item's class.

Negative quantities at a warehouse location occur when the quantity of the item in the inventory issue on the Issues (IN302000) form is greater than the on-hand quantity of the item at this location. For the over-issued quantity, a new cost layer is created. The cost is determined as follows:

• For items with the average cost valuation method and non-zero quantity on hand, the average cost of the item is used.
• For items with the average cost valuation method and on hand quantity equal to zero, the last cost of the item is used.
• For items with the FIFO valuation method, the last cost of the item is used.
• For items with the standard cost valuation method, the standard cost is used.

On the Journal Transactions (GL301000) form, the system inserts separate entries for the available quantity of the item and for the over-issued quantity of the item to the GL batch related to the issue.

Suppose that you need to issue 10 pieces of the APJAM32 item. The item has the FIFO valuation method, the available quantity is 6, and the last cost is 20. The resulting transaction in the GL batch will look as follows:

When the item is delivered to the warehouse and you create and release a receipt on the Receipts (IN301000) form, in the GL batch which is related to this receipt, the system automatically creates two adjusting entries for the over-issued quantity of the issue, in which the quantity of the item went negative. The first entry debits the inventory account and credits the AR accrual account. The item cost is copied from the cost in the cost layer for the over-issued quantity and the inventory account is copied from the GL batch related to the issue which caused the negative quantity. The second entry debits the AR accrual account and credits the inventory account. The cost is copied from the receipt and the inventory account is copied from the main entry of the GL batch related to the receipt.

Suppose that you have created and released the receipt of 20 pieces of APJAM32 to the location in which you still have negative quantity of -4 pieces of APJAM32 from the issue. The cost of the item in the receipt is 25. The resulting transaction in the GL batch will look as follows:

The system inserts the reference number of the issue, for which the additional entries are created, to the Ref. Nbr. column of the Journal Transactions form (Details tab) in the lines of the adjusting entries. Also, the system updates the value of the Ext. Cost column on the Issues (IN302000) form in the line which caused the negative quantity of the item.

Inventory Valuation and Revaluation

You can review the cost of inventory on hand by using the Inventory Valuation (IN615500) and Historical Inventory Valuation (IN617000) reports.

Generally, standard costs are revised at the end of the financial year based on the year’s financial results, although they can be updated more often. The pending standard costs and their effective dates are entered manually for each inventory item that uses this valuation method on the Price/Cost tab of the Stock Items (IN202500) form.

You can run the process of updating the standard costs with the pending standard costs for multiple inventory items by using the Update Standard Costs (IN502000) form. For items whose standard costs are being updated, revaluation of their cost is performed. The system generates a batch of transactions that increase or decrease the balance of the inventory accounts, depending on whether the pending costs are greater or less than the current costs and updates the Standard Cost Revaluation accounts defined by the item’s posting class.

Inclusion of Tax Amounts in Costs for Stock Items

You can configure the system to include use taxes, sales taxes of the Input group, and partially deductible VATs in the cost of the stock items being purchased. For tax amounts to be included in the costs of items in purchase orders, the following actions must be completed in the system:

• A tax reason code of the Adjustment type must be defined on the Reason Codes (CS211000) form, and specified as the Tax Reason Code on the Purchase Orders Preferences (PO101000) form.
• In the tax settings on the GL Accounts tab. on the Taxes (TX205000) form, the Use Tax Expense Account check box must be cleared.

For a stock item with the Average, Specific, or FIFO valuation method, on release of an AP bill prepared for a purchase order that includes the item, an inventory adjustment transaction is automatically generated to post the tax amounts to the item's inventory account.

The system shows the link to the generated inventory adjustment transaction in the Adjustment Nbr. box on the Financial Details tab on the Bills and Adjustments (AP301000) form for the AP bill. On release of the inventory adjustment, the system generates the following GL transactions:

• Inventory Account, Dr, Tax Amount
• PO Accrual account, Cr, Tax Amount

For stock items with the Standard valuation method, in the GL transaction generated on release of the AP bill that includes the items, the tax amount is posted directly to the account defined by the Tax Reason Code. For more information on including taxes in the cost of items, see Taxes Included in the Cost of Items: General Information.