Inventory Valuation Cost Methods

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Overview

In this document, we’ll define the different cost types available, and how they can be configured within the application to provide a real-time inventory valuation. This article will also detail how to use our Inventory Initialization Valuation Wizard to initialize your inventory to begin tracking and calculating the proper costs for each inventory action. We’ll also cover what costs are recorded to your Ledger detail and what reports you can run to see the different cost values for your current inventory on hand.

Cost Type Definitions

Before we begin configuration, let's start by delineating the following cost types within Savance Enterprise.

Calculated System Costs:

The following costs are calculated by the system based on the configuration within the Ledger Cost Hierarchy:

System Valuation Cost - This cost is derived from your Ledger Cost Hierarchy configuration. The hierarchy decides what cost and in what order is being calculated for specific action types, i.e. Stock Adjustments, Sales Orders, and or Purchase orders. This Valuation Cost will also be the same final value that is recorded in your Inventory Ledger.

FIFO Cost - FIFO (First In First Out) cost is calculated by using your purchase order received history and the quantity on hand. In the scenario that you have insufficient purchase history for the quantity of items you have on hand, the system will use your next cost listed in the hierarchy and the current on-hand quantity to calculate a FIFO cost until you have sufficient history.

LIFO Cost - LIFO (Last In First Out) cost is calculated the opposite as FIFO where by using the last cost of the recent purchase order received into inventory and then using that cost on the next action, ignoring any history

Weighted Average Cost - This cost looks at the average cost paid for items purchased and received over a period of time and calculates an average. Additionally, the average cost per item is requested when providing your initial inventory imports prior to go-live.

Last Paid Cost - The last paid cost represents the last item price you paid for an inventory item on a purchase order.

User Generated Costs:

The following costs are user generated that are imported and order entered into the system:

Cost - This value represents the into stock cost entered on your pricing profile during an inventory import, or entry.

Standard Cost - Represents a blanketed cost given to all distributors and would typically not be used when purchasing.

UD Cost 1- 5 - There are 5 User Defined Costs fields available in each pricing profile that can be used specifically for adding additional cost information. These can be leveraged in any number of scenarios for your business needs.

Cost Method Configuration

The next step is to configure your Ledger Cost Hierarchy by assigning the order of each cost type to determine what value is calculated when doing certain actions within the system. This setting will also determine what cost is being used and reported to your Ledger and Valuation reports.

From the top navigation to go Admin > Administrator > Sites > Ledger Cost Hierarchy

• First, choose the Cost Method you wish to configure by Action Type and Cost Type.

  

• Next, go through each Cost Method listed above and configure each Action Type, with the Cost Type in the hierarchy you want to use.

  • In the event, there is a zero value for the first cost type chosen, the system will scan the next fields from top to bottom until a non-zero value is present.
  

Ledger Cost Hierarchy Examples:

Below are configuration examples by each cost method based on best practices. NOTE: These are just suggestions however, due to the flexibility within our system you can ultimately configure these methods, and values based on your business preference.

Valuation Cost Method:

Valuation cost is the final value that is used in the valuation and ledger.

• Action Type: Stock Adjustment

  

• Action Type: Counting

  

• Action Type: Sales Orders

  

• Action Type: Purchase Orders

  

• Action Type: RMA’s

  

• Action Type: RTV’s

  

• Action Type: Valuation Initialization

  

FIFO Cost Method:

This configuration below will use these costs to calculate a FIFO cost once sufficient history has been established.

• Action Type: Stock Adjustment

  

• Action Type: Counting

  • **

    **

• Action Type: Purchase Orders

  

• Action Type: RMA’s

  

• Action Type: Valuation Initialization

  

LIFO Cost Method:

This configuration below will use these costs to calculate a LIFO cost once sufficient history has been established.

• Action Type: Stock Adjustment

  • **

    **

• Action Type: Counting

  • **

    **

• Action Type: Purchase Orders

  

• Action Type: RMA’s

  • **

    **

• Action Type: Valuation Initialization

  • **

    **

Weighted Average Cost Method:

This configuration below will use these costs to calculate a Weighted Average Cost once sufficient history has been established.

• Action Type: Stock Adjustment

  

• Action Type: Counting

  • **

    **

• Action Type: Purchase Orders*

  

• Action Type: RMA’s

  

**
**

• Action Type: Valuation Initialization

  

Inventory Valuation Initialization Wizard

This tool initializes all or a subset of inventory and prepares the system to begin tracking and gathering history of all inventory actions using the Ledger Cost Hierarchy configuration (in the Admin settings) described above. Additionally, once the initialization is complete, you will have a final value of all current inventory on-hand and this same value will be recorded on your Ledger.

Inventory Valuation Initialization | New Customers

As a new customer, Savance will assist you with your Ledger Cost Hierarchy configuration before we run the initialization tool. After the cost settings are complete the weekend prior to Go-Live we will request a final inventory import that will include all inventory items, their quantities and the Average Cost per item. Once the import is complete we will verify the totals to ensure the values match with your legacy system. If these numbers do not match, you will need to work with your accountant to adjust your ledger accordingly before your Trial Balance Sheet is imported and we run the initialization wizard. If the numbers do match we will initialize your inventory.

• The Inventory Valuation Initialization Wizard is located under Admin > Inventory Valuation Wizard.

  

• Within the wizard select ‘All Inventory’

• Next, you will choose a warehouse. NOTE: If you have more than one location you will need to initialize in each location.

• Select ‘Ok’ to begin initialization. NOTE: Depending on how many items you have this action can take several minutes to ½ hour or so to complete. It is best to run this NOT during business hours.

After the initialization is complete a system value for each item will be created. To view these values you can run one of our Inventory Valuation reports, or you can view each item’s values in the Valuation tab within the Item Manager under the Inventory > Inventory Manager menu. NOTE: Since you have no history in our system, the values calculated at first are using the Average Cost, and or Cost based on the hierarchy..

In addition, the system will begin tracking all inventory actions and use the Ledger Cost Hierarchy to calculate each cost method. Once sufficient history has been recorded, you will be able to see real-time costs for your FIFO, LIFO, and Weight Average Cost.

Inventory Valuation Initialization | Existing Customer

Just like a new customer, it is important that you first configure your Ledger Cost Hierarchy before utilizing the Inventory Valuation Initialization Wizard. NOTE: Depending on how many items you have this action can take several minutes to ½ hour or so to complete. It is best to run this NOT during business hours.

• Go to the Inventory Valuation Initialization Wizard is located under Admin > Inventory Valuation Wizard.

  

• Within the wizard select ‘All Inventory’

• Next, you will choose a warehouse. NOTE: If you have more than one location you will need to initialize in each location.

• Select ‘Ok’ to begin initialization. NOTE: When running the Valuation Initialization Wizard you will NOT lose your inventory history.

After the initialization is complete a system value for each item will be created. To view these values you can run one of our Inventory Valuation reports, or you can view each item’s values in the Valuation tab within the Item Manager under the Inventory > Inventory Manager menu. Since you most likely have sufficient history within our system, you will also be able to view your FIFO, LIFO, and Weight Average Costs.

Inventory Valuation Initialization | Specific Inventory

In the scenario, you have brought in some new items, or a new manufacturer’s line you will need to initialize these inventory items as well. Below, we will discuss each path you can follow to achieve this task.

Using the Inventory Valuation Wizard

After you’ve completed entering or importing your new items into the system go to Admin > Inventory Valuation Wizard.

• Choose ‘Specific Inventory’

  

  • The options to find specific inventory items will appear. Your options include:

    • Individual items

      • Allows you to search and add individual items numbers to the list using the inventory lookup module.

    • Item Groups

      • Allows you to search for an item/inventory group using dynamic & static groups values to pull a list of items.

    • Search Criteria

      • Allows you to create rules using the Inventory lookup to search for a group of products by i.e. MFG short Code and all part numbers that start with PN.

• To add specific items to initialize click and highlight on the option i.e. individual items, or item groups you want to search within and select . NOTE: If you need to edit, or delete an item from your items/groups shown, just highlight the specific item and right-click to make changes.

• After you completed selecting your items select ‘Ok’. Once the initialization is completed, the system will begin to track all actions for these item(s) to give you real-time costs based on the hierarchy configuration.

Using the Item Manager

If you have a single item you need to either initialize for the first time or reinitialize this can be done easily through the Item Manager.

• To begin go to Inventory > Inventory Manager > Item Manager.

• Use the Inventory Lookup, to select your item.

• While in the Item Manager select the Valuation Tab

  

• In the Valuation tab, you can see all your purchase order history, as well as your real-time costs.

  

• If you want to Initialize a single item, just select the Reinitialized Valuation button on the screen.

Inventory Valuation Reports

After your Ledger Cost Hierarchy settings have been configured and the Inventory Initialization has been completed from time to time you will need to run/view an Inventory Valuation report. The next section will delve into how to run/view the report and help understand what value calculations are

Within Savance Enterprise we offer the following Inventory Valuation reports

• Inventory Valuation Detail

• Inventory Valuation Detail by Manufacturer

• Inventory Valuation Summary

• Inventory Valuation Summary by Manufacturer.

Using the report engine go to Reports > Reporting Engine from your navigation menu. Next under the Company and Financial > Financial menu you will see all Inventory Valuation reports offered.

To run the report right-click or double click on the report name to preview the report.

• Next choose your filter based on:

  • Include negative or zero values

  • Date/ Time Period

  • Warehouse location

  

• After you’ve selected your filters select ‘Preview’ to run/view the report.

Each report will include all cost value methods available. See the below example to understand how to read this report and what values are in which columns and fields.

It is important to note that if you run your Inventory Valuation report based on your configurations within the Ledger Hierarchy Cost settings your item inventory values may not be true FIFO, LIFO or Weighted Average costs due to the fact there isn’t enough history of an item. In that scenario the value cost shown will be the next cost chosen within your Ledger Cost Hierarchy.

The summary of the report at the bottom will reflect this same layout with your total Valuation value in the right column.

Additional Cost Factors

In addition to your Ledger Cost Hierarchy settings within Admin there are a couple of other places that can affect what cost type is being used and when NOTE: These settings below only affect what costs appear on any orders, or PO’s.

Go to Admin > Administrator >Sites > Purchasing tab.

Here you can choose what Buying and Selling cost to use as part of the line details during entry.

• Critical Purchasing (Non-Direct), Linked RFQ/PO Button, Direct Cost, and PONow Cost: allows you to choose between using the:

  • Buying Cost Setting

  • Cost from Sales Order

• Buying Cost allows you to choose between:

  • True Cost

  • Trade Cost

  • UD Cost 1-5

  • Average Cost

  • Last Paid Cost

• Selling Cost allows you to choose between:

  • True Cost

  • Trade Cost

  • UD Cost 1-5

  • Average Cost

  • Last Paid Cost

  • FIFO Cost

  • LIFO Cost

NOTE: These are global settings.You may also adjust these same settings per warehouse if you prefer as well. Just go to Admin > Administrator >Warehouses > Purchasing tab.

You may also override these settings at the item level as well, by going to Inventory > Inventory Manager > Item Manager and selecting an item to update.

On the Item Manager screen select the Selling tab, here you can choose to override the admin settings and choose a different Selling Cost to use for this specific item during entry.

On the same screen, select the Purchasing tab, here you can override the admin settings and choose a different Buying Cost to use for this specific item during entry.

If you made any changes to the item specific be sure to select ‘Save’ to update your details.