Language:


Cost Accounting - Part 1

Use this setting to specify the costing method that you want to use to calculate stock valuations and the value of outgoing stock transactions.

Cost Model
When you remove an Item from stock, the stock valuation in the Nominal Ledger will be adjusted automatically. The value of each outgoing cost accounting posting will be calculated using the Cost Model specified in the relevant Item or Item Group record. If that Cost Model is Default, the Primary Cost Model described below will be used. Use these options to specify how the Cost Model should behave in certain specific circumstances.
Use Item Groups for Cost Model
When outgoing cost accounting transactions are generated from Deliveries, Invoices, Stock Depreciations, Stock Movements and Work Sheets, the value of those transactions will be calculated using the Cost Model specified in each Item record. If the Cost Model in an Item record is Default and you are using this option, the Cost Model will be taken from the Item Group to which the Item belongs. If that Cost Model again is Default, the Primary Cost Model described below will be used. If the Cost Model in an Item record is Default and you are not using this option, the Primary Cost Model described below will be used (i.e. the Cost Model in the Item Group will be ignored).

If you are using this option, it is recommended that all Stocked Items belong to Item Groups and that all Item Groups have Cost Models specified.

Original Cost on Returned Goods to Supplier
One specific way in which you can remove an Item from stock is to return it to its Supplier. You can do this by creating a record in the Returned Goods to Supplier register from the original Goods Receipt or Purchase Order.

When you return an Item to its Supplier, you may want to calculate the cost of that Item using the usual Cost Model (i.e. as if it was a normal removal from stock), or you may want to use the actual cost of that Item from the original Goods Receipt. Use this option if you want to use the second method.

For example, you are using the FIFO Cost Model and you have three Items in stock with costs 100, 200 and 300. If you need to return the last Item to its Supplier, you would find the original Goods Receipt and create a Returned Goods to Supplier record from it. If you are not using this option, 100 will be removed from your Nominal Ledger stock value, since that was the value of the first Item received into stock (i.e. as calculated using the FIFO Cost Model). If you are using this option, 300 will be removed from your stock value, since that was the precise cost of the returned Item in the Goods Receipt.

If you are not using this option, you can create a record in the Returned Goods to Supplier register from the original Goods Receipt or Purchase Order using the 'Create Returned Goods' function on the Operations menu. If you are using this option, you can only create the Returned Goods to Supplier record from the original Goods Receipt.

Original Cost on Returned Goods
One specific way in which you can receive an Item into stock is to receive a previously delivered Item back from a Customer. You can do this by creating a record in the Returned Goods register from the original Delivery or Sales Order.

When you receive an Item into stock in this way, you may want to use the standard Cost Price of the Item from the Item register, or you may want to use the actual cost of that Item from the original Delivery. Use this option if you want to use the second method.

For example, you are using the FIFO Cost Model and you have three Items in stock with costs 100, 200 and 300. The Cost Price in the Item record is 150. When you sell an Item, 100 will be removed from your Nominal Ledger stock value, since that was the value of the first Item received into stock (i.e. as calculated using the FIFO Cost Model). If the Customer returns the Item, you would find the original Delivery and create a Returned Goods record from it. If you are not using this option, the Item Cost and Unit Cost in the Returned Goods will be 150, the Cost Price from the Item. If you are using this option, the Item Cost and Unit Cost in the Returned Goods will be 100, since that was the precise cost of the returned Item in the Delivery.

If you are not using this option, you can create a record in the Returned Goods register from the original Delivery or Sales Order using the 'Create Returned Goods' function on the Operations menu. If you are using this option, you can only create the Returned Goods record from the original Delivery.

If you are using a Queued Cost Model (FIFO or LIFO), the decision whether to use this option and the choice whether Returned Goods will return Items to their original position in the cost queue or to a new position (see part 2) may be mutually dependent.

Primary Cost Model
The Cost Model is used for two purposes.

First, if you are using cost accounting (maintaining stock valuations in the Nominal Ledger), when you approve an outgoing stock transaction (e.g. Invoice, Delivery, Work Sheet or Stock Depreciation), a Nominal Ledger Transaction will be created automatically, debiting the value of the goods issued to a Cost Account and crediting it to a Stock Account. The value of the goods removed from stock will be calculated using a Cost Model, specified in the relevant Item or, if you are using the Use Item Groups for Cost Model option (described above), in the Item Group record. If that Cost Model is Default, this Primary Cost Model will be used.

Second, the Cost Model is used by the Stock List report to calculate the value of your stock. Again, the stock value of an Item will be calculated using the Cost Model specified in the relevant Item or, if you are using the Use Item Groups for Cost Model option, in the Item Group record. If that Cost Model is Default, this Primary Cost Model will be used. You can also produce a Stock List using an alternative Cost Model, for comparison purposes. If you have set the Primary Cost Model to None in this setting because you don't need to use cost accounting (step 2 on the 'Switching Cost Accounting Off' page, you will be able to choose a Cost Model each time you produce a Stock List report.

In both cases, the chosen Cost Model will sometimes be bypassed if you are using the Cost Price for Serial Number option in the relevant Item or Item Group record or in this setting (described below). In this case, individual Cost Prices and Serial Numbers are linked. When you sell an Item with a particular Serial Number, the appropriate Cost Price for that Serial Number will be used in the resulting cost accounting transaction. The Stock List report will use the appropriate Cost Prices for the Serial Numbers in stock. This applies to Items with Serial Numbers only.

The following Cost Model options are available:
None
Select this option if you do not wish to use a Cost Model. Outward cost accounting transactions will not be created. You will need to choose a Cost Model each time you produce a Stock List report, otherwise it will not contain a valuation (you can do this in the report specification window).

Cost Price
Use the Cost Price of the Item (visible on the 'Costs' card of the Item screen). If you choose this option, it is recommended that you also choose one of the Update Cost Price at Goods Receipt options (also on the 'Costs' card of the Item), to ensure the Cost Price is always up-to-date.

% of Base Price
Calculate the cost by applying a specified percentage to the Base Price (i.e. the retail price) of the Item. Specify the percentage in the % field immediately to the right. You can use this option in cases where a consistent gross margin is required.

Weighted Average
Use the Weighted Average Cost Price of the Item (the average unit price of all previous purchases, visible on the 'Costs' card of the Item screen).

The Weighted Average of an Item is updated each time you receive a unit into stock, using the following formula:

WA = ((Qty in stock x Current WA) + (Qty on GR x Unit Pr. on GR))
(Qty in stock + Qty on GR)

(where GR means Goods Receipt).

Queued
A true FIFO (First In First Out) or LIFO (Last In First Out) cost is used based on the cost prices recorded in Goods Receipts. Choose FIFO or LIFO using the Queued Cost Model options below.

The Queued Cost Model can provide a very precise stock valuation, especially for Items with variable Cost Prices. However, this precision also requires discipline. As their names suggest, First In First Out and Last In First Out require that you must make certain that you enter all stock transactions in strict chronological order. Failure to do this may cause your FIFO or LIFO values to become incorrect. Do not, for example, enter a Goods Receipt with yesterday's date if you have already entered one with today's. This applies to Deliveries and Stock Depreciations as well. It is also recommended that you always approve stock transactions when you save them for the first time. Do not, for example, go back to an earlier unapproved Goods Receipt and approve it if there are later approved ones, unless you change the date as well. You can use options such as Chronology in Stock in the Stock Settings setting and Force Chronology for Invoice in the Account Usage S/L setting to help ensure you do not break this rule.

!

If you choose the Cost Price, % of Base Price or Weighted Average options, make sure that the appropriate field contains values for each Item. Otherwise, cost accounting Transactions and Stock List valuations with a zero amount may result.


Queued Cost Model
If you set the Primary Cost Model (above) to Queued, use these options to choose whether you want to use a FIFO (First In First Out) or LIFO (Last In First Out) queue.
FIFO
When you deliver an Item or otherwise remove it from stock, the Item that you received into stock first will be the Item that you deliver first. In the Stock List report, Items will be valued in chronological order.

LIFO
When you deliver an Item or otherwise remove it from stock, the Item that you received into stock last will be the Item that you deliver first. In the Stock List report, Items will be valued in reverse chronological order.
If you have set the Primary Cost Model to None because you do not want to use the cost accounting feature, you should still choose a Queued Cost Model. In this case, you will need to choose a Cost Model each time you produce a Stock List report. If you choose the Queued Cost Model, the report will use the FIFO or LIFO queue as specified here (providing the equivalent choice in each Item or Item Group is Default).
Please click here for details about the remaining options in this setting.