Costing Methods


Roberto Scaramuzza - Linkedin profile

Roberto Scaramuzza – Linkedin profile

follow r1oby

follow r1oby

The costing method determines if an actual or a budgeted value is capitalized
and used in the cost calculation. Together with the posting date and sequence,
the costing method also influences how the cost flow is recorded. The following
methods are supported in Microsoft Dynamics NAV:

Costing method Description When to use

FIFO

An
item’s unit cost is the actual value of any receipt of the item,
selected by the FIFO rule.

In
inventory valuation, it is assumed that the first items placed in
inventory are sold first.

In
business environments where product cost is stable.

(When prices are rising, the balance sheet shows greater value. This
means that tax liabilities increase, but credit scores and the ability
to borrow cash improve.)

For items with a limited shelf life, because the oldest goods need to be
sold before they pass their sell-by date.

LIFO

An
item’s unit cost is the actual value of any receipt of the item,
selected by the LIFO rule.

In
inventory valuation, it is assumed that the last items placed in
inventory are sold first.

Disallowed in many countries, as it can be used to depress profit.

(When prices are rising, the value on the income statement decreases.
This means that tax liabilities decrease, but the ability to borrow cash
deteriorates.)

Average

An
item’s unit cost is the exact cost at which the particular unit was
received.

In
business environments where product cost is unstable.

When inventories are piled or mixed together and cannot be
differentiated, such as chemicals.

Specific

An
item’s unit cost is calculated as the average unit cost at each point in
time after a purchase.

For inventory valuation, it is assumes that all inventories are sold
simultaneously.

In
production or trade of easily identifiable items with fairly high unit
costs.

For items that are subject to regulation.

For items with serial numbers.

Standard

An
item’s unit cost is preset based on estimated.

When the actual cost is realized later, the standard cost must be
adjusted to the actual cost through variance values.

Where cost control is critical.

In
repetitive manufacturing, to value the costs of direct material, direct
labor, and manufacturing overhead.

Where there is discipline and staff to maintain standards.

The following image shows how costs flow through the inventory for each costing
method.

Costing methods

Costing methods differ in the way that they value inventory decreases and if
they use actual cost or standard cost as the valuation base. The following table
explains the different characteristics. (The LIFO method is excluded, as it is
very similar to the FIFO method.)

FIFO Average Standard Specific

General characteristic

Easy to understand

Based on period options:Day/Week/Month/Quarter/Accounting
Period
.

Can be calculated per item or per item/location/variant.

Easy to use, but requires qualified maintenance.

Requires item tracking on both inbound and outbound transaction.

Typically used for serialized items.

Application/Adjustment

Application keeps track ofthe remaining quantity.

Adjustment forwards costs according to quantity application.

Application keeps track of theremaining quantity.

Costs are calculated and forwarded per the valuation
date
.

Application keeps track of the remaining
quantity
.

Application is based on FIFO.

All
applications are fixed.

Revaluation

Revalues invoiced quantity only.

Can be done per item or per item ledger entry.

Can be done backward in time.

Revalues invoiced quantity only.

Can be done per item only.

Can be done backward in time.

Revalues invoiced and un-invoiced quantities.

Can be done per item or per item ledger entry.

Can be done backward in time.

Revalues invoiced quantity only.

Can be done per item or per item ledger entry.

Can be done backward in time.

Miscellaneous

If
you back-date an inventory decrease, then existing entries are NOT
reapplied to provide a correct FIFO cost flow.

If
you back-date an inventory increase or decrease, then the average cost
is recalculated, and all affected entries are adjusted.

If
you change the period or calculation type, then all affected entries
must be adjusted.

Use
theStandard Worksheetwindow to periodically update and
roll up standard costs.

Is
NOT supported per SKU.

No
historic records exist for standard costs.

You
can use specific item tracking without using the Specific costing
method. Then the cost will NOT follow the lot number, but the cost
assumption of the selected costing method.

Example

This section gives examples of how different costing methods affect
inventory value.

The following table shows the inventory
increases and decreases that the examples are based on.

Posting Date Quantity Entry No.

01-01-20

1

1

01-01-20

1

2

01-01-20

1

3

02-01-20

-1

4

03-01-20

-1

5

04-01-20

-1

6

Hh997373.note(en-us,NAV.70).gifNote
The resulting quantity in inventory is zero. Consequently, the
inventory value must also be zero, regardless of the costing
method.

Effect of Costing Methods on Valuing Inventory Increases

FIFO/LIFO/Average/Specific

For items with costing methods that use
actual cost as the valuation base (FIFOLIFOAverage,
or Specific),
inventory increases are valued at the item’s acquisition cost.

The following table shows how inventory
increases are valued for all costing methods except Standard.

Posting Date Quantity Cost Amount (Actual) Entry No.

01-01-20

1

10.00

1

01-01-20

1

20.00

2

01-01-20

1

30.00

3

Standard

For items using the Standard costing
method, inventory increases are valued at the item’s current standard
cost.

The following table shows how inventory
increases are valued for the Standard costing
method.

Posting Date Quantity Cost Amount (Actual) Entry No.

01-01-20

1

15.00

1

01-01-20

1

15.00

2

01-01-20

1

15.00

3

Effect of Costing Methods on Valuing Inventory Decreases

FIFO

For items using the FIFO costing
method, items that were purchased first are always sold first (entry
numbers 3, 2, and 1 in this example). Accordingly, inventory decreases
are valued by taking the value of the first inventory increase.

COGS is calculated using the value of the
first inventory acquisitions.

The following table shows how inventory
decreases are valued for the FIFO costing
method.

Posting Date Quantity Cost Amount (Actual) Entry No.

02-01-20

-1

-10.00

4

03-01-20

-1

-20.00

5

04-01-20

-1

-30.00

6

LIFO

For items using the LIFO costing
method, items that were purchased most recently are always sold first
(entry numbers 3, 2, and 1 in this example). Accordingly, inventory
decreases are valued by taking the value of the last inventory increase.

COGS is calculated using the value of the
most recent inventory acquisitions.

The following table shows how inventory
decreases are valued for the LIFO costing
method.

Posting Date Quantity Cost Amount (Actual) Entry No.

02-01-20

-1

-30.00

4

03-01-20

-1

-20.00

5

04-01-20

-1

-10.00

6

Average

For items using the Average costing
method, inventory decreases are valued by calculating a weighted average
of the remaining inventory on the last day of the average cost period in
which the inventory decrease was posted. For more information, see Design
Details: Average Cost
.

The following table shows how inventory
decreases are valued for the Average costing
method.

Posting Date Quantity Cost Amount (Actual) Entry No.

02-01-20

-1

-20.00

4

03-01-20

-1

-20.00

5

04-01-20

-1

-20.00

6

Standard

For items using the Standard costing
method, inventory decreases are valued similar to the FIFO costing
method, except valuation is based on a standard cost, not on the actual
cost.

The following table shows how inventory
decreases are valued for the Standard costing
method.

Posting Date Quantity Cost Amount (Actual) Entry No.

02-01-20

-1

-15.00

4

03-01-20

-1

-15.00

5

04-01-20

-1

-15.00

6

Specific

Costing methods make an assumption about
how cost flows from an inventory increase to an inventory decrease.
However, if more accurate information about the cost flow exists, then
you can override this assumption by creating a fixed application between
entries. A fixed application creates a link between an inventory
decrease and a specific inventory increase and directs the cost flow
accordingly.

For items using the Specific costing
method, inventory decreases are valued according to the inventory
increase that it is linked to by the fixed application.

The following table shows how inventory
decreases are valued for the Specific costing
method.

Posting Date Quantity Cost Amount (Actual) Applies-to Entry Entry No.

02-01-20

-1

-20.00

2

4

03-01-20

-1

-10.00

1

5

04-01-20

-1

-30.00

3

6

NAV 2013 MSDN

Advertisements