Product Costing - costing methods

Version Relevance: All versions

Issue: Can anybody help with these questions?

  1. How do the costing methods effect the inventory valuations particularly related to changing costs on purchase/works order receipts relative to the current cost field? For example;
    current stock 1000 off at say £2 each value £2000
    new receipt 1000 off at £1 each value £1000
    total 2000 off at average cost £1.50 each total stock value £3000

    This is the principle as to how we need to value our stock and not for example based on the latest cost i.e. 2000 off at 1 each.

    Working examples would be useful so we can decide if the current setting needs to be changed.

    Can anybody also confirm how the current cost changes within each inventory costing method based on say the above transaction?
  2. Are there any routines that we need to follow for the valuations?

Nov 6th, 2002

Feedback: All the information you need is contained in the Caliach Vision help topics and/or reference book, under Company Details Maintenance and Product costing. An overview of these processes is given for each topic.

The first thing you need to be aware of is that if you change the rule from say "Average Weighted" to "FIFO", you can immediately roll-up your current costs and apply the rule to your entire database! So you can get straight back to the rule you had previously.

When evaluating the FIFO method of costing, bear in mind that the system is taking account of the order of consumption of the parts, as well as the received costs.

So if you receive in 1000 items at £2 each, then receive in 1000 items at £1 each, and sometime during this period you have used 500, you now have physical stock of 1500 of which the system decides (this is the meaning of FIFO) that the current cost will be "weighted" assuming that 1000 of the items left in stock came in at £1, and that 500 came in at £2. (For LIFO the system decides that the cost will be weighted assuming that 1000 of the items left in stock came in at £2, and that 500 came in at £1.)

So for FIFO in the above example the new cost would be [(500x2)+(1000x1)/1500] = £1.333 per item = £1999.50 stock value for 1500 parts.

For LIFO the new cost would be [(1000x2)+(500x1)/1500] = £1.667 per item = £2500.50 stock value for 1500 parts.

The average cost (which is weighted by receipt quantities not stock quantities) would be [(1000x2)+(1000x1)/2000] = £1.50 per item = £2,250 stock value for 1500 parts.

Last price paid is self explanatory!

A current cost valuation can be printed off at any time, but is usually done just prior to and just after rolling up current costs. The same applies for standard cost valuation, but just before and just after roll-over.

Paul Wilson - Caliach Consultant