Inventory Cost to Sales

Version Relevance: All versions

Issue: I ran the financial planning inventory value movement report and was a bit surprised to see that it only valued physical stock and not WIP as well.

Until components are received back from WIP they still need to be valued to come up with a full cost for inventory or am I barking up the wrong tree. Otherwise we will be writing off component values each time a works order issue is done and then writing them back once the receipt is done. If the two occur in different months won't this cause fluctuations in cost of sales?

Jun 30th, 2005

Feedback: The financial planning report (and other inventory movement reports) are counting and valuing MOVEMENTS of stock (dynamic), not the actual value of current physical stock or WIP (static). The dynamic tells you how you got to the static... The movements may not always agree exactly with actual stock valuations due to changes in current/standard costs and BoMs.

Valuations of both existing stock and WIP are found under Process -- Inventory -- Print Stock Valuation reports. The first report in the list is all you should need, as it includes both physical inventory, and WIP (inventory currently issued to open works orders).

This should be printed at the accounting period cut-off, and used to journal the new values to your stock asset account/s through your stock movement trading account/s (the difference between last month's and this month's). It does not include the value added by operations logged on work orders because this is typically ignored by auditors (you can't usually realise the stock value for part completed work!). The work-in-process report does this instead.

Cost to sales as measured by the closing stock method is not affected by movements to WIP, because they are still valued at the same cost while they are WIP as they were when they were physical inventory.

When you finally receive product into stock and ship it, the stock value of the finished product temporarily appears and then disappears (no net change), but of course the WIP value for that work order is reduced by the appropriate amount when you receive in the WO quantity of the finished product - this is one measure of the cost to sales. A more common one is the actual current/standard cost of the product.

Purchase costs do not by themselves increase cost to sales, because they also increase the net worth of the company due to inventory asset increases; but the difference between what you actually paid and the resultant value (at current or standard cost) will cause small discrepancies when reconciling costs. This is one definition of purchase price variance, and you can measure it by comparing costed inventory movements for purchase receipts/returns, against the standard purchase history reports.

Paul Wilson - Caliach Consultant