When calculating the average cost of an inventory item,
the cost and currency variances are used to update inventory costs.
This action occurs when the Update Cost/Currency Variances
on Inventory Costs check box is selected. If the check
box is cleared, the variance costs are not used to update inventory
costs but are written to variance accounts instead.
The Update Cost/Currency Variances on Inventory Costs option
is available from the Inventory Defaults window
of the Organizations application.
For any transaction involving movement of items, the change of
value in inventory must equal the transaction cost. In any case where
this condition is not true, additional transactions must record the
difference.
The product uses a perpetual average (or moving average) method
for maintaining inventory value.
The primary features of the perpetual average method are the following:
- Inventory is valued at the average cost of the items in stock.
- The average cost is updated each time an item is received into
the storeroom.
- Each transaction is considered individually for its effect on
the average cost.
- Items are sold or issued at the average cost at the time of the
sale or issue.
- Each transaction must balance credit and debit accounts.
Variances must be recorded if transactions affecting an inventory
control account do not have an equal effect on inventory value.
Calculation of average cost for invoice
variance
When invoice quantity is less than or equal to
inventory balance, the average cost is calculated as follows:
- Average cost = cost / quantity
When invoice quantity is greater than inventory balance,
the average cost is calculated as follows:
- Average cost = (current average cost * inventory current balance)
+ cost/inventory current balance + quantity
In either case, the remaining invoice variance is recorded
in the invoice transactions (INVOICETRANS) table.
Example with invoice variance
- Storeroom before invoice approval (after receipts):
- Balance = 8
- Average Cost = 10.00
- Value = 80.00
- Receipt Line (to be matched to the invoice):
- Quantity = 4
- Cost = 11.00
- Invoice line (actual invoice):
- Quantity = 4
- Cost = 11.10
- Receipt update:
- Storeroom after invoice approval:
- Balance = 8
- Average Cost = 10.05
- Value = 80.40
Example without invoice variance (balance is less
than or equal to invoice quantity):
- Storeroom before invoice approval (after receipts and issues):
- Balance = 1
- Average Cost = 10.00
- Value = 10.00
- Receipt Line (to be matched to the invoice):
- Quantity = 4
- Cost = 11.00
- Invoice line (actual invoice):
- Quantity = 4
- Cost = 11.10 [ total variance is 0.40: 4 * (11.10 - 11.00) ]
- Receipt update:
- Quantity = 0
- Cost = 0.10 [ applied to inventory: 1 * (11.10 - 11.00) ]
- Invoice variance:
- Quantity = 0
- Cost = 0.30 [ applied as invoice variance: (4 - 1) * (11.10 -
11.00) ]
- Storeroom after invoice approval:
- Balance = 1
- Average Cost = 10.10
- Value = 10.10