Purchase Price different than Standard Cost

When standard cost is in used, the inventory value is based on the standard cost set up in the Item card. Any price difference than the standard cost will be posted as variance. Let's consider the following example:

1) Create a Purchase Order in Cronus database from Vendor 10000.
2) Select Type = Item and No. = 1110 in the Purchase Line. Navision will automatically filled the Direct Unit Cost Excl. SST field and Unit Cost (LCY) field with 1.05, which is pulled from Item Card's Standard Cost.
3) Change the Direct Unit Cost Excl. SST to 2.00.
4) Enter 20 into the Quantity field.
5) Post the Purchase Order as received and invoiced.


Now, Open Item Card and browse to Item 1110 - Rim. Click on Item --> Entries --> Ledger Entries. Notice that Navision has posted 21.00 to Cost Amount (Actual) field, which is (20 x 1.05) instead of 40.00 (20 x 2.00). Click on the 21.00 to drill-down to the Value entries.
The actual acquisition cost is 40.00 but the inventory is valued at 21.00. The difference of 19.00 is posted with the Value Entry Type of Variance.


When we post the Inventory to G/L, the following G/L Entries will be created:
-40.00 Direct Cost Applied Account (GENERAL POSTING SETUP)
+40.00 Inventory Account (INVENTORY POSTING SETUP)
-19.00 Inventory Account (INVENTORY POSTING SETUP)
+19.00 Purchase Variance (GENERAL POSTING SETUP)




Please note that the net effect are:
-40.00 Direct Cost Applied Account
+21.00 Inventory Account
+19.00 Purchase Variance Account


Another set of G/L Entries posted are:
+40.00 Purchase Account (GENERAL POSTING SETUP)
+04.00 Purchase SST Account (SST POSTING SETUP)
-44.00 Payable Account (VENDOR POSTING SETUP)


If we add additional cost to the purchase such as freight cost, the variance will also change accordingly.
1) Create a Purchase Order from Vendor 10000.
2) Add a purchase line of Charge (Item) for item P-FREIGHT.
3) Enter 10 in the Direct Unit Cost Excl. SST field.
4) Click on Line --> Item Charge Assignment.
5) Click on Functions --> Get Receipt Lines.
6) Select the line with 20 PCS of Items 1110 and then click on the OK button.
7) Enter 1 in the Qty. to Assign field.
8) Close the Item Charge Assignement (Purch) screen.
9) Post the Order as Received and Invoiced.


Now, open Item Card and browse to Item 1110 and then open the Item Ledger Entries. You can see that the Cost Amount (Actual) remain at 21.00. Drill down to the Value Entries, you will notice that Navision has created another Direct Cost entry with Cost Amount (Actual) = 10 and Cost per Unit = 0.50. At the same time, Navision also created a Variance entry with Cost Amount (Actual) = -10.00 and Cost per Unit = -0.50. So, the net off effect still 21.00.


On the G/L Entries side, we will get:
-10.00 Direct Cost Applied Account
+10.00 Inventory Account
-10.00 Inventory Account
+10.00 Purchase Variance Account


+10.00 Purchase Account
+01.00 Purchase SST Account
-11.00 Payable Account


After all the posting, the net effects are as follows:
-50.00 Direct Cost Applied Account
+21.00 Inventory Account
+29.00 Purchase Variance Account
+50.00 Purchase Account
+05.00 Purchase SST Account
-55.00 Payable Account


At the end, the Inventory Account still remain at 21.00, which is based on the standard cost.

Setup Standard Unit Cost for an Item

Irregardless of costing method used, the unit cost is set up in the Invoice Tab in the Item Card. The total unit cost consists of direct and indirect cost. This total cost in entered in the Standard Cost field. If you can identify specifically the indirect cost, you can enter it in the Overhead Rate or Indirect Cost % fields. Please note entering a value in the Overhead Rate field will not change the total Unit Cost.

Average Cost Calculation in Navision

Average costing in Navision can caters for the following situation:

1. Invoice the sale of an item before purchase has been invoiced.
2. Backdate posting
3. Recover incorrect posting.

Average cost in Navision is calculated as the SUM (Cost Amount (Actual)) / SUM (Invoiced Quantity) for value entries witha valuation data that is equal or earlier that inventory decrease.

Costing Methods in Navision

Navision supports the following costing methods:

1. FIFO (First In First Out)
2. LIFO (Last In First Out)
3. Average
4. Specific
5. Standard
   

Please take note that whenever inventory quantity drop to zero, the cost of the item will also be zerorized regardless of the costing method used.

Expected Cost Posting (Interim)

If the Expected Cost Posting to General Ledger option has been activated, Navision will post the Expected Cost to G/L when quantity part of inventory is posted. This option can be activated at Administration --> Application Setup --> Warehouse --> Inventory Setup.

For example, when user post a warehouse receipt for an item, Navision will post the expected cost to the Inventory Account (Interim) and Invt. Accrual Acc. (Interim). The cost is considered as expected because it is not invoiced. When the invoice is received and posted, Navision will reverse out the entries in the 2 interim accounts and post to the actual Inventory Account. Therefore, the G/L entries will looks as follows:

Post Warehouse Receipt
1) Credit Invt. Accrual Acc. (Interim)
2) Debit Inventory Account (Interim)
Post Invoice
1) Debit Inv. Accrual Acc. (Interim)
2) Credit Inventory Account (Interim)3) Credit Direct Cost Applied Account
4) Debit Inventory Account


During sales, Inventory (Interim) and COGS (Interim) are involved.

Post Shipment
1) Credit Inventory (Interim)
2) Debit COGS (Interim)

Post Sales Inovoice
1) Debit Inventory (Interim)
2) Credit COGS (Interim)
3) Credit Inventory
4) Debit COGS

When you post Production Journal, there are 2 types of entries will be posted - Consumption and Output

Post Consumption
1) Credit Inventory
2) Debit WIP


Post expected output cost
1) Credit WIP
2) Debit Inventory (Interim)

Run Adjust Cost - Item Entries batch job
1) Debit WIP
2) Credit Inventory (Interim)
3) Credit WIP
4) Debit Inventory
If there is any indirect cost, will be transferred to Inventory account as well
5) Credit Indirect Cost
6) Debit Inventory


Adjustment, revaluation, rounding or transfer will all go to Inventory Adjustment account
1) Debit / Credit Inventory
2) Credit / Debit Inventory Adjustment

Inventory Posting to G/L Account (Without Interim)

There are 2 ways we can reconcile the inventory ledger with general ledger:
1) Automatic Cost Posting - automatically post to G/L when user post inventory
2) Post Inventory Cost to G/L

Reconciliation with G/L:
1) For purchase
--> Debit Inventory Account
--> Credit Direct Cost Applied Account
2) For Sales
--> Credit Inventory Account
--> Debit COGS

Unit Cost Calculation in Sales Line

1) Navision use the following values in item card to calculate unit cost in sales line (item journal line)
a) Unit Cost
b) Average Cost (LCY)
c) Standard Cost

2) Navision uses Average Cost as the initial suggestion for the Unit Cost in sales line for all costing methods except standard cost.

3) Navision will first copy the Average Cost (LCY) in item card to Unit Cost field in item card.

4) The value in Unit Cost field is then copied to the Unit Cost (LCY) field in Sales Line table (Unit Cost field in item journal line).

5) The value in the Unit Cost (LCY) on sales line will then copied to the Cost Amount (Actual) in Value Entry table.

The above methods are true for Navision 3.7. For Navision 4.0 and above, the costing calculation has been changed.

Navision Application Methods

1) When you post an increase transaction, Navision places a check mark at the Open field in Item Ledger Entry.

2) At the same time, the quantity increased will be copied to the Remaining Quantity field in the Item Ledger Entry.

3) Please note that Remaining Quantity in Item Ledger Entry is not outstanding quantity to be received. It is the quantity remain in inventory.

4) When an item is sold (or any outbound transaction) the unit in the inbound item ledger entry will be reduced by the number of units sold.

5) If the quantity in the outbound entry is the same or greater than the remaining quantity, Navision will remove the check mark in the Open field for the inbound item ledger entry.

6) Which inbond entries to be applied are depends on the Cosing Method used.

7) Users can also manually specify which entry to apply to. When creating sales line, users can specify which entry to applied to at the Applies-to Entry field in the sales line.

8) The records of item entries application is stored in Applied Item Entry table.

Cost of Goods Sold

1) Difficulties in detemining cost of goods sold will arises when:
a) The purchase price fluatuate over time AND
b) Not able to determine the specific item when the item is sold

2) The above 2 situation will make Navision not able to determine the exact cost of goods sold because we do not know the items sold is from which purchases. Therefore, assumption of the cost need to be made to estimate the cost of goods sold.

3) Each time a sale is make, we need to know which items have been sold and which purchase entry should be applied. The entry application can be done manually or automatically.

4) In manual application, user will chooses the exact receipt to apply to.

5) In most situation, automatic application is more feasible. This can be done based on some assumptions on how the items physically flow through inventory.

Unit Cost Calculation

1) Inventory in Navision is valued based on the Value Entries .

2) Cost is recorded in the Cost Amount (Actual) field in Value Entry table.

3) Navision will copy value from Unit Cost (LCY) field on Purchase Line / Unit Cost field on the item journal line to Cost Amount (Actual).

4) Direct Unit Cost Excl./Incl. VAT in Purchase Line / Item Journal Line is copied from Item Card Last Direct Cost.

5) For Item Journal Line, the Last Direct Cost is copied to the Unit Amount field on the item journal line.

6) Unit Cost in the Purchase Line / Journal Line is calculated based on
a) Last Direct Cost
b) Unit Cost

7) Formula to calculate Unit Cost (LCY) field in Purchase Line:
Unit Cost (LCY) = (Direct Unit Cost - (Discount Amount / Quantity)) * (1 + Indirect Cost % / 100)) + Overhead Rate

8) Formula to calculate Unit Cost in Item Journal Line:
Unit Cost = Unit Amount * (100% + Indirect Cost %) + Overhead Rate

9) For Standard Costing method, Standard Cost in Item Card will be copied to the Purchase Line Direct Unit Cost Ext./Incl. SST.

10) Summary of the flow of cost - Non Standard Cost:

Item Card (Last Direct Cost) --> Purchase Line (Direct Unit Cost Excl./Incl. SST) --> Purchase Line (Unit Cost (LCY) --> Value Entry (Cost Amount (Actual))


Item Card (Last Direct Cost) --> Item Journal Line (Unit Amount) --> Item Journal Line (Unit Cost) --> Value Entry (Cost Amount (Actual))

Inventory Posting to G/L

1) Inventory Value and COGS are presented in G/L Account.

2) Amount in the G/L Account is calculated based on value entries.

3) The reconcialation takes place when you post inventory cost to G/L Account

Navision Inventory Posting Flow

1) 2 kinds of inventor posting in Navision
a) Quantity
b) Value

2) Transaction that results in change on inventyro quantity
a) Purchases
b) Purchase Returns
c) Sales
d) Sales Return
e) Transfer
f) Inventory Adjustments
g) Consumption
h) output

3) Each transaction occurs will caused Navision to record the inventory changes in item ledger entry.


4) Every time when inventory quantity change, inventory value will also change.

5) Changes of inventory value is recorded as value entry.

6) Navision will create value entry for:
a) direct cost
b) indirect costs
c) rounding
d) revaluation
e) variances

7) Please note that one item ledger entry may have more than one value entry.

8) Item ledger and item value entries cannot be deleted once a document has been invoiced.

9) Cost amounts posted initially may not be the actual inventory value. You need to use Adjust Cost - Item Entries batch job to adjust the value entries.

Cost Flow Assumption

1) The major challenge in Inventory Accounting arise when:
a) Acquisition unit cost fluctuate over tme.
b) Individual item is usually cannot be traced from which PO when the Item is removed from Inventory. This means the actual cost of the Item removed from the Inventory cannot be determied.

2) This above challenge cause 2 problems:
a) Not able to determine the cost of Item removed from Inventory.
b) Not able to determine the cost of Item on hand in the Inventory.

3) Physical idenfication of items is impractical because new items purchased will be mixed with the old items when shelving and storing.

4) Because of the above challenges and problems, assumption is needed to determine the cost of goods sold and the cost of remaining amount. The most common assumption / costing methods are:
a) First In First Out
b) Last In First Out
c) Weighted Average
- Weighted Average calculate the Average cost on each purchase. The average price will be used for all withdrawal of inventory until the next purchase is made.

Acquisition Cost

Acquisition Cost = Direct Cost + Indirect Cost

1) Direct Cost includes
a) Invoice Price at purchase order
b) Additional cost associated with the purchase

2) Example of additional cost includes custom duty, freight and insurance.

3) Indirect cost include:
a) Cost to run the purchasing department
b) Cost or Warehouse department
c)

Inventory Posting Flow

1) There are 2 typs of inventory posting in Navision
a) Quantity
b) Values

2) Transaction that involves quantity posting:
a) Purchases
b) Sales
c) Transfer
d) Inventory Adjustment
e) Consumption
f) Output

3) Quantity will be reflected in Item Ledger Entry

4) Value will be reflected in Value Entry