Costs
Costs Maintained by the System
Cost Flow for Inventory Adjustments
Overview
As used in this section, the term cost refers to the unit amount paid to your supplier and/or the unit value of items in your inventory. The order entry operator is usually not concerned with costs. During Order Entry and Order Maintenance, cost is not displayed unless you have the proper security clearance. All cost information is established by file maintenance, purchasing, and receiving personnel, and automatically flows through the Order Entry and Invoicing systems. Cost can not be overridden on stock orders. The cost of the selected inventory is used. Cost can be overridden on direct ships and special orders.
All costs can be broken down into two portions: the base portion, which is the cost of the material; and the freight portion, which includes any costs associated with bringing the material into stock, such as freight, duty, and handling. For suppliers who include freight in their prices to you, you may have only a base cost inclusive of freight; and zero in the freight portion of the cost. This is valid and simplifies the costing process.
Costs Maintained by the System
The system maintains six different costs:
- Last Cost – The cost of the last receipt of each item. The receiving programs automatically update this cost. A separate last cost is maintained for each item number, lot, slab, roll, or serial number; and separate last costs are maintained for like items at different warehouses. This cost is maintained in two parts: last base cost and last freight cost, which together equal the total last landed cost.
- Average Cost – True weighted average cost of each item. The receiving programs and other programs automatically update this cost. Each receipt is averaged with the existing on-hand balance to calculate a new average cost per unit. A separate average cost is maintained for each item, lot, slab, roll, or serial number. Separate costs are maintained for like items at different warehouses or different bin locations within the same warehouse. The average cost that is maintained for each lot, roll, slab or serial number will likely be identical to the last cost, as each is usually unique. Averaging occurs only if an item is received more than once with the same warehouse, serial number, lot, and location. This cost is also referred to as actual cost when little or no averaging occurs. All orders and invoices for stock use this cost.
- Standard Cost – This cost is not automatically updated by the system. It is entered and maintained by purchasing personnel using the Cost File, Item File, or both. It can be used for many purposes, the most common of which are:
- Current Cost – The current cost from your supplier.
- Replacement Cost – The cost of the next receipt. The Build-A-Container Purchasing System can optionally update these costs.
- Market Cost – The current market costs. This concept applies primarily to commodity type products whose costs fluctuate regularly.
- Transaction Cost – This is a cost assigned (overridden) for a specific transaction. Cost can only be overridden when processing direct shipments, special orders, credits, purchase orders or special promotional sales. Orders for stock use average cost as the transaction cost.
- House Cost – This cost is not automatically updated by the system. It is entered and maintained by users as an alternative cost for sales and commission reports. It is an effective way of forcing gross profit figures to be artificially high for products that would normally be sold at near or below cost, such as discontinued items. House cost can also be used to force consistent gross profits and commissions for products that have multiple serial numbers in stock, each bought at significantly different costs. The house cost is only used by the system, when specified by the user, on reports such as the X by Y Gross Profit Analysis and the X by Y Sales Commissions reports. This cost is maintained in the Cost File and the SKU File.
- Accounting Cost – This cost is not automatically updated by the system. It is entered and maintained by the accounting department. It is used to store LIFO or FIFO costs which are used primarily on end-of-year inventory valuation reports. The Inventory Value Reports allow you to choose from all of the available cost options and include many special provisions for analyzing and comparing accounting costs for current and prior months. Accounting costs can be entered in the Cost or SKU File for specific items, warehouses, or lot numbers. Special programs are available on the Special System Maintenance Menus for automatically updating this cost.
You can store up to 11 standard costs for each item. You can store one overall or default standard cost, as well as standard costs for the same item from different suppliers and for various quantity breaks. All purchase orders use standard cost unless overridden, or unless a promotional cost is found in the Promotional File. The default Standard Cost can be maintained in two parts: base cost plus freight cost.
The cost that is retrieved by Order Entry and used to figure cost of sales, and gross profit is:
- Average cost for sales from stock, or stock transfers. Standard cost for direct shipment, or special orders, unless overridden by Order Entry operator. Only the base portion of the standard cost is used for direct ships. For special orders and back orders, standard cost including freight is used until the material is received and the back order or special order is filled. At that time, the actual cost of the received material is used.
- Standard cost for purchase orders. Only the base portion of the cost is used. The freight portion is assigned during the receiving process. This cost can be overridden by the purchase order entry operator.
- Each transaction can also contain a cost allowance. Cost allowance is usually a negative amount which reduces cost for the purpose of computing gross profit and for accruing rebates due from manufacturers. Cost allowances are commonly used when a promotional price given to your customer automatically earns a rebate from the manufacturers.
The cost assigned by the Order Entry programs is used to determine gross profit dollars and percentage for each order. It is important to note that actual gross profit and cost of sales are only determined when an order is invoiced. All costs assigned via Order Entry are subject to change by the time they are invoiced. When a stock order is invoiced, it is recosted. This preserves the integrity of system statistics since cost of sales must relate to the physical movement of stock, not to the order in which stock was allocated. Stock of any given item can turn completely between the time an order is taken and shipped. Therefore, the stock actually sold could have been received after the order was taken, at a different cost than the stock that was previously on-hand.
The Order Entry operator can override the cost on direct ships, special orders, credit memos, and purchase orders. The overridden cost is then used to compute the gross profit for the order.
At the time of invoicing:
- Stock orders are recosted using current average costs.
- Direct shipments assume the cost as entered on the order, but can be overridden.
- Special orders pick up the cost of the related receipts of material. If a special order is invoiced prior to being received, the cost as entered on the related purchase order is used.
- Special supplier promotions cam also affect costs. These promotions are referred to as rebates or cost allowances. Rebates and cost allowances affect the cost as it relates to gross profit, but do not affect inventory. If the cost of an item in stock is $4.00 but gets a rebate of $1.00 when sold, the stock is reduced by $4.00 but gross profit is based on $3.00. Rebates should be booked as a credit to cost of sales and a debit to rebates receivable. When rebates are paid by the supplier, rebates receivable is credited and cash is debited.
Cost Flow for Purchasing
- Standard costs for each product are entered in the Item or Cost files.
- Purchase orders use standard base costs, unless overridden.
- Receipts, when based on purchase orders, use the base cost from the purchase order, and the standard freight cost. Standard freight costs can be retrieved from the Item or Cost files, or from a related freight table. Base and freight costs can be overridden in the receiving process, based on a user's security clearance.
- When receipts are posted, inventory value is increased by the exact value of the receipts. New inventory records are assigned the unit cost of the receipt as the average cost. Updated inventory records are reaveraged. All new or updated inventory records are assigned a new Last Cost. the new last cost is comprised of a new base cost plus a new freight cost.
Cost Flow for Sales
- Order Entry assigns the cost of the exact inventory records selected, as the cost of the order.
- When invoiced, the cost assigned to the order is rechecked against inventory, and the latest cost of the exact inventory records is used as the cost of the invoice.
- When invoices are updated against inventory, the exact cost value of the invoice is deducted from inventory, with the remaining quantity in each updated inventory record reaveraged. This applies to stock transfers as well.
Cost Flow for Inventory Adjustments
When inventory adjustments are made, inventory value is increased or decreased by the exact value of the adjustment. All updated inventory records are reaveraged.
Miscellaneous Item Costs
MISC items can have costs automatically figured based on a default gross profit percentage entered into the Item File. This is useful when you set up a miscellaneous item number for ordering different items. It allows the order desk personnel to enter different prices but not costs. The system computes the cost by using the default gross profit percentage. These items are used primarily for special orders and direct ships. Refer Chapter 7, Non-Stock Items for more details.
Analyzing Costs
You can analyze in many ways, both on screen and via reports. The Item File graphs can graph the past 25 months of last and average costs. The Cost Variance Reports lists percentage variances between last, average, and standard costs, highlighting or listing only those with large variances. The Inventory Value Reports display unit costs and values based on any of six current costing methods. They also can print costs and values going back 24 months.
Importing
When using the Build-A-Container system or the extended receiving cost options, the system can calculate freight and landed costs based on several components, including overseas freight, inland freight, or brokers fees.
Freight Costs
Freight costs can be retrieved from the following files:
- The Cost and Item Files (standard freight costs)
- The Freight Cost Table (which is linked to the Cost File for more elaborate freight calculations based on variables such as weight)
- The Build-A-Container system (refer to the option to update costs in the Build-A-Container documentation)
- The Interwarehouse Freight Table (used to add additional freight costs onto material being transferred for a customer)
Viewing and Adjusting Costs
Users can be blocked from viewing or overriding costs in the following ways:
- Your system administrator can enable or disable users from viewing cost in Order Entry by via the Allow Costs To Show On Orders setting on the User ID Control Panel (SET 2).
- Your system administrator can enable or disable users from adjusting costs in the Receipts and Inventory Adjustments programs via the Allow User To Adjust setting on the User ID Control Panel (SET 2).
- Your system administrator can also enable or disable users from being able to enter direct ship orders and purchase orders via the User ID Control Panel (SET 2).
- Users who are restricted to the Order Desk Menus are unable to view costs that would normally show on inquiry screens in the otherwise similar Customer Service Menu.
- For functions requiring the input or verification of cost, such as direct ships, purchase orders, special orders, special orders for miscellaneous items, and credit memos, users can adjust the cost if they can access the function.
- All costs and gross profit figures are available to users who have authority to access order registers, management screens, and analysis reports.