Microsoft Dynamics® NAV 2009

Inventory Costing

Introduction

• Instructor’s name

• Training schedule

• Organizational moments– Facilities– Restrooms

Course Description

• Audience– Microsoft Dynamics Certified Partners’ employees

selling, implementing, and supporting Microsoft Dynamics NAV 2009

• Training Goal:– Learn the basics and advanced features of

Inventory Costing

Course Objectives

• To provide an overview on inventory valuation and accounting principles

• To instruct on managing, monitoring, analyzing, and tracing inventory costs in Microsoft Dynamics NAV 2009

Course Outline

• Inventory Costing Overview• Inventory Costing Principles• Inventory Costing Functionality• Inventory Valuation Functionality• Inventory Costing Setup

Course Objectives

What areyour objectives and

expectations?

• Inventory costs• Inventory accounting

principles– Bases– Cost object– Cost flow assumptions

• Inventory posting flow• Inventory periods

• Unit cost calculation• Costing methods– FIFO, LIFO, Standard,

Specific– Average

• Inventory transfersand returns

• Inventory adjustment functionality

Session 1 Outline

Microsoft Dynamics NAV 2009

Inventory Costing Overview

Base Equation

Ending Inventory

Beginning Inventory

NetPurchases

Cost ofGoods Sold

Cost Classification

Costs Included in the Balance Sheet and Income Statement

Capitalized Non-capitalized

Inventoriable Non-inventoriable

Perpetual Inventory Method

Perpetual inventory method – a method that records and calculates the cost of withdrawals at the time the items are taken from inventory

Ending

Inventory (known)

Beginning

Inventory (known)

NetPurchases

(recorded)

Cost ofGoods

Sold(solved for)

Bases of Inventory Valuation

• Acquisition cost – historical cost of items• Standard cost – an estimate of what inventory

items should cost• Net realizable cost – amount that a company

could realize as a willing seller with a willing buyer

• Replacement cost – amount the company would have to pay to acquire the item

• Lower-of-cost-or-market-basis – lesser of acquisition cost and market value

Cost Object and Cost Assignment

Cost Object-anything for which a separate measurement of costs is desired

Direct Costs Indirect Costs

Trac

ing

Allocation

Acquisition Cost Formula

Acquisition Cost

Purchase Cost

(- Discounts)

Additional Acquisition

Costs

Indirect Costs

Accounting for Inventory

?Cost of Goods Sold

Net Purchases

Cost Flow Assumptions

First-In, First-Out

Beginning Inventory

+

Net Purchases

Goods Available for

Sale

EndingInventory

+

Cost of GoodsSold

Cost Flow Assumptions

Last-In, First-Out

Beginning Inventory

+

Net Purchases

Goods Available for

Sale

EndingInventory

+

Cost of GoodsSold

Cost Flow Assumptions

Weighted Average

Beginning Inventory

+

Net Purchases

Goods Available for

Sale

EndingInventory

+

Cost of GoodsSold

Microsoft Dynamics NAV 2009

Inventory Costing Principles

Determining the Value of Inventory

Inventory TransactionValue Entries

Item Ledger Entries

General Ledger Entries

ReconciliationPosting

Accounting for Inventory

0D.

Starting Date..........

Ending Date

Posting Date

Value of Quantity on Hand

Value of Inventory Increases

Value of Inventory Decreases

Inventory Value on Ending Date

Inventory Posting Flow

Quantity Posting-records changes in quantity on inventory

Item Ledger Entries

Sales(incl. purchase

returns)

Transfers

Inventory Adjustments

Purchases(incl. sales returns)

Output

Consumption

Distributor

Manufacturer

Inventory Posting Flow

Value Posting-records changes in inventory value

Value Entries

Direct Costs

Rounding

Revaluations

Indirect Costs

Variances

Inventory

Inventory Posting Flow

General Ledger

Inventory DecreaseInventory Increase

Item Ledger Entry

Item Ledger Entry

Application Entry

G/L EntryG/L Entry

Value EntryValue Entry

Inventory PeriodsAccounting Period

Inventory Period

Accounting Period

Inventory Period

Accounting Period

Inventory Period

Accounting Period

Inventory Period

Accounting Period

Inventory Period

Accounting Period

Inventory Period

Reopen

Late postings,cost adjustments,

additional costs, and so on.

Outbound entries closedCosts adjusted & posted to G/L

Accounting Period

Inventory Period

Accounting Period

Inventory Period

Accounting Period

Inventory Period

Close Close

Microsoft Dynamics NAV 2009

Inventory Costing Functionality

Unit Cost Calculation

Acquisition Cost

FIFO, LIFO, SpecificAverage

Last Direct Cost(+ Indirect Cost % + Overhead Rate)

Average Cost

ValuationBase

CostingMethod

Field

Standard Cost

Standard

Standard Cost

Unit Cost

Unit Cost Posting

Inbound transaction

Value entries

Item ledger entries

• Purchased quantity

• Related item charge

• Entry with direct unit cost

• Entry with item charge as indirect cost

Entry with unit cost + item charge as Cost Amount (Actual)

Inventory

Linking Inventory Increases and Decreases

Inc

reas

e D

ecrease

Link

Application Method

Costing Method

Fixed Application

User

Costing Methods

Costing method – a combination of application methods and cost flow assumptions

+ +

Costing Methods

First-In, First-Out

Posting Date Cost Amount (Actual) Entry No.

1/1/2010 10 1

1/1/2010 20 2

1/1/2010 30 3

1/2/2010 -10 4

1/3/2010 -20 5

1/4/2010 -30 6

Costing Methods

Last-In, First-Out

Posting Date Cost Amount (Actual) Entry No.

1/1/2010 10 1

1/1/2010 20 2

1/1/2010 30 3

1/2/2010 -30 4

1/3/2010 -20 5

1/4/2010 -10 6

Costing Methods

Average

Posting Date Cost Amount (Actual) Entry No.

1/1/2010 10 1

1/1/2010 20 2

1/1/2010 30 3

1/2/2010 -20 4

1/3/2010 -20 5

1/4/2010 -20 6

Costing Methods

Specific*

Posting Date Cost Amount (Actual) Entry No.

1/1/2010 10 1

1/1/2010 20 2

1/1/2010 30 3

1/2/2010 -20 4

1/3/2010 -10 5

1/4/2010 -30 6

2

1

3

3

2

1

* - same principle as fixed application

Costing Methods

Standard

Posting Date Cost Amount (Actual) Entry No.

1/1/2010 15 1

1/1/2010 15 2

1/1/2010 15 3

1/2/2010 -15 4

1/3/2010 -15 5

1/4/2010 -15 6

Application of Entries

Application algorithm:

Is there a fixed application?

Are there Item Tracking Lines?

What is the costing method?

Item Application Entry

Fixed Application

Fixed Application

Posting Date Cost Amount (Actual) Entry No. Applies-to

Entry No.

1/1/2010 10 1

1/1/2010 20 2

1/1/2010 30 3

1/2/2010 -20 4 2

1/3/2010 -10 5 1

1/4/2010 -30 6 3

Average Cost Calculation TypeAverage Cost Period

Average Cost Calculation

Average Cost

• Day• Week• Month• Accounting

period

• For each item• For each item,

location, and variant

Valuation Date

Average Cost Calculation

Average Cost Period

Item Cost

Sum of Receipts

Cost of Inbound

Transactions

Total Inventory

Qty.

Calculation formula:

Non-inventoriable Costs

Non-Inventoriable Costs

Item Charge

Cost Shares Breakdown

The Cost Shares Breakdown Report• Print Cost Share option:– Sale– Inventory– WIP Inventory

• Cost elements:– Purchase and material– Capacity and capacity overhead– Manufacturing overhead– Subcontracted cost– Other

Inventory Transfers

Location A

Inventory Increase Inventory DecreaseTransfer

Inbound Entries Outbound Entries

Location B

Inbound Entries Outbound Entries

Application

Application

valued according to costing method

Inventory Returns

Exact Cost Reversal• Cancels the effect of postings made to COGS accounts• Restores the items in inventory at the correct cost

Location A

Inbound Entries Outbound Entries

Fixed Application

PurchaseInbound Return

Outbound ReturnSale

Inventory Adjustment

Item cost may need to be adjusted if:• The item is valued according to FIFO or LIFO

costing methods• Unit cost is changed due to additional direct

cost• The item is valued at average cost• Sales occur before purchase

Inventory Adjustment

Ways of adjusting inventory costs:• Adjust Cost – Item Entries batch job

– For each item– For each item category– For all items

• Automatic adjustment– Daily– Weekly– Monthly– Yearly– Always (when posting occurs)

better performance

Rounding

10/3 = 3.(3)

Average costing method

Other costing methodsSeparate rounding entry

Cumulative rounding entry

Session 1 Summary• Costs are classified as:

– Capitalized, non-capitalized– Inventoriable, non-inventoriable

• Direct costs are traced to the cost object, indirect costs – allocated to the cost object

• Supported cost flow assumptions are FIFO, LIFO, Weighted Average

• Inventory posting is comprised of quantity and value posting• Posting flow includes creation of the following entries:

– Value entries– Item ledger entries– General ledger entries

• Inventory periods help with posting of inventory transactions

Session 1 Summary

• Unit cost on purchase line is retrieved based on the item’s costing method

• Unit cost on sales line depends on how the link is established between the inventory increase and decrease

• Supported costing methods are FIFO, LIFO, Average, Specific, Standard

• Entry application can be of two types:– Based on the costing method– Fixed application

• Average cost depends on the valuation date• Non-inventoriable costs can be recorded as item charges

Session 1 Summary

• Inventory transfers are valued using the transfer application• Inventory returns are valued using the fixed application• Inventory costs need to be adjusted automatically or using the

adjustment batch job• Rounding is facilitated by creating cumulative or standalone

rounding value entries

Session 1 Summary

Questions?

Session 1 Summary

Test Your Knowledge!

Microsoft Dynamics NAV 2009

Inventory Costing

Session 2 Outline

• Inventory valuation• Posting inventory costs to the General Ledger– Post Inventory Cost to G/L batch job– Posting expected inventory value– Tracing G/L entries

• Inventory revaluation• Physical inventory• Inventory costing setup

Microsoft Dynamics NAV 2009

Inventory Valuation Functionality

Inventory Valuation

Inventory Valuation

Value Entries

Direct Cost Indirect Cost Variance Revaluation

Rounding

Inventory Valuation Report

Starting Date.......... ....

Ending Date

Posting Date

Value of Quantity on Hand

Value of Inventory Increases

Value of Inventory Decreases

Inventory Value on Ending Date

Expected Costs

Posting Inventory Costs to G/L

Balance Sheet Income StatementAccount Name

Inventory

Account Name

Direct Cost Applied

Overhead Applied

Purchase Variance

COGS

PurchaseLedger Entries

SaleLedger Entries

DebitCredit

Credit

Debit

The Post Inventory Cost to G/L Batch Job

Processing Algorithm:

1. Determine the posting method.2. Determine whether expected cost posting is enabled.3. Calculate the amounts to be posted:

Amount to be posted = Cost Amount (Actual) - Cost Posted to G/L4. Create general ledger entries for the calculated amounts.5. Update the Cost Posted to G/L field:

Cost Posted to G/L = Cost Amount (Actual)6. Update the Cost is Posted to G/L field on the item card.7. Display the report.

Posting Expected Inventory Value

Amountto be posted

Expected Cost Posted

to G/L

Cost Amount

(Expected)

InterimG/L Accounts

RegularG/L Accounts

Amountto be posted

Post Inventory Cost to G/Lbatch job

Post Inventory Cost to G/Lbatch job

1 2

Tracing G/L Entries

General ledger entries can be traced to underlying value and item ledger entries because of the following features:

• Inventory – G/L Reconciliation tool– Displays reconciliation differences between the inventory

ledger and G/L– Allows to drill-down to specific entries– Exposes the reasons for reconciliation differences

• Links between value and general ledger entries– One-to-one relation– One-to-many relation

Inventory Revaluation

Revaluable quantity = Sum of quantities on invoiced item ledger entries for all inventory increases and decreases with posting dates equal or earlier than the revaluation date• For standard-valued items, expected costs can also be revalued (interim

inventory accounts in G/L will be affected)

Ways of performing revaluation in the revaluation journal:• Entering a line manually and applying it to the item ledger entry in

question• Running the Calculate Inventory Value batch job

Physical Inventory

ActualQuantity on Hand

CalculatedQuantity on Hand

Physical Inventory CountAdjustments

Adjust Cost – Item Entries batch job

Microsoft Dynamics NAV 2009

Inventory Costing Setup

Inventory Costing Setup

The setup of Inventory Costing consists of:• Setup of inventory periods• General setup

– Automatic Cost Posting– Expected Cost Posting to G/L– Average Cost Calculation Type– Average Cost Period

• Individual item setup– Costing Method

Session 2 Summary

• Inventory is valued based on value entries.• Inventory cost is posted to the income statement and balance

sheet accounts in the General Ledger based on the types of value and item ledger entries.

• The Post Inventory Cost to G/L batch job can post per entry or per posting group.

• Expected inventory value can be posted to interim inventory accounts.

• General ledger entries can be traced down to underlying value and item ledger entries.

Session 2 Summary

• Revaluation is based on actual cost (or expected cost for standard-valued items).

• The Calculate Inventory Value batch job allows to perform inventory revaluation to a wider extent.

• Physical inventory counting helps resolve differences between the actual and calculated quantity of items on hand.

• Inventory costing setup reflects the way the company decides to control and account for its inventory value.

Session 2 Summary

Questions?

Session 2 Summary

Test Your Knowledge!

Course Summary

The course highlighted the following points:

• Classification of inventory costs, definition of cost object• Bases of inventory valuation, cost flow assumptions• Costing methods and application of entries• Inventory posting flow, unit cost and average cost calculation• Cost flow of inventory transfers and returns• Cost adjustment and rounding• Reconciliation between inventory ledger and G/L• Inventory revaluation• Setup of the Inventory Costing functionality