CHAPTER 5: COSTING TRUSTWORTHINESS · 2016-09-12 · Chapter 5: Inventory Costing −...

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Chapter 5: Inventory Costing − Trustworthiness

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CHAPTER 5: COSTING − TRUSTWORTHINESS Objectives

The objectives are:

• Explain the benefits of using inventory periods. • Close an inventory period. • Follow the audit trail of changes that are made to inventory periods. • Explain how inventory periods align with accounting periods. • View sales and customer statistics based on adjusted cost. • Explain new posting principles of the adjustment batch job. • Describe the improved inventory posting structure in G/L. • Explain the new average cost principles and the effect of setup

options.

Introduction Trustworthy costing data guarantees effective analysis, valuation, and reporting as less time and worry is wasted on verifying results. In addition, it instills confidence in users who analyze and report on inventory value. Inventory Costing in Microsoft Dynamics� NAV 5.0 introduces several improvements and new features with the common purpose of increasing the trustworthiness of costing data in the system. Inventory periods help a company to control inventory value over time by defining shorter periods that can be closed for posting as the fiscal year progresses. Cost and profit figures displayed in sales and customer statistics include any cost adjustments made and therefore provides a trustworthy basis for profit analysis. To align with the common accounting principle that sales revenue in G/L is recognized at the time of invoicing, cost adjustments are now posted with the same date as the related sales invoice � not the shipment. Improved inventory posting structures guarantee that G/L account and balancing account posting pairs always balance and therefore provide trustworthy data for reconciliation. Average cost principles are extended with setup options for average cost periods and therefore provide for true periodic average costing. This chapter provides training on all the new features within the theme of costing data trustworthiness and is taught as part conceptual description and part demonstration of actual use and exercise labs on selected functionality.


What�s New in Microsoft Dynamics NAV 5.0 − Application Part II

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Inventory Periods Back-dated inventory transactions and potential cost adjustments affect the balance and inventory valuation of an already closed reporting period. To some companies, especially those who report within a global corporation, this is unacceptable. To obtain more control of inventory value over time, the concept of inventory periods is introduced with the current version.

An open inventory period defines a period in which users can post changes to inventory. When an inventory period is closed, no quantity or value changes can be posted to inventory before its ending date.

To make sure that all transaction entries in a closed period are final, these two conditions must be met before an inventory period can close:

• All outbound item ledger entries in the period must be closed (no negative inventory).

• All costs in the period must be adjusted. In addition, it is recommended that all costs within the period are posted to G/L. Inventory periods are managed in the Inventory Periods window.

FIGURE 5-1: TWO OPEN INVENTORY PERIODS A test report can be run directly from the Inventory Periods window and will show if any of the required conditions block the period from closing, such as open item ledger entries.



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FIGURE 5-2: TEST REPORT LISTING ERRORS THAT BLOCK THE INVENTORY CLOSING Refer to the demonstration titled "Closing Inventory Periods" to learn how to create and close inventory periods based on the listed conditions. A closed inventory period can be reopened temporarily to accommodate late changes, such as to enable the posting of a late purchase invoice into a past inventory period. Refer to the demonstration titled "Reopen an Inventory Period for Posting and View the Resulting Audit Trail."

NOTE: If a closed period contains open item ledger entries that relate to inbound quantities that have not yet been applied to outbound transactions, you can still apply outbound quantities to these entries despite the period being closed.

Inventory Periods Align with Accounting Periods Inventory periods are not strictly integrated with accounting periods in any way that imposes entry dependencies between the two. However, the inventory period status is displayed in the Accounting Periods window for information.



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FIGURE 5-3: ACCOUNTING PERIODS SHOW STATUS AND LINKS TO INVENTORY PERIODS Notice that the period closing performed for November has automatically closed all earlier periods that correspond to existing accounting periods. In addition, the Inventory Period Closed field is included in the Close Income Statement window to inform accountants working at G/L level about the status of the inventory ledger in order to avoid reconciliation issues.

FIGURE 5-4: INVENTORY PERIOD STATUS SHOWN WHEN CLOSING INCOME STATEMENT



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Another simple integration is the following informational message displayed when closing an inventory period that is within a closed accounting period:

FIGURE 5-5: SYSTEM INFORMS OF AFFECTED ACCOUNTING PERIODS

Demonstration − Closing Inventory Periods

ATTENTION: Load a clean Cronus database without changes. When an inventory period is over, it must be closed to block new transactions with posting dates within that period. A period to be closed is likely to have unresolved entries that conflict with the listed conditions. Therefore, the Inventory Periods window links to tools that help resolve such conflicts. Scenario: On January 1, 2008, the controller continues to close the December, 2007 inventory period. To make sure that the period closes without warnings or conflicts, the controller decides to run a series of preparatory steps:

1. Adjust all item costs

2. Test the period closing function

3. Post inventory costs to G/L

The controller resolves any issues revealed during these steps and then successfully closes the inventory period. As outlined in the scenario text, a user performing this task will routinely run the preparatory steps to save time. This demonstration deviates somewhat in order to provoke the various warning messages. First, create the inventory periods to be closed. For simplicity's sake, create them before the work date:

Steps 1. Click FINANCIAL MANAGEMENT → INVENTORY → COSTING → INVENTORY

PERIODS.

2. In the first Ending Date field, enter 11-30-07. The program automatically names the period November 2007.

3. Create a second period with an ending date of 12-31-07 (December).



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FIGURE 5-6: TWO INVENTORY PERIODS CREATED

Continue to the actual closing process, starting with November.

4. Select the November period and then click FUNCTIONS→ CLOSE PERIOD.

After a confirmation message, a message appears that indicates that some item costs must be adjusted.

5. Click FUNCTIONS → ADJUST COST → ITEM ENTRIES and run the batch

job without filters.

6. Close the November period.

The period closes successfully and you can continue with the December period. 7. Select the December period and then click FUNCTIONS → CLOSE

PERIOD.

A message appears that states that some item ledger entries within the period are negative. The controller must find all negative (open) item ledger entries within the period and resolve them one by one � typically by posting related inbound transactions. The program provides a test report to help you find these � and any unadjusted item cost entries.



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8. Select the December period, click FUNCTIONS → TEST REPORT AND PREVIEW THE REPORT

FIGURE 5-7: TEST REPORT WITH OPEN ITEM LEDGER ENTRIES Notice that the report lists three items with one or more open item ledger entries that restrict the inventory period from closing. Users may now typically continue to finish and post any outstanding inbound item transactions, such as purchase receipts. Another typical process when closing a period is to do a physical inventory count. This is likely to turn out any lost inventory items and therefore helps resolve open item ledger entries. In this demonstration, simulate a physical inventory count by creating the needed positive inventory adjustments in the item journal.

9. Click WAREHOUSE MANAGEMENT → INVENTORY → ITEM JOURNALS and create and post these positive inventory adjustments.

Posting Date Item Location Quantity 12/01/07 8908-W BLUE 6 12/01/07 8916-W BLUE 3 12/01/07 8924-W BLUE 3

After these inventory postings, adjust all costs again.

10. Go back to the Inventory Periods window and then click FUNCTIONS → ADJUST COST → ITEM ENTRIES to run the batch job without filters.

To avoid differences between inventory and G/L, it is recommended that any unposted inventory costs within the period are posted to G/L before closing the period. For convenience, a link to this batch job is also available in the Inventory Periods window.

11. Click FUNCTIONS → POST INVENTORY COST TO G/L.



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13. Select to post Per Entry and put a check mark in the Post field.

14. Click Preview to post unposted inventory costs to G/L.

15. Now close the December inventory period and accept the confirmation message.

To illustrate that transaction posting within the December period is now blocked, try to post a purchase order on 12/10/07:

16. Open purchase order no. 106010 (OSLO Storage Unit/Shelf, 88 pcs.), change the posting date to 12/10/07, and try to post Receive.

The system blocks the posting and advises that the period is opened first.

FIGURE 5-8: THE SYSTEM BLOCKS THE PURCHASE TRANSACTION This concludes the demonstration of typical tasks involved in closing inventory periods.

Demonstration − Enable Delayed Posting and View Audit Trail When a user has closed an inventory period, it cannot be deleted. This guarantees full traceability. However, the inventory period can be reopened if there is a special need to enable posting before its ending date. When one inventory period is reopened, all earlier inventory periods are also reopened. This demonstrates how to enable an extraordinary inventory posting by reopening a period. It also shows how the item register can function as an audit trail to help re-create the original inventory value as reported when the inventory period was closed the first time. Scenario: As described in step 16 of the previous demonstration, the 88 OSLO storage units arrived on 12/10/07 and the responsible purchasing agent wants to post the receipt for that date. But the December period is closed. The controller must therefore temporarily reopen the December period to enable the posting. At the next periodic audit, the auditor looks into the inventory period entries to see why the period was reopened.



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Steps

1. Select the December period and then click FUNCTIONS → REOPEN PERIOD.

2. Open purchase order no. 106010 (OSLO Storage Unit/Shelf, 88 pcs.), change the posting date to 12/10/07, and then post Receive.

3. Run the Adjust Cost � Item Entries batch job.

4. Close the December inventory period.

5. Select the December period and then click INVT. PERIOD → INVT. PERIOD ENTRIES (or press CTRL+F5).

FIGURE 5-9: READY TO LOOK UP FROM THE LAST INVENTORY PERIOD ENTRY

The Inventory Period Entries window shows the history of inventory period actions that were performed in the demonstration. Entry number 80 is for the item journal lines you posted to resolve negative inventory before the first closing action. Entry number 81 is for the purchase receipt you posted before the second closing action. The different fields provide the following audit trail information:

Field Audit Trail Information Entry Type Which action was performed Ending Date What is the period's ending date User ID Who performed the action Creation Date/Creation Time When was the action that is performed Closing Item Register No. What was the value before the action Description Why was the action performed

Continue to investigate what the item value was before the closing action.



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6. In the Inventory Period Entries window, look up from the Closing Item Register No. field in the last line to see the item transactions that occurred before the closing action.

FIGURE 5-10: ITEM REGISTERS WINDOW FOR ANALYSIS OF AUDIT TRAIL

7. In the Item Registers window, look up from the From Value Entry

No. field of entry number 80 to access the related value entries and derive the item value before the closing action.

As illustrated, the item register will help you re-create the original inventory value as reported when the inventory period was closed the first time. This concludes the conceptual descriptions and demonstrations of typical tasks involved in reopening inventory periods and following the involved audit trail. To use inventory periods to control inventory value fluctuations does require some extra user interaction when:

• Setting up inventory periods • Resolving hindrances before closing inventory periods • Reopening inventory periods

In return, the inventory periods feature provides the following benefits:

• Ability to finish and close inventory periods for additional reporting • Audit trail of item transactions by inventory period



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Sales Statistics Show Cost Adjustment In earlier versions, profit and cost information in customer and sales statistics were based on initial item unit costs only. Additionally, profit and cost information was not updated with potential item cost adjustments, such as those caused by additional direct costs. In the current version, all customer and sales statistics have additional fields for adjusted profit and cost. Therefore, users can easily see any differences that relate to cost adjustment. Users can now derive correct profit figures directly from sales statistics, for example, for commission calculations. Four new statistics fields (fields number 5-8 on the left-hand side) are provided in the Customer Statistics window.

FIGURE 5-11: CUSTOMER STATISTICS WINDOW WITH COST ADJUSTMENTS In addition to the three Adjusted.. fields, the Cost Adjmt. Amount (LCY) field is added to all sales statistics windows to display the sum of cost adjustments made to items for the customer or sales document in question. From this summed-up cost adjustment amount, users can drill into the individual value entries to understand what caused the cost to change and therefore the profit.



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The solution for cost updates on statistics is implemented in a way that has little affect the performance of the cost adjustment process. The reason is that it basically consists of a function that updates cost information in the relevant statistics forms and reports only � not in the underlying posted sales line tables.

Profit Analysis In some cases, users need to derive profit analysis information by looking into posted sales line tables to gather the relevant price/cost/margin figures. They may obviously like to know of any cost adjustments that may affect these figures. To provide this insight, two new fields, Document Type and Document Line No. fields have been added to the Item Ledger Entry table so that value entries can be traced to their related sales line documents. The two fields are visible in the Value Entries window to help users quickly determine if the value entry relates to a sales document that is part of their profit analysis.

FIGURE 5-12: DOCUMENT TYPE AND DOCUMENT LINE NO. FIELDS FOR TRACING In summary, the following costing improvements are now available in sales statistics:

• Adjusted profit and cost figures • Drill-down from cost adjustment sum to value entries • No adverse effect on adjustment performance • Traceability from item ledger and value entries to sales document

lines • C/AL function to help create sales statistics reports



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New Principle in Cost Adjustment Posting In earlier versions, the value entry of a sales adjustment amount was posted with the same posting date as the shipment of the sale that the adjustment was associated with. The same applied to the value posting of rounding entries. In the current version, the value entry of a sales adjustment amount is posted with the same posting date as the invoice of the sale that the adjustment was associated with. The same applies to the value posting of rounding entries. This applies to both methods of adjustment posting:

• Adjust Cost � Item Entries batch job • Automatic cost adjustment

This new adjustment posting principle aligns with common practice and with the general principle in Microsoft Dynamics NAV financial management that sales revenue in G/L is recognized at the time of posting the invoice. Moreover, increased flexibility and performance is provided with the option to filter on item and/or item group before the batch job is run (refer to the chapter titled "Usability").

Demonstration − Adjustment Date is the Sales Invoice Date This demonstrates that cost adjustments are now posted with the same posting date as the related sales invoice. Scenario: A late freight charge on the receipt of side panels triggers a cost adjustment on an invoiced sale of side panels. The system posts the cost adjustment on the same date as the invoice � not the shipment.

Steps

1. Create this sales order line:

Posting Date Item Quantity 01/20/08 70000 10

2. Post (Ship) the sales order.

3. Change the posting date to 01/22/08.

4. Post (Invoice) the sales order with posting date 01/22/08.

5. Create this purchase order line for a freight charge:



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Posting Date Item Charge Quantity Direct Unit Cost 01/24/08 P-FREIGHT 1 10

6. Assign the freight charge (LINE → ITEM CHARGE ASSIGNMENT) to the

purchase receipt of item 70000 (Side Panel).

7. Make sure that it is assigned and then post the freight charge (Receive and Invoice).

8. Run the Adjust Cost � Item Entries batch job for item 70000.

9. Open the item ledger entries of item 70000, select the sales shipment posted on 01/20/08 and look up to its value entries.

FIGURE 5-13: ADJUSTMENT ENTRY HAS SAME DATE AS THE SALES INVOICE

Notice that the cost adjustment caused by the freight charge is posted on 01/22/08 � the invoice date of the related sales invoice. The introduction of the Inventory Periods feature means that cost adjustment may sometimes relate to value entries in closed inventory periods. In that case, the program cannot use the posting date of the original value entry in the adjustment entry. It will therefore use the starting date of the next open inventory period. Therefore, the Closed Period Posting Date field is removed from the request form of the adjustment batch job. In summary, the new posting principles of the cost adjustment batch job are as follows:

• Adjustment entries now take the posting date of the invoice value entry.

• If the original value entry is in a closed inventory period, the adjustment entry takes the starting date of the next open inventory period.



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Improved Inventory Posting Structure in G/L In earlier versions, the Post Inventory Cost to G/L batch job posted certain entries in ways that made it difficult to reconcile inventory correctly with G/L. This was the case when:

• Reconciling value entries from past posting periods • Reconciling value entries posted per posting group

The most critical issues and their resolutions are described in the following according to how the system behaved before and after Microsoft Dynamics NAV 5.0.

Reconciling Value Entries from Past Posting Periods In earlier versions, old value entries with posting dates before the Allow Posting From date were posted to G/L with the date the user entered in the Closed Period Entry Posting Date field. This made it difficult to analyze and compare the inventory ledger and G/L per period. In the current version, the Post Cost to G/L batch job is now blocked if one or more value entries have posting dates outside the allowed posting period. This guarantees that value entries with posting dates before the Allow Posting From date are posted to G/L with their correct date.

FIGURE 5-14: THE SYSTEM BLOCKS G/L POSTING DUE TO POSTING PERIOD SETUP In order to complete the batch job, users must enable the posting of those old value entries � typically by temporarily changing or removing the date in the Allow Posting To field in order to open G/L for posting. To eliminate the risk that value entries are posted to G/L with wrong dates, the Closed Period Entry Posting Date field is removed from the request form of the Post Inventory Cost to G/L batch job.

NOTE: The Inventory Periods feature helps guarantee that posting dates in inventory and G/L are aligned after reconciliation: If unreconciled value entries exist in an inventory period that you are trying to close, the system displays a message urging you to run the Post Inventory Cost to G/L batch job (for more information, see the topic titled "Inventory Periods.").



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Reconciling Value Entries Posted per Posting Group When users post per posting group, costs are summarized per:

• Location Code • Inventory Posting Group • General Business Posting Group • General Product Posting Group.

This means that there are multiple value entries behind each summarized G/L entry. In earlier versions, costs posted to G/L per posting group did not carry identical posting dates, and there was therefore no way to link each G/L entry with its value entries in such bundled posting structures. Because a posting date link was missing, the program on found an un-posted value entry, modified the value entry to fit the G/L entry, and then posted the costs to G/L � on a potentially wrong posting date. This meant that account and balancing account postings were not necessarily matching pairs that made reconciliation difficult. In the current version, when users post per posting group, the program creates G/L entries with the cost amounts summarized for value entries:

• on the same posting date • per the same posting group • per the same amount sign (debit/credit) • per the same combination of balancing accounts

This means that a G/L entry is created for each combination of posting date, general business posting group, general product posting group, inventory posting group, and location code. Therefore, posting to G/L will always result in matching account and balancing account posting pairs.

Extensions to Periodic Average Costing In earlier versions, average cost calculation was only based on the cost flow of a single day, where each day started with an opening average. All inbound entries of that day were then added to the opening average to calculate the daily average that was used to value the cost of that day's outbound entries. This implementation of periodic average costing provided a daily average � not a true periodic average.

NOTE: This is a valid average costing principle for many companies, and it can still be used in the current version by selecting Day as Average Cost Period.



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In the current version, the system can be set up to calculate true periodic average cost by selecting between four average cost periods on which average cost calculation will be based. The Average Cost Period setup field (in the Inventory Setup window) has these options:

• Day • Week • Month • Accounting Period

The general principle of the average cost calculation is the same as in earlier versions, except each periodic average (closing entry) may now be calculated from the cost flow that occurs during a longer period (for example, one month).

Limitations to New Periodic Average Costing Setting the average cost calculation up based on user-defined periods is subject to the following limitations:

• When a fiscal year is closed, the average cost period cannot be changed

• Average-cost items can only be revalued at the end of a cost period • Only one average cost period can apply at a time

ATTENTION: If the average cost period is changed, all item values within that fiscal year will change accordingly.

Effect of Using an Average Cost Period of Day When the average cost period is set to Day, the program calculates the average cost as a daily average. (This is how the calculation was made in earlier versions) Valuation Date Quantity Cost Amount

(Actual) Entry No.

01-01-07 1 20 1 01-01-07 1 40 2 01-01-07 -1 -30 3 02-01-07 -1 -30 4 02-02-07 1 100 5 02-03-07 -1 -100 6

TABLE 1: AVERAGE COST PERIOD SET TO DAY



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Notice in table 1 that the average cost is calculated for 01-01-07 and applied to entry 3. The average cost for entry 4 remains the same as the previous day. Then, the average cost for entry 6 is re-calculated for the new day with a new value.

Effect of Using an Average Cost Period of Month When the average cost period is set to Month, the same transaction history as illustrated for Day results in different average costs (closing entries) because of the longer calculation period. Table 2 shows the same transactions with an average cost period of Month. Here the average cost of entry 3 is calculated in the average cost period for January, and the average cost for entries 4 and 6 is calculated in the average cost period for February. Valuation Date Quantity Cost Amount

(Actual) Entry No.

01-01-07 1 20 1 01-01-07 1 40 2 01-01-07 -1 -30 3 02-01-07 -1 -65 4 02-02-07 1 100 5 02-03-07 -1 -65 6

TABLE 2: AVERAGE COST PERIOD SET TO MONTH At the start of the February period, the cost of the one piece in inventory is 30. To calculate the average cost for February, the program adds the average cost of the piece received into inventory (100) to the average cost at the start of the period (30) and divides the result (130) by the total quantity in inventory (2). This gives the resulting average cost of the item in the February period (65). The program then assigns that average cost to the inventory decreases in the period (entries 4 and 6).

NOTE: In the topic "Average Cost Dynamics," in the chapter titled "Transparency," you can view in the new Average Cost Calc. Overview window how average costs are calculated over time according to average cost period.



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Conclusion Microsoft Dynamics NAV 5.0 includes new and improved features aimed at increasing the trustworthiness of costing data. Inventory periods help you control which and when inventory values are posted to G/L. Adjusted cost information in statistics provide more correct profit figures for multiple users. Cost adjustment now takes the posting date of the associated invoice date to follow common accounting practice. G/L entries created from inventory values are now structured correctly according to posting date and posting group. The average costing method has been extended with setup options for different average cost periods in order to provide true periodic average costing. Trustworthy costing data guarantees effective analysis, valuation, and reporting as less time and worry is wasted on verifying results. In addition, it helps instill confidence in users who analyze and report on inventory value.



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Test Your Knowledge − Inventory Costing − Trustworthiness 1. What are the benefits of using inventory periods?

2. List conditions and recommendations for closing an inventory period.

3. How does one determine which entries are blocking the period closing function?

4. List costing improvements in sales statistics.

5. Which two changes are made to the cost adjustment posting principles?

6. Which two issues are resolved regarding inventory posting structure? Outline the resolutions.

7. Explain the differences between using Day and Month as average cost period.



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Quick Interaction: Lessons Learned Take a moment and write down three key points you have learned from this chapter: 1.

2.

3.



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CHAPTER 5: COSTING TRUSTWORTHINESS · 2016-09-12 · Chapter 5: Inventory Costing −...

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