CHAPTER 6: COSTING TRANSPARENCY - CBSi 6: COSTING Chapter 6: Inventory Costing − Transparency Page...

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Chapter 6: Inventory Costing − Transparency

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CHAPTER 6: COSTING − TRANSPARENCY Objectives

The objectives are:

• Trace costs between the inventory ledger and G/L. • Analyze if and how the inventory ledger is reconciled with G/L. • Get detailed insight into the dynamics of periodic average costs. • View costs broken into Inventory, WIP, and COGS.

Introduction Transparency of costing data is important to effective and correct management of inventory costs. Inventory Costing for Microsoft Dynamics � NAV 5.0 introduces several improvements and new features with the common purpose of increasing the transparency and reporting capability of costing information in the system. The new G/L � Inventory Reconciliation tool enables quick and clear overview of the status of inventory posting to G/L, and easy access to the underlying entries. Multiple users can now analyze the dynamics of average cost calculation in a smart overview window that makes it easy to spot and trace data entry errors. The Cost Shares Breakdown report is extended to include cost components of outbound transactions. This chapter provides training on all the new features within the theme of costing data transparency 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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Traceability between G/L Entries and Value Entries The current version provides the following new features for situations where a controller or auditor has to trace between specific G/L entries and their original value entries, for example, to explain unexpected variations in G/L accounts:

• New G/L � Item Ledger Relation window � for structured cost auditing

• Lookup from G/L entry to value entries � for specific entry tracing • Lookup from value entry to G/L entry � for specific entry tracing

The G/L − Item Ledger Relation Window To provide detailed cost tracing, a new table is provided that is filled during posting to G/L. The G/L � Item Ledger Relation table provides full traceability as it holds complete relations information for both methods of inventory posting to G/L:

• Per Entry: One-to-one relation between G/L entry and value entry • Per Posting Group: One-to-many relation between a G/L entry and

value entries � according to improved posting structure

NOTE: In earlier versions, posting per posting group made tracing from G/L almost impossible. For more information about improvements to inventory posting structures in the current version, refer to the topic titled "Improved Inventory Posting Structure in G/L" in the chapter titled "Trustworthiness."

The information is displayed in the G/L � Item Ledger Relation window that is opened from the G/L Registers window for a specific G/L register number.



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FIGURE 6-1: OPENING FROM G/L REGISTER NUMBER 55 The window opens for the selected G/L register, listing the value entries posted to that register together with relevant information for cost auditing.

FIGURE 6-2: ITEM LEDGER RELATION WINDOW SHOWING RELEVANT TRACING DATA The G/L - Item Ledger Relation window is designed to help the user identify the item value entries that constituted a G/L entry for a selected G/L register.

Tracing G/L Entries to Value Entries and Vice Versa In investigating cost issues for specific entries, a link is provided in all General Ledger Entries windows to look up the value entry of entries that created a particular G/L entry.



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FIGURE 6-3: G/L ENTRY WITH LINK TO VALUE ENTRIES Similarly, a link is provided in the Value Entries window to look up the resulting G/L entry of one or more value entries.

FIGURE 6-4: VALUE ENTRIES WITH LINK TO G/L ENTRY

NOTE: The multiple value entries shown in the figure 6-4 indicate that the G/L entry is based on summarized value entries. This means that reconciliation (post inventory cost to G/L) was done per posting group.

Notice that because of the new G/L posting structure, the posting date of a G/L entry and its related value entries is always the same. This fact is basically the basis for correct reconciliation.



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This concludes the conceptual description of functionality to compare the inventory ledger and G/L entry by entry. The following is a demonstration of how the functionality may be used in a typical cost tracing scenario.

Demonstration − Trace the Origin of an Unexpected G/L Total

ATTENTION: Load a clean Cronus database without changes. Financial controllers and auditors primarily consider figures in the G/L level � not the inventory level. However, they sometimes need to trace the original inventory costs that make up those G/L figures. The following demonstration shows how easily users can do this in the current version. Scenario: When invoicing the purchase order for 88 pieces of the OSLO storage unit (item no. 1952-W), a purchasing agent accidentally changes the quantity significantly before posting the order. Some time later, the controller is reviewing the Raw Materials account in G/L and spots an unexpectedly high total that he starts to analyze.

Steps Start the demonstration by posting an incorrect purchase order:

1. See existing purchase order 106010 for 88 pieces of OSLO Storage Unit.

2. Change the quantity from 88 to 888 (enter an extra 8).

3. Post the purchase order (Receive and Invoice).

4. Run the Post Inventory Cost to G/L batch job without filters and per entry. Remember to put a check mark in the Post field.

Now, when the controller is doing a routine review of inventory G/L accounts, he suspects that the Finished Goods account is too high.

5. In the chart of accounts, locate G/L account number 2120, Finished Goods, and drill down to the entries.



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FIGURE 6-5: FINISHED GOODS ACCOUNT WITH SUSPICIOUS G/L ENTRY

In this list of G/L entries, it is clear to the controller that the direct cost posting on 01/27/08 is unusually high. The controller decides to trace the original cost.

6. Click ENTRY → VALUE ENTRIES to see the origin of the G/L entry.

FIGURE 6-6: VALUE ENTRY REVEALING THE SOURCE OF THE COST AMOUNT

Now the controller can confirm that a purchase invoice with a high cost amount exists, and the controller can then pursue his suspicion that a data entry error has occurred by locating the document and purchasing agent in question to investigate more. This concludes the demonstration of simple cost tracing from G/L. The topic titled "Inventory - G/L Reconciliation" describes another transparency feature that the controller will frequently use after having performed cost tracing, namely to review if and how inventory reconciles with G/L.



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Inventory − G/L Reconciliation Tool Microsoft Dynamics NAV 5.0 includes a specialized tool to provide quick insight into the status of reconciliation between the inventory sub ledger and G/L. To list its features in short, the Inventory - G/L Reconciliation tool:

• Exposes reconciliation differences by comparing what is recorded in G/L and what is recorded in the inventory ledger (value entries).

• Displays unreconciled cost amounts in the value entries in the inventory ledger as if they were mapped to corresponding inventory-related accounts in G/L and compares those to the totals actually recorded in the same accounts in G/L.

• Reflects the double entry structure of G/L by visually presenting data as such. For example, a COGS entry has a corresponding inventory entry.

• Lets users drill down and see the entries that make up the cost amounts.

• Includes filters to narrow the analysis by date, item, and location. • Explains reasons for reconciliation differences in informative

messages.



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Figure 2-7 shows the reconciliation status of Cronus International Ltd. for the month of January, 2008 when the Post Inventory Cost to G/L batch job is run.

FIGURE 6-7: INVENTORY - G/L RECONCILIATION TOOL The Name column on the far left in the grid lists the various G/L account types that are associated with inventory. The Inventory, Inventory (Interim), and WIP Inventory columns show the invoiced, non-invoiced, and WIP totals of each G/L account type. These are calculated from value entries, that is, they are projected onto the G/L account types where they will end when they are eventually posted to G/L. The Total column shows the sum (in bold font) of the value entry amounts in the three inventory columns. The G/L Total column shows the amounts (in bold font) for each G/L account type that exists in G/L. These are calculated from G/L entries, that is, they represent inventory costs already posted to G/L. The Difference column represents the difference between G/L Total and Total.



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NOTE: Because the amounts of the value entries in the inventory ledger are projected onto the G/L accounts as based on the inventory posting setup, changing this setup will change the reconciliation status. Refer to the demonstration titled "Audit Inventory Reconciliation".

The Underlying Inventory Report Entry table The various amounts and totals displayed in the Inventory - G/L Reconciliation window are calculated in the Inventory Report Entry table. Users can drill down in the various amounts shown in the window to see the underlying value entries or G/L entries. The table contains two types of entries:

• Item: These entries are summaries of all the value entries of all the items that fall within the filters set in the Inventory - G/L Reconciliation window.

• G/L Account: These entries are summaries of all the general ledger entries for each account that is associated with inventory.

When a user drills down on an amount in the reconciliation tool, the entries of the table are displayed in the Inventory Report Entry window filtered by the account drilled down on. Figure 6-8 is an example of the inventory report entries under the COGS (Interim) account.

FIGURE 6-8: THE INVENTORY REPORT ENTRY TABLE HOLDS ALL RECONCILIATION DATA When the Difference field contains an amount, there will also be text in the Warning field. For additional explanation about a difference, users can drill down on the fields to display the complete warning message.



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TIP: The button for displaying warnings can only be accessed when an empty column is visible behind the Warning field. However, no extra column has to be visible if you press F6 to open the warning message.

Warning Messages The following warning messages are offered by the system as suggested reasons why the inventory ledger does not reconcile with G/L: Warning Title Warning Message Expected Cost Posting

The program is not set up to use expected cost posting. Therefore, inventory interim G/L accounts are empty and this causes a difference between inventory and G/L totals.

Post Cost to G/L Some of the cost amounts in the inventory ledger have not yet been posted to G/L. You must run the Post Cost to G/L batch job to reconcile the ledgers.

Compression Some inventory and/or G/L entries have been date compressed.

Posting Group You have possibly restructured your chart of accounts by re-assigning inventory related accounts in the General and/or Inventory Posting Setup.

Direct Posting Some inventory costs have been posted directly to a G/L account bypassing the inventory ledger.

Posting Date There is a difference between the posting date of the value entry and the associated G/L entry within the reporting period. (This can only occur with old data. If the database started on the current version, dates cannot differ.)

Closed Fiscal Year Some of the cost amounts are posted in a closed fiscal year. Therefore, the inventory related totals are different to their related G/L accounts in the income statement.

Similar Accounts You have possibly defined one G/L account for different inventory transactions.

Deleted Accounts You have possibly restructured your chart of accounts by deleting one or more inventory related G/L accounts.

NOTE: In addition to reconciliation differences that the system will warn about, manual postings to the inventory account will also lead to a difference between inventory and G/L.

This concludes the conceptual description of the new reconciliation status tool. As indicated in the list of warnings, typical tasks to resolve differences found with the tool include dealing with issues that relate to inventory posting setup. The following is a simple demonstration that illustrates how to resolve a setup issue.



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Demonstration − Audit Inventory Reconciliation This demonstrates how to use the transparency features that are provided with the Inventory � G/L Reconciliation window for these auditing tasks:

• Resolve initial differences between the inventory ledger and G/L • Review if inventory reconciles with G/L • Re-reconcile after the introduction of a new difference

Scenario: On 01/31/08, Ken, the controller, is about to close the month of January, 2008. Before closing, he wants to check if inventory reconciles with G/L. He finds several differences with the reconciliation tool that he starts to resolve. When reconciliation is complete and he performs the final check, a new difference is introduced. Before resolving it, he briefly drills into the underlying table to see the origin of the new difference.

Steps Start by calculating the reconciliation status of January, 2008 as follows:

1. Click FINANCIAL MANAGEMENT → INVENTORY → ANALYSIS & REPORTING → INVENTORY → G/L RECONCILIATION.

2. Enter a date filter of 01/01/08..01/31/08 and put a check mark in the Show Warning field.

3. Click the Calculate button.

The following reconciliation status is calculated:

FIGURE 6-9: RECONCILIATION STATUS OF A CLEAN CRONUS DATABASE



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This particular period shows some differences between the inventory ledger and G/L that must first be resolved.

Resolve Initial Differences Cronus International Ltd. is not set up for expected cost posting and this causes a difference that the controller must consider.

4. Drill down on the Warning field to read the following explanation:

FIGURE 6-10: RECONCILIATION WARNING ABOUT EXPECTED COST SETUP

5. Drill down on the sum of 8,195.50 in the grid between the COGS

(Interim) G/L account and the Inventory (Interim) balancing account to open the Inventory Report Entry window.

FIGURE 6-11: VALUE ENTRY REVEALING THE SOURCE OF THE COST AMOUNT

Notice that the pointer defaults to the top of the relevant column. The COGS (Interim) column holds the projected G/L entries that relate to non- invoiced costs. Be aware that, although they seem to belong to a G/L account (COGS (Interim), these costs are in fact not yet posted to G/L (because the system is not set up for expected cost posting), and this is what causes the warning. That the costs are not posted to G/L yet is validated by the fact that the G/L Total cell in the horizontal line of the COGS (Interim) account is empty.



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NOTE: Under ordinary circumstances, companies not set up for expected cost posting may ignore this warning and consider inventory reconciled anyway. Alternatively, company policy may be that all outstanding invoices must be posted before inventory can be reconciled with G/L, therefore they may actually not operate with interim G/L accounts.

Although perhaps an unrealistic action, make a shortcut here and change the setup for expected cost posting in order to illustrate that the warning will change after changing the setup.

6. Open the Inventory Setup window and put a check mark in the Expected Cost Posting field. Click YES to the system messages.

7. Run the Post Inventory Cost to G/L batch job without filters and per entry. Remember to put a check mark in the Post field.

8. Go back to the Inventory � G/L Reconciliation window and recalculate.

All sums in the inventory Total column now balance with sums in the G/L Total column to indicate that reconciliation is complete.

FIGURE 6-12: INVENTORY RECONCILED FULLY WITH G/L At this point, inventory reconciles with G/L and the controller can now continue to close the inventory period. However, as demonstrated in the following, a new difference can quickly disturb the balance.



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Introduce a New Difference Scenario: An order processor is ready to post the last sales invoice for January, 2008.

9. Open existing sales order 101005 for 4 pieces of the ANTWERP Conference Table and post it (Invoice).

10. Go back to the Inventory � G/L Reconciliation window and recalculate.

FIGURE 6-13: RECONCILIATION STATUS WITH NEW DIFFERENCE

For both the COGS (Interim) and the COGS accounts, there is now a difference between values in the inventory ledger and those actually posted to G/L. The warning message gives the controller a clear indication why, and he can therefore continue to resolve this new difference by running the Post Inventory Costs to G/L batch job � hopefully for the last time in January.

NOTE: Some companies decide to set their system up for automatic cost posting and this obviously eliminates the Post Cost to G/L warning completely.

This concludes the demonstration of how to use the Inventory � G/L Reconciliation window to obtain insights about potential differences and how to resolve them in order to reach successful reconciliation.



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Insight to Average Cost Dynamics In addition to extensions made to average costing principles, the current version includes detailed insight into the dynamics of average unit costs. This transparency is important to many companies to help them make pricing decisions or to track and resolve cost fluctuations caused by data entry errors. (Refer also to the topic titled "Extensions to Periodic Average Costing" in the chapter titled "Trustworthiness.") The main element of the transparency improvements to average costing is the Average Cost Calc. Overview window that opens as a lookup from the Unit Cost field on item cards.

NOTE: Although the Average Cost Calc. Overview window is most relevant for unit costs based on Average costing method, it can also be opened from the Unit Cost field of items using costing method FIFO and LIFO.

Figure 6-14 is an example of a lookup from the Unit Cost field of item 80100, Printing Paper.

FIGURE 6-14: AVERAGE COST CALCULATION OVERVIEW FOR ITEM 80100 The Average Cost Calc. Overview window provides an overview of all the entries that were used to calculate the average unit cost in each average cost period (default setup is Day). A closing entry represents the average unit cost that is valid for each average cost period and which is applied to all outbound entries within that period. The average cost calculation overview for Printing Paper (Figure 6-14) displays in expanded lines above each closing entry all the entries that were used to calculate the average cost displayed in the closing entry line. Users can also collapse some or all lines to only see the summarized closing entry for the end of each average cost period.



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The Type field indicates what kind of entry it is and how the program used it in the calculation of the average cost. If the field type is: Then Closing entry The entry is a summary of the average cost on the last

day of the average cost period. Increase The entry represents an inbound transaction by which

the item came into inventory, such as a purchase or a positive adjustment. Notice that the increase relates to inventory value � not unit cost.

Decrease The entry represents an outbound transaction by which the item went out of inventory, such as a sale or a negative adjustment. Notice that the decrease relates to inventory value � not unit cost.

Applied Increase The entry is an inbound transaction where the entry was fixed applied to an inventory decrease. An example of this is a sales return that was fixed applied to a sales invoice.

Applied Decrease The entry is an outbound transaction where the entry was fixed applied to an inventory increase. An example of this is a purchase return fixed applied to a purchase receipt.

Revaluation The entry contains a value that resulted from the posting of a revaluation journal that changed the value of the item in inventory. The program adds partial revaluation costs to the average cost calculation after calculating the decreases.

Select an entry and then click the Navigate button to view all the documents and entries that relate to the entry in the overview window.

Demonstration − Drill into Source Entries of an Average Cost If users want to determine why an item has a particular average cost, they can drill down from the item's Unit Cost field to review the posted entries that the average cost is calculated from. Scenario: The average unit cost of Printing Paper has suddenly gone up by about 50 %. The increase is so large that the controller decides to analyze the history of average cost postings and resolve any errors.

Post Incorrect Unit Cost to Disturb the Average Simulate a situation where one in a series of similar purchase transactions over a two-month period is suddenly posted with an extra zero on the unit cost. To do this in an easy way, create and post two batches of item journal lines.



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Steps Continue to create a data entry error that can later be tracked:

1. Create and post these item journal lines of entry type Purchase:

Posting Date Item Location Quantity Unit Cost 01/24/08 80100 BLUE 10 96 02/24/08 80100 BLUE 10 100 02/25/08 80100 BLUE 10 100 02/26/08 80100 BLUE 10 1100 (error) 02/27/08 80100 BLUE 10 110

2. Create and post these item journal lines of entry type Sale:

Posting Date Item Location Quantity Unit Cost 01/24/08 80100 BLUE 5 0.00 02/24/08 80100 BLUE 5 0.00 02/25/08 80100 BLUE 5 0.00 02/26/08 80100 BLUE 5 0.00 02/27/08 80100 BLUE 5 0.00 02/28/08 80100 BLUE 5 0.00 02/29/08 80100 BLUE 5 0.00

Drill into Source Entries to Find Posting Errors In the remaining steps of the demonstration, drill into the transaction history of item 80100 to find the incorrect unit cost entry.

3. Run the Adjust Cost � Item Entries batch job for item no. 80100.

4. Open the item card of item number 80100, Printing Paper, and drill down on the Unit Cost field.

5. In the Average Cost Calc. Overview window, click FUNCTIONS → EXPAND ALL.



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FIGURE 6-15: AVERAGE COST CALCULATION OVERVIEW FOR ITEM 80100

Notice the distinct deviation in unit cost that was caused by a purchase on 02/26/08. The next step is to use Navigate to find the purchase document in question and correct the posting error. Notice that each average cost calculation (Closing Entry) is based on the cost flow of one day.

NOTE: The Average Cost Calc. Overview window only displays days where transactions are made. This explains why the span in valuation date between some lines is more than one day. Notice, however, that all entries before each closing entry are from the same day.

For more information about average cost calculation, refer to the topic titled "Extensions to Periodic Average Cost" in the chapter titled "Trustworthiness."



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Demonstration − Review the Effect of Average Cost Period Setup

To illustrate how the Average Cost Period setup field affects the average cost calculation over time, continue to change the setup to Month, and then review the average cost dynamics of item 80100 again.

Steps Start to change the average cost period:

1. Open the Invoicing tab of item card 80100 and notice that the unit cost is currently 4.25289 (based on an average cost period of Day).

2. Open the Inventory Setup window and change the average cost period from Day to Month.

In the confirmation message, note the instruction to run the cost adjustment batch job.

3. Run the Adjust Cost - Item Entries batch job for item 80100.

4. Go back to the item card. The unit cost changed to 4.25259 (based on an average cost period of Month).

5. Drill down to the average cost calculation overview.

FIGURE 6-16: AVERAGE COST CALCULATION OVERVIEW FOR ITEM 80100

Notice that each average cost calculation (Closing Entry) is based on the cost flow of the previous month. Notice also that the typing error that caused the large average cost increase.



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This concludes the description and demonstration of a new feature that provides increased transparency of average cost dynamics � according to the setup of average cost period. For more information about the principles of the average cost period setup, refer to the topic titled "Extensions to Periodic Average Costing" in the chapter titled "Trustworthiness."

Cost Shares Breakdown Report The main purpose of the Cost Shares Breakdown report is to support decision-makers in addressing the reasons for cost variances daily. Companies where the inventory value moves quickly from the balance sheet to the income statement also need insight into the cost shares of sold items (COGS). In the current version, the Cost Shares Breakdown report is extended to also show the cost composition of sales � not only inventory and WIP. This is facilitated with the Print Cost Share option field that has these options:

• Sales • Inventory • WIP Inventory

Accordingly, the report can be used to print or view costs broken into COGS, inventory, or WIP according to these different cost elements:

• purchase and material cost • capacity cost • capacity overhead cost • manufacturing overhead cost • subcontracted cost • variance • indirect cost • revaluation • rounding

The Cost Shares Breakdown report has the following limitations:

• It breaks down cost at a single BOM level. Accordingly, it does not roll up the costs from lower BOM levels.

• It cannot calculate the cost share from items that use the Average costing method.



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Demonstration − Report Detailed Cost Shares of Sales This demonstrates how to define and preview a report that displays the detailed cost composition of all sales (COGS) made until a specific date.

Steps Create the report:

1. Click FINANCIAL MANAGEMENT → INVENTORY → REPORTS → COST SHARES BREAKDOWN.

2. Preview the report without filters, an ending date of 02/01/08, printing cost shares for Sales, and without details.

FIGURE 6-17: COST SHARES BREAKDOWN REPORT BASED ON SALES The report shows that the cost shares of COGS are broken down as follows:

• A total of -32,440.70 LCY was posted as COGS. • Of the total, -33,822.05 was a result of material costs. • Of the total, 1,415.59 was a result of revaluation. • Of the total, -34.24 was a result of material variance.

This concludes a brief description of the renewed Cost Shares Breakdown report for detailed analysis of cost distribution across different cost components.



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Conclusion Microsoft Dynamics NAV 5.0 contains valuable features and improvements that enhance the traceability of costing information for different users. These features and improvements include effective links between G/L entries and value entries, auditing tools that help review reconciliation status, overviews of average cost dynamics for users to spot potential data entry errors, and improved cost analysis reports suited for controllers and finance managers. Transparency of costing data is important to effective and correct management of inventory costs.



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Lab 6.1 − Analyze Business Figures with the Reconciliation Tool

Scenario: You want to use the reconciliation tool to investigate the following business figures of the whole calendar year 2008.

Challenge Yourself!

• Determine which item has the highest amount in outstanding invoices � and which customers to invoice for those.

• Determine which item contributed to the highest purchase variance. • Identify G/L accounts that do not reconcile with inventory. Resolve

the issues until full reconciliation is established.

Need a Little Help?

1. Prepare a reconciliation status based on a date filter of 01/01/08..21/31/08.

2. Drill down on the COGS (Interim) amount to find the item with the highest outstanding invoice amount. Use Navigate to find the customers who have non-invoiced deliveries.

3. Drill down on Purchase Variance amount to find the item with the highest purchase variance amount (a negative figure).

4. Run the Post Inventory Costs to G/L batch job to resolve warnings of type Post Cost to G/L.



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Test Your Knowledge − Inventory Costing − Transparency 1. What can the Inventory Entry Relation window be used for?

2. From which ledger entry window is the Navigate function available?

3. Describe the general concept of the Inventory � G/L Reconciliation tool.

4. Which three balancing inventory accounts are included in the Inventory � G/L Reconciliation window?

5. List at least three warnings that refer to reconciliation issues.

6. Outline the functionality of the Average Cost Calc. Overview window.

7. What is the main purpose of the Cost Shares Breakdown report?



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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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