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Current Cost Price: Different- Purchase/Sales

Q Wang
2005-10-23
2013-05-02
  • Q Wang
    Q Wang
    2005-10-23

    Anybody who is successfully using the accounting module (I am using 252d), could you help me to understand how the inventory and COGS is calculated? 

    My understanding is, based on the accounting practise, the postings should be as follows:

    Purchase:
    --------------
    1. Inventory Dr, by the full invoice amount (i.e., the currest cost price = last PO price)
    2. Cash Cr, by the same amount

    Sales:
    ---------
    1. Inventory Cr, the amount is calculated based on the costing method - here, our only choice is "Average Cost - FIFO is not implemented yet" (i.e., the Current Cost Price = Average Cost, which is calucated by: Average Cost Amount Sum/Average Cost Quantity Sum)
    2. COGS Dr, the amount = Inventory Cr amount as above
    3. A/R Dr, the amount = Sales invoice amount
    4. Sales Revenue Cr, the amount = Sales invoice amount

    As in 252 version of compiere, there is no way to switch "Current Cost Price" from "Last PO price" to "Average Cost Price" back and forth if multiple users are creating PO and Sales Orders in the same time.  Therefore, the costing calculation might not be correct.  And, if the costing is not correct, what is the risk of using this accounting software? Could anybody help me on this issue?

    Thank you very much!

     
    • ADAXA
      ADAXA
      2005-10-23

      I think you will find all accounting in 252d is base on standard cost.

      The entries wil be:
      purchase
      debit goods inv but not received
      credit creditors

      material receipt
      debit stock at std cost
      credit goods received but not invoiced

      invoice/receipt matching
      dr goods received but not invoiced
      cr goods invoiced but not received
      dr/cr invoice price variance

      in Gardenworld "Material Expense" or similar is used as one of the above two accounts .. resulting in a purchase ntry of debit expenses, credit creditors .. which does not make a lot of sense if you are buying inventory.

      The sale is as you indicated except COGS will be a t standard cost. 

      Also note that until you explicitly set the standard cost Compiere uses "current cost" .. in fact it uses current cost as the standard...

      regards..

       
    • Q Wang
      Q Wang
      2005-10-25

      Thanks!  How is standard cost calculated, do you know?  I explicitly update the current cost to "average cost" for the purpose of inventory calculation when shipment to customers is made, but I don't want the inventory to be based on AVERAGE COST when receipt is made from vendors!  I hope the inventory is Debit by the full invoice amount (which is based on the PO cost) rather than the Average Cost, or Standard Cost.  How do you handle this inventory calculation difference between sales and purchase shipments?  Best regards.

       
    • ADAXA
      ADAXA
      2005-10-25

      it is not calculated , it is nominated by you when you fill in the cost tab or when you set it by costing update process. 

      In a standard costing system the inventory will  be updated at standard cost not purchase cost. The system then puts the difference to invoice price variance... that's the way standard cost systems work ;-)

      I am sure there are arguments for and against each valuation method. I like standard cost because every time there is a purchasing error and someone spends too much..
      (a) in standard costing the entry for the 'error' is 
      debit expense in the month it happens ... and you see it immediately.  
      (b) in FIFO (etc) the 'error' is debited to asset (inventory) and you spend the next six months trying to understand why gross margin is less than planned!

      just my personal bias..

      regards.

       
    • Q Wang
      Q Wang
      2005-10-26

      thanks adaxa...sounds like the standard cost does not change - it is setup as the STANDARD PRICE in the default purchase price list version.  Am I right?  I am just curious how the posted amount is calculated.  I will prefer to use average cost rather than standard cost if the standard cost does not change with different PO.  As our products have different prices among different vendors, it might be more accurate to use average cost for the inventory calculate...but the problem with this is that it might take us 6 months to figure out how the inventory is calculated every time when there is an in or out in the warehouse!  Regards. Q

       
    • ADAXA
      ADAXA
      2005-10-26

      It is not a price list thing..
      look for Product Costing window .. and a tab called 'costing - old' (from memory) .. where you can enter Current Cost and Future Cost.  Current Cost is used as standard cost until you run the cost update process to set the std cost.

      " I am just curious how the posted amount is calculated." .. see earlier (first) response.

      re yr comment about average cost .. If the cost varies all the time I assume that neither of std or average cost will be intrinsically more accurate.  At least with std you see all the differences up front as purchase invoice price variances and any under-budget gross margin % from then on must be sales price related... choose your own preferred way to be misled.

      regards..

       
    • Q Wang
      Q Wang
      2005-10-27

      thanks adaxa... Further questions:

      1. You said it is not a price list thing...but how does the system deal with the following situation: Several purchase orders have been created for one product, each has different unit price as the vendor is different (different price list schema with different vendors) - how does compiere know which unit price to use as Current Cost (or Standard Cost) for your sales order then? 

      Checking my "costing - old" tab, my Current Cost was setup as the unit price in my first purchase order, and the Standard Cost is zero (even if it has Std Cost Amount Sum and Std Cost Quantity Sum calculated).  So, is the Current Cost based on the unit price in the first purchase order, or the unit price in the default purchase price list?

      2. "At least with std you see all the differences up front as purchase invoice price variances and any under-budget gross margin % from then on must be sales price related... " My testing for using average cost also post the invoice price variances (58100 account), do you think this is different from using std cost? 

      3.  Another question: I am still thinking that for purchasing, when a material receipt is created, the Product Asset account (14120) is Debited but the amount should be equal to the full invoice amount rather than the calculation of Current Cost X Quantity.  As current cost or standard cost is not always equal to the invoice unit price, it could cause the difference been posted to Invoice Price Variance account (58100) which reduces the actual product asset value.  How do you think about this issue?  Do you let compiere to use it Current Cost to calculate the amount when posting a material receipt, or you manually update the cost as "Last PO price" before posting the material receipt?  I have asked this question many times at different places but still did not get a clear answer. 

      Big thanks to you.

      Q

       
    • ADAXA
      ADAXA
      2005-10-28

      "is the Current Cost based on the unit price in the first purchase order, or the unit price in the default purchase price list?" .... have never created items without setting a 'current cost' so can't comment on the PO side. .. when current cost is set Compiere uses it as the std cost until you expressly set a standard. I am sure it does not refer to a price list .. imagine you buy a green handled screwdriver ;-) which is imported.. the PO price might be $10, freight and duty might to $2 so you would usually set the std cost as $12 .. so picking up a purchase price list value as std cost would be problematic.

      "My testing for using average cost also post the invoice price variances (58100 account), do you think this is different from using std cost?" .. it is doing this *because* it is using standard costing not average/FIFO/LIFO costing ...if it was average the debit would be in inventory.

      "when a material receipt is created, the Product Asset account (14120) is Debited but the amount should be equal to the full invoice amount rather than the calculation of Current Cost X Quantity." .... No, if you are using std costing - and prior versions of Compiere ONLY used std costing, then the debit to inventory will by definition be at std cost and any difference will go to invoice price variance.

      regards..

       
    • Q Wang
      Q Wang
      2005-10-28

      Dear Adaxa,

      1. "have never created items without setting a 'current cost' so can't comment on the PO side. .. " I like the example of the screw driver...So you mean the standard cost is set up manually (so that you could include all other expenses like tax, shipping)? This make sense.  Now, the question is, if you can manually adjust the standard cost, the 14120 Product Asset account could be debitted by exactly the invoice amount when a material receipt is completed, so that when matching invoice with receipt, there is no variance between the two docs.  Isn't this a reasonable workflow?  I just don't think it reasonable to have the different invoice and receipt amount when purchasing.  Then, you sell the product and both inventory and cogs accounts are dealt with based on this standard cost.

      Now, if the above is correct (let me know if i am wrong) - manually set up standard cost to reflect the total invoice amount - what if your next purchase order has a different unit price, shipping fee or tax?  The total cost of this order is different from the previous one, and therefore the standard cost should be manually set AGAIN to a different number.  How do you deal with the sales side then (both inventory and cogs) - which standard cost do you use for the sales this time? 

      For example:

      Purchase order A:
      -------------------------
      Product: Blue screw driver, unit price $10/ea, shipping $2/ea, qty: 10. Total invoice: $120.

      Invoice:
      21100 A/P Trade: $120 (Cr)
      51200 Merchandise purchase $120(Dr)

      Receipt:
      14120 Product Asset $120 (Dr) (By setting up standard cost as $12/ea before posting)
      21190 Not invoiced receipt $120(Cr)

      Match invoice:
      21190 Not invoice receipt $120 (Dr)
      51200 Merchandize purchase $120 (Cr)
      NOTE: There is no posting to 58100 account (Invoice price variance)

      Sales Order A:
      ---------------------
      Sales price: $18/ea, qty: 1, total invoice: $18

      Invoice:
      12100 A/R Trade $18 (Dr)
      41000 Trade Rev $18 (Cr)

      Shipment:
      51100 Product CoGs $12 (Dr)
      14120 Product Asset $12 (Cr)

      Now, Purchase order B:
      ---------------------------------
      Unit price: $10/ea, shipping $3/ea, qty = 10: total invoice: $130

      Now, set up standard cost as $13, so that:

      Receipt:
      14120 Product Asset $130 (Dr) (By setting up standard cost as $13/ea before posting)
      21190 Not invoiced receipt $130 (Cr)

      Sales order B:
      --------------------
      Sales price: $18/ea, qty: 1, total invoice: $18

      Invoice:
      12100 A/R Trade $18 (Dr)
      41000 Trade Rev $18 (Cr)

      Shipment:
      51100 Product CoGs $13 (Dr)
      14120 Product Asset $13 (Cr)

      Now, theoreticaly this calculation for both 14120 Product Asset (Inventory) and 51100 Product CoGs is not correct, no matter if it is based on FIFO or Average Costing.  So, do you mean this is the way that "Standard Costing" deal with inventory/cogs calculation?

      2. "it is doing this *because* it is using standard costing not average/FIFO/LIFO costing ...if it was average the debit would be in inventory"  You are totally correct.  My testing was based on "Standard Costing" when I set up my accounting schema, not "Average Costing".  However, I did use the process "Product Cost Update" and Set Future Costs to "Average Cost" - this is what I meant by saying "average costing".  Now I am clear.

      3. " .... No, if you are using std costing - and prior versions of Compiere ONLY used std costing, then the debit to inventory will by definition be at std cost and any difference will go to invoice price variance."  Do you mean we don't manually set up standard cost very often, so that the difference between invoice and receipt will have to be posted somewhere?

      Sorry to write such a long message but I hope this does not confuse you too much.  I really appreciate your time to help me out of this confusion as it has been bothering me for a long time...

      Q

       
    • millenia
      millenia
      2005-11-22

      Hello adaxa,

      Are you saying that Compiere still does not support Average Cost?  I thought in 252d Average Cost is supported?