Inventory costing 101

What is inventory costing?  Boy.  That’s a pretty open-ended question!  Inventory costing is the mechanism by which AX determines the cost of goods sold of materials that were issued from your company.  What does this mean and why is it needed?

Think for a second about an item that has a lot of transactions.  You might buy it on many purchase order, receive it on many product receipts, and post many different invoices for this material at different costs.  When it comes time to sell this material, how does AX know which particular value it should use for that individual piece of material coming out of your inventory?

First, AX calculates a perpetual running average based on the current on-hand inventory quantities and current inventory values (if this includes physically updated, or received material, is controlled by the “include physical value” checkbox on the item model group.)  This running average is used as the initial cost when the material is placed on a sales order.

However, the true COGS value is based on the inventory valuation method chosen for the item.  Since the valuation methods require financially updated receipts, this evaluation of the true COGS value happens during one of two periodic processes; inventory recalculation or inventory close.

During this process, AX calculates the true COGS value of each individual transaction.  When a value other than the initial running average is determined to be the true cost, AX posts an adjustment to the actual sales order’s inventory transaction to adjust the cost price.  It offsets this adjustment against the inventory to true up the actual inventory value, as well.  The goal of this process is to match, or settle, each issue with the correct receipt as determined by the valuations method.

In the case of the recalculation, all unsettled transactions are reviewed and may have adjustments posted against them.  In the case of an inventory close, once the correct value is determined, the transactions are formally settled against each other and financially closed if the full quantity has been settled.

Again, the inventory closing procedure is used to determine the actual COGS value of an issue transaction.  The costs on receipt transactions, like production orders or purchase orders, are driven by the invoice or actual costs of the material.  An easy way to remember, receipts are inputs and issues are outputs.

If anyone is interested, I plan to have some additional posts about different costing methodologies, marking, and other topics around inventory costing.  Let me know what you think in the comments or hit me up on Twitter @jac_rod