Do I need to use Exact Cost Reversing?

 

With this post, I hope I can show the importance of exact reversing.

Navision from a quite long has an option in S&R Setup and P&P Setup called "Exact Cost Reversing Mandatory". These options can explain many times incorrect valuation that I meet in some implementations.

1.  Setup

Let's create 2 items (A and B) both have a costing method of average.  

Each item will have a distinct Inventory Posting group. Objective is to have distinct Inventory Accounts. Item A will have G/L Account 3211 and Item B will have 3212.

2.  Posting

Now let's create 6 purchase Invoices, 3 for each item.  I will create 3 invoices separately for each item for only simplicity.  Date Format is Portuguese day / month / year

Item      Posting Date      Quantity              Unit Cost             Line Amount

A             01/01/2008         10                           10                           100
B             01/01/2008         10                           10                           100
A             02/01/2008         10                           150                        1500
B             02/01/2008         10                           150                        1500     
A             03/01/2008         5                             15                           75                                         
B             03/01/2008         5                             15                           75

Run report "Adjust Cost - Item Entries" and followed by "Post Inventory Cost to G/L"

Open Item card from both items. You will see notice that in both cards you will have a costing of 67.

In both G/L accounts you will have a value of 1 675.

 

Resulting Item Ledger entries

Posting Date      Entry Type          Item      Qty.       Cost Amount

01-01-08              Purchase             PA          10           100
01-01-08              Purchase             PB          10           100
02-01-08              Purchase             PA          10           1 500
02-01-08              Purchase             PB          10           1 500
03-01-08              Purchase             PA          5             75
03-01-08              Purchase             PA          5             75

 

3 -Reversing

Now, after you have posted all invoices you checked that price is incorrect in invoices of day 02-01-08.  Correct price per unit is 15 and not 150.

Let's create 2 credit memos. Now the process will slighter different from both items.

3.1 - In Purchase and Payables Setup check if field "Exact Cost Reversing Mandatory" isn't checked.
3.2 - Create a credit memo for posted invoice of item A in day 02-01-08. You can use copy document feature. Confirm that "Appl.-to Item Entry" is blank.
3.3 - Post Invoice.
3.4 - Enabled Exact Cost Reversing Mandatory in P&P Setup.
3.5 Create a credit memo for item B for posted invoice 02-01-08. You can also use copy document feature. Notice that "Appl.-to Item" now has a number. This is item ledger entry number. If you post credit memo without applying an item ledger entry it will give an error. Since we have defined has required in Setup.
3.6 Run report "Adjust Cost - Item Entries"

4 . Results

Let's see results.

Now Item A has a unit cost of 58,333 and Item B has a unit cost of 11,667.

Why this huge difference in costing? Both items were purchased at the same price, in same dates and were made credit memos over the same values.

Navision by design handles returns differently using "Appl.-to Item" field.

Item Ledger entries of credit memos.

 

Posting Date      Entry Type          Item      Qty.       Cost Amount

02-01-08              Purchase             A             -10         -800      
02-01-08              Purchase             B             -10         -1 500

 

Let's see the differences.

Item A was returned at average cost, and not by real purchased price. Returning at average cost will be almost the same has making a sales invoice.

4.1 Open Item ledger entries from Item A.
4.2 Select purchase return and select value entries.

Make visible field "Valued By Average Cost". You will that this purchase return valuation have been made valuated at average costing.

4.3 Open Item ledger entries from Item A.
4.4 Select purchase return and select value entries.

Make visible field "Valued By Average Cost". You will that this purchase return valuation wasn't valuated at average costing.

By applying  Appl.-to Item Navision will make a fixed  link between item ledger entries, those entries aren't be valuated at average costing. These entries will cancel each others.  Even you after apply an item charge to original purchase order. Item cost from purchase return will increase at the same value of purchase entry.

It's still possible to make exact reverse costing without enabling "Exact Cost Reversing Mandatory". This option only inflicts to be required in returns.

When not making purchase return by copy document function, it could be hard to some user's select correct item ledger entry. Microsoft in version 5.0 of Navision has improved quite a lot using "Get Posted Document Lines to Reverse". You can reverse using posted documents lines instead of selecting item ledger entries.  

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