Dynamics 365 Business Central: Item Costing, part 8

Dynamics 365 Business Central: Item Costing, part 8

okay we're going to keep going on costing.

I got some great comments from some people trying to keep me honest, so I appreciate that.

Definitely something that I did last time, was not perfectly accurate. I'm going to highlight that.

So please, if you find something that I'm doing wrong, comment, let me know, and we can readdress that.

cost of goods sold interim. This one gets posted when you ship, not invoice, and the idea is that I actually had this as a 50000 account, which means that it was hanging out on the income statement.

Here's the issue with that, if I ship, not invoice, if I not invoice, there's no revenue. So I am actually posting a cost of goods sold without any revenue. Which means that our gross profit will go down unrealistically.

That’s because we have cost with no revenue, and this number will be messy. So how do you fix that?

Well, this really should be a 1000 number, you know somewhere on the balance sheet. I think I put it actually 10706, or something like that, a balance sheet account. That way it's basically just accruing on the balance sheet. It's an accrual account, so my bad, good note. 

I actually will fix that in the video. But anyways, what I was going to talk about in this video is not that, this was just a highlight from comments, so please keep commenting.

We're going to talk about FIFO. FIFO is a very simple inventory system. We're going to create the FIFO coffee mug and I think we'll just buy, let's say 100 at $10.

So that's a purchase at $10 and then another hundred at $11. I know there's an interesting note on this, is that when you actually buy the 100 at $10 and 100 at $11, the item card will show unit cost 10.5.

Even though you have a FIFO system, and this is the first transaction, let's say this is 4/3, and this is 5/3, actually. 4/3 & 4/4, so this is on the 3rd of April and this is on the 4^th.

The item card should be showing unit cost of 10 because it's a FIFO. FIFO means that it takes the first transaction that's available, has remaining quantity, and takes inventory from that, takes the cost from that. Then when that's done, it goes to the next one. The cost of the product that you're selling is dependent on that.

However, on the item card that shows you the average cost, as the unit cost, it always does that, and we'll drill into that.

It's confusing, you're running a FIFO costing method, but it's showing average cost in the card. But that's just the way Business Central is.

We're going to do a sale showing that it picks up the 10 first. Then we'll do another sale where we're actually combining the two and it's replenishing out, and you see this unit cost change.

Let's take a look at the video how FIFO works and square that away.

Okay, so just like I spoke about with the cost of goods sold interim, I've actually moved that to be an asset account. You see here cost of good interim is here, and yes, it makes more sense to have that as the asset or close to the inventory account. 

But as you can see, the more of the accrual cost postings that you have in the system ,the more sub-accounts you have towards the inventory accounts, or asset accounts hang out there for accruals.

Anyways, I'm going to talk about FIFO. If we go into the items, I'm going to create a new item, and so we're going to be playing around with FIFO, LIFO, average, specific.

In order to specifically focus on each one, I'll just create a new item. It's called the FIFO coffee mug, and I'll create a FIFO, average, LIFO, and all of that, different items.

This is just a standard one, and we can see that the costing method is FIFO. Right now the unit cost is 0, okay, so I'm going to go ahead and do a purchase order and buy this.

I could have done an inventory adjustment, but let's do a purchase order. It's more realistic. 

I'll do a new one to Fabrikam, and just put in the invoice number here, because I'm going to post this. So it's posted at 4/3. That's the posting date.

It's the FIFO coffee mug. I'm going to actually put it into the main location and hopefully not forget. 100 for $10. So if I go ahead and hit posting > post, receive and invoice. I was lucky it hit the same number again.

Let's go ahead and post. Now I have generated inventory of 100 for $10 each, but I'm going to create another invoice for the same item to show you the FIFO effect.

If I only had one invoice, one cost, then it wouldn't matter what costing method I had.

It would all show the same thing except if it were standard. But now I'm going to get into the main location. Another 100, and this time around it's going to be $11.

We go ahead and post, receive and invoice.

Okay, so now we have two transactions, and if I go into items, right here, it posts.

I go into my FIFO coffee mug. Now, I have the unit cost as $10.50 right here, right. So that is displaying the average cost, because we have a hundred a $10 and then we have a hundred at $11. So the average cost is $10.50, and that's being displayed here. Even though we're showing FIFO. Now if I close this out and do a sales order, so we do a sales order...

We're going to sell this, let's see what cost actually posts when we sell it.

So it says the average cost is $10.5, but the costing method is FIFO. When we post this, and let's say we're going to post just 50. We should get $10 for those, as the cost. So even though the unit cost comes in here as $10.50, technically, since it's a FIFO coffee mug, it should be just costed out at $10 because I'm getting the first transaction.

So I sell there at $20, just get some profit, like that. Then we'll go ahead and post this, main location, ship and invoice. I don't want to see they posted one.

If I go into items and take a look at my FIFO coffee mug and I look at the transactions, there's a couple of ways to get into that.

I can see that the cost amount here is 500, so interestingly enough the unit cost on the item card is giving me the average cost. The cost that comes in on the sales order is the average cost. 

It’s the unit cost from the item card, however, since the item is a FIFO it will post the FIFO cost, which is 500. So it's coming from here. It's taking out these 50 and taking that at $10 each, $500 total.

 So just to further that, if I go ahead and sell 100 now, which would mean that I would sell all of these 50 and 50 of these, so that the total cost of that should be $500 from here and then $550 from here. So then $1,050.

Let's go ahead and validate data. If we just go into our sales order, and it's tricky, because the unit cost is showing average, not FIFO. But that's just something that you have to know.

I go in here, click on the Adatum corporation again, we sell the FIFO, and go into main.

I sell 100, let's say we're doing it at $20. So now you can see that the unit cost is $10.667, which is the average of what is remaining in inventory.

Go ahead and hit post, ship and invoice. Go back, get into the items, and take a look at the FIFO coffee mug. Navigate entries, ledger entries. I see now that the cost is $1,050. Which was fifty out of here, 500 total and 50 out of here, which is 550. Then that accumulates to that. So it is doing the FIFO entries all the way through. It's really easy to read FIFO. FIFO makes perfect sense all the way through. It is a very nice way of doing costing.

However if you look at the card, you can see now that the unit cost is up to $11. This is actually accurate. This is both true for FIFO and average now, because we only have one entry left, which is at $11. But as you can see before, when we had more entries left, this was showing the average.

If you drill down in here, you can see that it's actually tracking all of the entries and keeping track of the average cost and showing the average cost here.

It would be nice to maybe think about the cost amount expected, how that actually affects this number, or not, in that case. But that might be a later topic.

Hopefully this made sense, as far as FIFO. FIFO is one of the easiest and nicest when it comes to reading cost and it's very clear.