Dynamics 365 Business Central: Item Costing Part 13

Dynamics 365 Business Central: Item Costing Part 13, Flushing Out Average:

Hey, everyone. We’re going to keep going again with costing. We took a little break. I think this is video number 12 in the series. We still have a few things to cover like standard costing, etc. What I wanted to go into today is more on the average costing. It’s a little nuance but super important that people understand well. Actually, there was a comment that was made on the channel, and I’m going to cover it today. One of our interns, Alex, actually helped me with this. Thank you, Alex. Now we’re going to get into it.

If we have an item – actually, I have the average coffee mug. If we have a purchase – I’ll go put the date. I’ll put it as the 15^th, today’s date. Purchase of 10 quantity and unit cost let’s say $10, so for 100 total cost. Then we have a sale on the 15^thfor the same 10 and let’s say the price is 15, but price doesn’t really matter. We have here $10, total of $100. We sell the 10, which means that right now we are at zero quantity. Let’s say, if on the same day we buy – so 7/15 we buy 10 at 20. That’s 200. Then we sell them again on the same day, 10. Then the unit cost of this sale intuitively would be 20 because it zeroes out here, but in actuality what the system does, it puts it out at 15. The cost of goods sold basically or the cost of this transaction.

This transaction, the cost of it was 10 before, but what it does, it goes in here and fixes that, and makes it 15. Within the day, it’s averaging all transactions. It doesn’t matter whether you go to zero or not. Now if you go on another day, let’s say the day after, 16, and you purchase something, let’s say 10 for $25 – purchase price keeps going up, 250. You sell it again, those 10. The cost of that is 25. It does zero out for a different day. Here you are starting out afresh. If you do it within the day, it’s averaging it out, all of it and fixing the entries. If you get in another purchase, it fixes something that’s already posted, and apply to and closed.

It’s important to understand that within day entries are all being averaged out. Outside of the day, it averages remaining. Let’s take a look at that in the system. Let’s take a look at the average coffee mug. I go here into navigate, history, entries, ledger entries. I’ve posted everything here so instead of actually going through the postings, I’m just going to explain what’s happening. You could see here that we have purchases for 1,000, another 100 and 1,100. Then there are sales all the way down to this sale right here. We have zero quantity, so it’s flushed out. Then we buy the item at 1,000 for 10, so $100 a piece, so way more expensive to throw it off.

Then we sell it again, and you can see that cost is definitely not $100 per piece. It’s actually $14 per piece. All of these other entries here got adjusted. If I click on the sale, you can see that there is an adjustment entry to make up for this huge cost or the very expensive coffee mugs that I had. Now this all happened on the fourth. Now if I get into the fifth, I buy at 1,000 and I sell at 1,500. The cost is 1,000. It’s no longer picking this 147 or whatever that was. It’s clearing it out and starting afresh for the new day. This is a very important fact about how average behaves. It averages within the day.